UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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þ | | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| | | For the fiscal year endedDecember 31, 20042007 |
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OR |
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o | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| | For the transition period from to |
Commission File Number 0-19034
REGENERON PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
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| New York | | 13-3444607 |
(State or other jurisdiction of
incorporation or organization) | | (I.R.S. Employer Identification No) |
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| 777 Old Saw Mill River Road, Tarrytown, New York | | 10591-6707 |
| (Address of principal executive offices) | | (Zip code) |
(914)347-7000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
(Title of Class)
Securities registered pursuant to Section 12(g) of the Act:
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| Title of each class | | Name of each exchange on which registered |
| Common Stock — par value $.001 per share | | Nasdaq Global Market |
Securities registered pursuant to section 12(g) of the Act: None
(Title
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of Class)
Preferred Share Purchase Rights expiring October 18, 2006
(Title of Class)the Securities Act. Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o No þ
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 þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of thisForm 10-K or any amendment to thisForm 10-K. oþ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” inRule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer þ | | Accelerated filer o | | Non-accelerated filer o | | Smaller reporting company o |
| | | | (Do not check if a smaller reporting company) | | |
Indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Act). Yes þo No oþ
The aggregate market value of votingthe common stock held by non-affiliates of the registrant aswas approximately $1,112,577,000 computed by reference to the closing sales price of the stock on NASDAQ on June 30, 2004, was $398,715,000.2007, the last trading day of the registrant’s most recently completed second fiscal quarter.
Indicate the
The number of shares outstanding of each of Registrant’sthe registrant’s classes of common stock as of February 28, 2005:15, 2008:
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Class of Common Stock | | Number of Shares |
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| Class A Stock, $.001 par value | | 2,358,3732,257,698 |
| Common Stock, $.001 par value | | 53,763,23476,727,047 |
DOCUMENTS INCORPORATED BY REFERENCE:
Specified portions of the Registrant’s definitive proxy statement to be filed in connection with solicitation of proxies for its 20052007 Annual Meeting of Shareholders are incorporated by reference into Part III of thisForm 10-K. Exhibit index is located on pages 4459 to 4761 of this filing.
TABLE OF CONTENTS
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PART I |
| Item 1. Business |
| Item 2. Properties |
| Item 3. Legal Proceedings |
| Item 4. Submission of Matters to a Vote of Security Holders |
PART II |
| Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
| Item 6. Selected Financial Data |
| Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
| Item 7A. Quantitative and Qualitative Disclosure About Market Risk |
| Item 8. Financial Statements and Supplementary Data |
| Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
| Item 9A. Controls and Procedures |
| Item 9B. Other Information |
PART III |
| Item 10. Directors and Officers of the Registrant |
| Item 11. Executive Compensation |
| Item 12. Security Ownership of Certain Beneficial Owners and Management |
| Item 13. Certain Relationships and Related Transactions |
| Item 14. Principal Accountant Fees and Services |
PART IV |
| Item 15. Exhibits and Financial Statement Schedules |
SIGNATURE |
Report of Independent Registered Public Accounting Firm |
Balance Sheets at December 31, 2004 and 2003 |
Statements of Operations for the Years Ended December 31, 2004, 2003, and 2002 |
Statements of Stockholders’ Equity for the Years Ended December 31, 2004, 2003, and 2002 |
Statements of Cash Flows for the Years Ended December 31, 2004, 2003, and 2002 |
Notes to Financial Statements |
BY-LAWS |
AMENDMENT #1 TO MANUFACTURING AGREEMENT |
AMENDMENT #2 TO MANUFACTURING AGREEMENT |
AMENDMENT #3 TO MANUFACTURING AGREEMENT |
AMENDMENT #4 TO MANUFACTURING AGREEMENT |
AMENDMENT #5 TO MANUFACTURING AGREEMENT |
EMPLOYMENT AGREEMENT |
AMENDMENT NO. 1 TO COLLABORATION AGREEMENT |
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES |
CONSENT OF PRICEWATERHOUSECOOPERS LLP |
CEO CERTIFICATION-SECTION 302 |
CFO CERTIFICATION-SECTION 302 |
CERTIFICATIONS-SECTION 906 |
PART I
This Annual Report onForm 10-K contains forward-looking statements that involve risks and uncertainties relating to future events and the future financial performance of Regeneron Pharmaceuticals, Inc., and actual events or results may differ materially. These statements concern, among other things, the possible success and therapeutic applications of our product candidates and research programs, the timing and nature of the clinical and research programs now underway or planned, and the future sources and uses of capital and our financial needs. These statements are made by us based on management’s current beliefs and judgment. In evaluating such statements, stockholders and potential investors should specifically consider the various factors identified under the caption “Risk Factors” which could cause actual events or 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, except as required by law.
General
Regeneron Pharmaceuticals, Inc. is a biopharmaceutical company that discovers, develops, and intends to commercialize pharmaceutical products for the treatment of serious medical conditions. We currently have four clinical development programs, including three late-stage clinical programs: ARCALYSTTM(rilonacept; also known asIL-1Trap) in various inflammatory indications, aflibercept (VEGF Trap) in oncology, and the VEGF Trap-Eye formulation in eye diseases using intraocular delivery. Aflibercept is being developed in oncology in collaboration with the sanofi-aventis Group. The VEGF Trap-Eye is being developed in collaboration with Bayer HealthCare LLC. Our fourth clinical and preclinical pipeline includesdevelopment program is REGN88, an antibody to the Interleukin-6 receptor (IL-6R) that is being developed with sanofi-aventis. REGN88 entered clinical development in patients with rheumatoid arthritis in the fourth quarter of 2007. We expect that our next generation of product candidates will be based on our proprietary technologies for developing human monoclonal antibodies. Our antibody program is being conducted in collaboration with sanofi-aventis. Our preclinical research programs are in the treatmentareas of cancer,oncology and angiogenesis, ophthalmology, metabolic and related diseases, of the eye, rheumatoid arthritis and other inflammatory conditions, allergies, asthma, and othermuscle diseases and disorders.disorders, inflammation and immune diseases, bone and cartilage, pain, and cardiovascular diseases. Developing and commercializing new medicines entails significant risk and expense. Since inception we have not generated any sales or profits from the commercialization of any of our product candidates.
Our core business strategy is to combine ourmaintain a strong foundation in basic scientific research and discovery-enabling technology and combine that foundation with our manufacturing and clinical development capabilities to build a successful, integrated biopharmaceutical company. Our efforts have yielded a diverse pipeline of product candidates that we believe has the potential to address a variety of serious medical conditions. We believe that our ability to develop product candidates is enhanced by the application of our technology platforms. TheseOur discovery platforms are designed to discoveridentify specific genes of therapeutic interest for a particular disease or cell type and validate targets through high-throughput production of mammalian models. Our human monoclonal antibody technology (VelocImmune®) and cell line expression technologies may then be utilized to design and produce new product candidates directed against the disease target. Based on theVelocImmune platform which we believe, in conjunction with our other proprietary technologies, can accelerate the development of fully human monoclonal antibodies, we moved our first antibody product candidate (REGN88) into clinical trials in the fourth quarter of 2007. We plan to advance two new antibody product candidates into clinical development in 2008 and an additional two to three antibody product candidates each year thereafter beginning in 2009. We continue to invest in the development of enabling technologies to assist in our efforts to identify, develop, and commercialize new product candidates.
Here is a summary of the clinical status of our clinical candidates as of December 31, 2004:
Late-Stage Clinical Programs:
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| • 1. | VEGF TRAPARCALYSTTM — Oncology:Inflammatory Diseases Protein-based product candidate designed to bind Vascular Endothelial Growth Factor (called VEGF, also known as Vascular Permeability Factor or VPF) and the related Placental Growth Factor (called PlGF), and prevent their interaction with cell surface receptors. VEGF (and to a less validated degree, PlGF) is required for the growth of new blood vessels that are needed for tumors to grow and is a potent regulator of vascular permeability and leakage. In 2001, we initiated a dose-escalation phase 1 clinical trial designed to assess the safety and tolerability of the VEGF Trap in subjects with advanced solid tumor malignancies. The preliminary results of this study were announced at the annual meeting of the American Society of Clinical Oncology (ASCO) in June 2004 and we updated these results in a poster session at the 16th Annual EORTC-NCI-AACR Symposium on Molecular Targets and Cancer Therapeutics in September 2004. The phase 1 trial was an open label, dose-escalation study conducted at three sites in the United States. The study enrolled and treated 38 patients with incurable, relapsed, or refractory solid tumors with subcutaneous injections of VEGF Trap. In total, the trial enrolled patients with 15 different types of cancer. Preliminary results of this study indicated that: |
ARCALYSTTM(rilonacept; also known asIL-1Trap) is a protein-based product candidate designed to bind the interleukin-1 (called IL-1) cytokine and prevent its interaction with cell surface receptors. We are evaluating ARCALYSTTM in a number of diseases and disorders where IL-1 may play an important role, including a group of
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rare diseases called Cryopyrin-Associated Periodic Syndromes (CAPS) and other diseases associated with inflammation.
In November 2007, we announced that we received notification from the U.S. Food and Drug Administration (FDA) that the action date for the FDA’s priority review of the Biologics License Application (BLA) for ARCALYSTTM in CAPS had been extended three months to February 29, 2008. In August 2007, the FDA granted priority review status to the BLA for ARCALYSTTM for the long-term treatment of CAPS. The FDA previously granted Orphan Drug status and Fast Track designation to ARCALYSTTM for the treatment of CAPS. In July 2007, ARCALYSTTM also received Orphan Drug designation in the European Union for the treatment of CAPS.
CAPS represents a group of rare inherited auto-inflammatory conditions, including Familial Cold Autoinflammatory Syndrome (FCAS) and Muckle-Wells Syndrome (MWS). CAPS also includes Neonatal Onset Multisystem Inflammatory Disease (NOMID). ARCALYSTTM has not been studied, and is not expected to be indicated, for the treatment of NOMID. The syndromes included in CAPS are characterized by spontaneous, systemic inflammation and are termed auto-inflammatory disorders. A novel feature of these conditions (particularly FCAS and MWS) is that exposure to mild degrees of cold temperature can provoke a major inflammatory episode that occurs within hours. CAPS is caused by a range of mutations in the gene NLRP3(formerly known asCIAS1) which encodes a protein named cryopyrin. Currently, there are no medicines approved for the treatment of CAPS.
We have initiated a Phase 2 safety and efficacy trial of ARCALYSTTM in the prevention of gout flares induced by the initiation of uric acid-lowering drug therapy used to control the disease. We previously reported positive results from an exploratory proof of concept study of ARCALYSTTM in ten patients with chronic active gout. In those patients, treatment with ARCALYSTTM demonstrated a statistically significant reduction in patient pain scores in the single-blind, placebo-controlled study. Mean patients’ pain scores, the key symptom measure in persistent gout, were reduced 41% (p=0.025) during the first two weeks of active treatment and reduced 56% (p<0.004) after six weeks of active treatment. In this study, in which safety was the primary endpoint measure, treatment with ARCALYSTTM was generally well-tolerated. We are also evaluating the potential use of ARCALYSTTMin other indications in which IL-1 may play a role.
Under a March 2003 collaboration agreement with Novartis Pharma AG, we retain the right to elect to collaborate in the future development and commercialization of a Novartis IL-1 antibody which is in clinical development. Following completion of Phase 2 development and submission to us of a written report on the Novartis IL-1 antibody, we have the right, in consideration for an opt-in payment, to elect to co-develop and co-commercialize the Novartis IL-1 antibody in North America. If we elect to exercise this right, we are responsible for paying 45% of post-election North American development costs for the antibody product. In return, we are entitled to co-promote the Novartis IL-1 antibody and to receive 45% of net profits on sales of the antibody product in North America. Under certain circumstances, we are also entitled to receive royalties on sales of the Novartis IL-1 antibody in Europe.
Under the collaboration agreement, Novartis has the right to elect to collaborate in the development and commercialization of a second generation IL-1 Trap following completion of its Phase 2 development, should we decide to clinically develop such a second generation product candidate. Novartis does not have any rights or options with respect to our ARCALYSTTM product candidate currently in clinical development.
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| 2. | • | the VEGF Trap was generally well-tolerated at the dose levels studied, and |
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| • | circulating levels of the VEGF Trap at the highest dose (1.6 milligrams per kilogram of body weight (mg/kg) per week) were consistent with levels observed to be effective in preclinical models.Aflibercept (VEGF Trap) — Oncology |
Aflibercept is a protein-based product candidate designed to bind all forms of Vascular Endothelial Growth Factor-A (called VEGF-A, also known as Vascular Permeability Factor or VPF) and the related Placental Growth Factor (called PlGF), and prevent their interaction with cell surface receptors. VEGF-A (and to a less validated degree, PlGF) is required for the growth of new blood vessels that are needed for tumors to grow and is a potent regulator of vascular permeability and leakage.
Aflibercept is being developed in cancer indications in collaboration with sanofi-aventis. We and sanofi-aventis began the first four trials of our global Phase 3 development program in the second half of 2007. One trial is evaluating aflibercept in combination with docetaxel/prednisone in patients with first line metastatic androgen
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independent prostate cancer. A second trial is evaluating aflibercept in combination with docetaxel in patients with second line metastatic non-small cell lung cancer. The third Phase 3 trial is evaluating aflibercept in first-line metastatic pancreatic cancer in combination with gemcitabine. The fourth Phase 3 trial is evaluating aflibercept in second-line metastatic colorectal cancer in combination with FOLFIRI (Folinic Acid (leucovorin), 5-fluorouracil, and irinotecan). In all of these trials, aflibercept is being combined with the current standard of chemotherapy care for the stated development stage of the cancer type.
The collaboration is conducting a number of other trials in the global development program for aflibercept. Five safety and tolerability studies of aflibercept in combination with standard chemotherapy regimens are continuing in a variety of cancer types to support the Phase 3 clinical program. Sanofi-aventis has also expanded the development program to Japan, where they are conducting a Phase 1 safety and tolerability study in combination with another investigational agent in patients with advanced solid malignancies.
The collaboration is also conducting Phase 2 single-agent studies of aflibercept in advanced ovarian cancer (AOC), non-small cell lung adenocarcinoma (NSCLA), and AOC patients with symptomatic malignant ascites (SMA). The AOC and NSCLA trials are fully enrolled and ongoing. The SMA trial is approximately 50% enrolled and continues to enroll patients. In 2004, the FDA granted Fast Track designation to aflibercept for the treatment of SMA.
In addition, more than 10 studies are currently underway or scheduled to begin that are being conducted in conjunction with the National Cancer Institute (NCI) Cancer Therapy Evaluation Program (CTEP) evaluating aflibercept as a single agent or in combination with chemotherapy regimens in a variety of cancer indications.
The first registration submission to a regulatory agency for aflibercept is possible as early as 2008, potentially as third line treatment as a single agent in advanced ovarian cancer (AOC) or in AOC patients with SMA. However, in order for our ongoing Phase 2 study in AOC to be sufficient to support such a submission, we believe that the final unblinded results of the study would have to demonstrate a more robust response rate than that reported in the interim analysis of blinded data from the study presented in June 2007 at the annual meeting of the American Society of Clinical Oncology (ASCO).
Cancer is a heterogeneous set of diseases and one of the leading causes of death in the developed world. A mutation in any one of dozens of normal genes can eventually result in a cell becoming cancerous; however, a common feature of cancer cells is that they need to obtain nutrients and remove waste products, just as normal cells do. The vascular system normally supplies nutrients to and removes waste from normal tissues. Cancer cells can use the vascular system either by taking over preexisting blood vessels or by promoting the growth of new blood vessels (a process known as angiogenesis). Vascular Endothelial Growth Factor (VEGF) is secreted by many tumors to stimulate the growth of new blood vessels to supply nutrients and oxygen to the tumor. VEGF blockers have been shown to inhibit new vessel growth, and, in some cases, can cause regression of existing tumor vasculature. Countering the effects of VEGF, thereby blocking the blood supply to tumors, has demonstrated therapeutic benefits in clinical trials. This approach of inhibiting angiogenesis as a mechanism of action for an oncology medicine was validated in February 2004, when the FDA approved Genentech, Inc.’s VEGF inhibitor, Avastin®. Avastin® (a trademark of Genentech, Inc.) is an antibody product designed to inhibit VEGF and interfere with the blood supply to tumors.
Aflibercept Collaboration with the sanofi-aventis Group
In September 2003, we entered into a collaboration agreement with Aventis Pharmaceuticals, Inc. (predecessor to sanofi-aventis U.S.) to collaborate on the development and commercialization of aflibercept in all countries other than Japan, where we retained the exclusive right to develop and commercialize aflibercept. In January 2005, we and sanofi-aventis amended the collaboration agreement to exclude, from the scope of the collaboration, the development and commercialization of aflibercept for intraocular delivery to the eye. In December 2005, we and sanofi-aventis amended our collaboration agreement to expand the territory in which the companies are collaborating on the development of aflibercept to include Japan. Under the collaboration agreement, as amended, we and sanofi-aventis will share co-promotion rights and profits on sales, if any, of aflibercept outside of Japan for disease indications included in our collaboration. In Japan, we are entitled to a royalty of approximately 35% on annual sales of aflibercept, subject to certain potential adjustments. We may also receive up to $400.0 million in milestone
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payments upon receipt of specified marketing approvals. This total includes up to $360.0 million in milestone payments related to receipt of marketing approvals for up to eight aflibercept oncology and other indications in the United States or the European Union. Another $40.0 million of milestone payments relate to receipt of marketing approvals for up to five oncology indications in Japan.
Under the aflibercept collaboration agreement, as amended, agreed upon worldwide development expenses incurred by both companies during the term of the agreement will be funded by sanofi-aventis. If the collaboration becomes profitable, we will be obligated to reimburse sanofi-aventis for 50% of aflibercept development expenses in accordance with a formula based on the amount of development expenses and our share of the collaboration profits and Japan royalties, or at a faster rate at our option.
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| 3. | | Detailed results of the trial are expected to be submitted for publication in a peer-reviewed journal once all patients complete the extended treatment phase available to patients who maintained stable disease after the initial 10-week treatment period and the full results of the extension phase have been analyzed. |
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| | A second phase 1 trial, which commenced in April 2004, is studying higher VEGF Trap exposures through intravenous administration. This study is also designed to evaluate the safety, tolerability, and pharmacokinetics of intravenous VEGF Trap in advanced cancer patients. |
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| | We and the sanofi-aventis Group plan to initiate multiple clinical studies in 2005 to evaluate the VEGF Trap as a single-agent and in combination with other therapies in various cancer indications. During the third quarter of 2004, the U.S. Food and Drug Administration (FDA) granted Fast Track designation to the VEGF Trap for a specific niche cancer indication. As a result of the FDA’s decision, we and sanofi–aventis plan to initiate a clinical trial in that indication in 2005. |
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| | In September 2003, we entered into a collaboration agreement with Aventis Pharmaceuticals, Inc. (now part of the sanofi-aventis Group) to jointly develop and commercialize the VEGF Trap throughout the world with the exception of Japan, where product rights remain with us. Under the collaboration agreement, as amended in January 2005, we and sanofi-aventis will share co-promotion rights and profits on sales, if any, of the VEGF Trap for disease indications included in our collaboration. In December 2004, we earned a $25.0 million payment from sanofi-aventis, which was received in January 2005, upon the achievement of an early-stage clinical milestone. We may also receive up to $360.0 million in additional milestone payments upon receipt of specified marketing approvals for up to eight VEGF Trap indications in Europe or the United States. |
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| | Under the collaboration agreement, agreed upon development expenses incurred by both companies during the term of the agreement will be funded by sanofi-aventis. If the collaboration becomes profitable, we will reimburse sanofi-aventis for 50% of the VEGF Trap development expenses in accordance with a formula based on the amount of development expenses and our share of the collaboration profits, or at a faster rate at our option.— Eye Diseases |
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| • | VEGF TRAP — Eye Diseases: VEGF both stimulates angiogenesis and increases vascular permeability. It has been shown in preclinical studies to be a major pathogenic factor in diabetic retinopathy, diabetic macular edema, and age-related macular degeneration, and is believed to be involved in other medical problems affecting the eyes. In January 2005, we and sanofi-aventis amended our collaboration agreement to exclude rights to develop and commercialize the VEGF Trap for eye diseases through local delivery systems. We now have the exclusive right to develop and commercialize the VEGF Trap for eye diseases through local administration to the eye and plan to initiate a clinical trial of the VEGF Trap delivered through intravitreal injection in mid-2005. While use of the VEGF Trap for eye diseases using systemic delivery remains part of our collaboration with sanofi-aventis, we and sanofi-aventis do not currently intend to pursue further clinical development using systemic delivery of VEGF Trap for eye diseases. Two phase 1 clinical trials of the VEGF Trap delivered systemically for the potential treatment of eye diseases were completed in 2004. We expect to discuss the results from these trials at scientific conferences in 2005. |
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| • | INTERLEUKIN-1 TRAP (IL-1 Trap): Protein-based product candidate designed to bind the interleukin-1 (called IL-1) cytokine and prevent its interaction with cell surface receptors. IL-1 may play an important role in a number of rheumatological and other diseases and disorders, including diseases associated with inflammation in blood vessels. |
The VEGF Trap-Eye is a form of the VEGF Trap that has been purified and formulated with excipients and at concentrations suitable for direct injection into the eye. The VEGF Trap-Eye currently is being tested in a Phase 3 trial in patients with the neovascular form of age-related macular degeneration (wet AMD) and has completed a small pilot study in patients with diabetic macular edema (DME).
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| | In October 2003, we announced that the IL-1 Trap demonstrated evidence of clinical activity and safety in patients with rheumatoid arthritis in a phase 2 dose-ranging study in approximately 200 patients. Patients treated with the highest dose, 100 milligrams of the IL-1 Trap, exhibited non-statistically significant improvements in the proportion of American College of Rheumatology (ACR) 20 responses versus placebo, the primary endpoint of the trial. Patients treated with the IL-1 Trap also exhibited improvements in secondary endpoints of the trial. Patients in this trial experienced |
In the clinical development program for the VEGF Trap-Eye, we and Bayer HealthCare have initiated a Phase 3 study of the VEGF Trap-Eye in wet AMD. This first trial, known as VIEW 1 (VEGF Trap:Investigation ofEfficacy and Safety inWet age-related macular degeneration), is comparing the VEGF Trap-Eye and Genentech, Inc.’s Lucentis® (ranibizumab), an anti-angiogenic agent approved for use in wet AMD. This Phase 3 trial is evaluating dosing intervals of four and eight weeks for the VEGF Trap-Eye compared with ranibizumab dosed according to its label every four weeks. We and Bayer HealthCare plan to initiate a second Phase 3 trial in wet AMD in 2008. This second trial will be conducted primarily in the European Union and other parts of the world outside the U.S.
In October 2007, we and Bayer HealthCare announced positive results from the full analysis of the primary12-week endpoint of a Phase 2 study evaluating the VEGF Trap-Eye in wet AMD. The VEGF Trap-Eye met the primary study endpoint of a statistically significant reduction in retinal thickness, a measure of disease activity, after 12 weeks of treatment compared with baseline (all five dose groups combined, mean decrease of 119 microns, p<0.0001). The mean change from baseline in visual acuity, a key secondary endpoint of the study, also demonstrated statistically significant improvement (all groups combined, increase of 5.7 letters, p<0.0001). Preliminary analyses at 16 weeks showed that the VEGF Trap-Eye, dosed monthly, achieved a mean gain in visual acuity of 9.3 to 10 letters (for the 0.5 and 2 mg dose groups, respectively). In additional exploratory analyses, the VEGF Trap-Eye, dosed monthly, reduced the proportion of patients with vision of 20/200 or worse (a generally accepted definition for legal blindness) from 14.3% at baseline to 1.6% at week 16; the proportion of patients with vision of 20/40 or better (part of the legal minimum requirement for an unrestricted driver’s license in the U.S.) was likewise increased from 19.0% at baseline to 49.2% at 16 weeks. These findings were presented at the Retina Society Conference in September 2007.
We and Bayer HealthCare are also developing the VEGF Trap-Eye in DME. In May 2007, at the annual meeting of the Association for Research in Vision and Ophthalmology (ARVO), the companies reported results from a small pilot study of the VEGF Trap-Eye in patients with DME. In the study, the VEGF Trap-Eye was well tolerated and demonstrated activity in five patients, with decreases in retinal thickness and improvement in visual acuity.
VEGF-A both stimulates angiogenesis and increases vascular permeability. It has been shown in preclinical studies to be a major pathogenic factor in both wet AMD and diabetic retinopathy, and it is believed to be involved in other medical problems affecting the eyes. In clinical trials, blocking VEGF-A has been shown to be effective in patients with wet AMD, and Macugen® (OSI Pharmaceuticals, Inc.) and Lucentis® (Genentech, Inc.) have been approved to treat patients with this condition.
Wet AMD and diabetic retinopathy (DR) are two of the leading causes of adult blindness in the developed world. In both conditions, severe visual loss is caused by a combination of retinal edema and neovascular proliferation. DR is a major complication of diabetes mellitus that can lead to significant vision impairment. DR is
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| | statistically significant reductions in c-reactive protein (CRP) levels, and the improvements in CRP levels demonstrated a clear dose response to the IL-1 Trap. The IL-1 Trap was generally well tolerated and no serious drug-related adverse events were reported. |
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| | In mid-2005, we plan to further evaluate the safety and efficacy of the IL-1 Trap in rheumatoid arthritis in a double-blind, placebo-controlled, multi-center trial. This trial will be conducted in a larger patient population, testing higher doses of IL-1 Trap for a longer period of time than the phase 2 trial completed in 2003. We expect to evaluate doses of 160 milligrams and 320 milligrams of IL-1 Trap delivered subcutaneously once a week. Additional trials of the IL-1 Trap will be required to support an application seeking approval to market the IL-1 Trap in rheumatoid arthritis. |
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| | In the fourth quarter of 2004, we initiated a pilot study of the IL-1 Trap in patients withCIAS1-Associated Periodic Syndrome (CAPS), a spectrum of rare diseases associated with mutations in theCIAS1gene. IL-1 appears to play a significant role in these diseases. In December 2004, the FDA granted orphan drug status to the IL-1 Trap for the treatment of these diseases. We expect to commence an additional trial for this indication in 2005. |
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| | We believe blocking IL-1 could be useful in many potential indications where inflammation plays a role. Examples include such indications as osteoarthritis, certain rare genetic diseases, Still’s disease, cardiovascular diseases, and many others. In 2005, we plan to initiate several proof-of-concept studies to identify where the IL-1 Trap demonstrates evidence of efficacy and safety. |
characterized, in part, by vascular leakage, which results in the collection of fluid in the retina. When the macula, the central area of the retina that is responsible for fine visual acuity, is involved, loss of visual acuity occurs. This is referred to as diabetic macular edema (DME). DME is the most prevalent cause of moderate visual loss in patients with diabetes.
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| • | INTERLEUKIN-4/INTERLEUKIN-13 TRAP (IL-4/13 Trap): Protein-based product candidate designed to bind both the interleukin-4 and interleukin-13 (called IL-4 and IL-13) cytokines and prevent their interaction with cell surface receptors. Based on preclinical data, IL-4 and IL-13 are thought to play a major role in diseases such as asthma, allergic disorders, and other inflammatory diseases. At a scientific conference during the second quarter of 2004, we presented the results of a placebo-controlled, double-blind, dose escalation phase 1 trial of the IL-4/13 Trap using subcutaneous injections in adult subjects with mild to moderate asthma. The IL-4/13 Trap was generally safe and well tolerated at the doses tested. We plan to initiate a phase 2 trial in 2005 to evaluate the safety and potential efficacy of the IL-4/13 Trap in asthma or allergy indications. |
Our Areas of FocusCollaboration with Bayer HealthCare
In October 2006, we entered into a collaboration agreement with Bayer HealthCare for the global development and commercialization outside the United States of the VEGF Trap-Eye. Under the agreement, we and Bayer HealthCare will collaborate on, and share the costs of, the development of the VEGF Trap-Eye through an integrated global plan that encompasses wet AMD, diabetic eye diseases, and other diseases and disorders. Bayer HealthCare will market the VEGF Trap-Eye outside the United States, where the companies will share equally in profits from any future sales of the VEGF Trap-Eye. If the VEGF Trap-Eye is granted marketing authorization in a major market country outside the United States, we will be obligated to reimburse Bayer HealthCare for 50% of the development costs that it has incurred under the agreement from our share of the collaboration profits. Within the United States, we retain exclusive commercialization rights to the VEGF Trap-Eye and are entitled to all profits from any such sales. We received an up-front payment of $75.0 million from Bayer HealthCare. In 2007, we received a $20.0 million milestone payment from Bayer HealthCare following dosing of the first patient in the Phase 3 study of the VEGF Trap-Eye in wet AMD, and can earn up to $90.0 million in additional development and regulatory milestones related to the development of the VEGF Trap-Eye and marketing approvals in major market countries outside the United States. We can also earn up to $135.0 million in sales milestones if total annual sales of the VEGF Trap-Eye outside the United States achieve certain specified levels starting at $200.0 million.
Antibody Research Technologies and Development Program:
One way that a cell communicates with other cells is by releasing specific signaling proteins, either locally or into the bloodstream. These proteins have distinct functions, and are classified into different “families” of molecules, such as peptide hormones, growth factors, and cytokines. All of these secreted (or signaling) proteins travel to and are recognized by another set of proteins, called “receptors,” which reside on the surface of responding cells. These secreted proteins impact many critical cellular and biological processes, causing diverse effects ranging from the regulation of growth of particular cell types, to inflammation mediated by white blood cells. Secreted proteins can at times be overactive and thus result in a variety of diseases. In these disease settings, blocking the action of secreted proteins can have clinical benefit.
Regeneron scientists have developed two different technologies to design protein therapeutics to block the action of specific secreted proteins. The first technology, termed the “Trap” technology, was used to generate our current clinical pipeline, including aflibercept, the VEGF Trap-Eye, and ARCALYSTTM. These novel “Traps” are composed of fusions between two distinct receptor components and the constant region of an antibody molecule called the “Fc region”, resulting in high affinity product candidates.
Regeneron scientists also have discovered and developed a new technology for designing protein therapeutics that facilitates the discovery and production of fully human monoclonal antibodies. We call our technologyVelocImmune®and, as described below, we believe that it is an improved way of generating a wide variety of high affinity, therapeutic, fully human monoclonal antibodies.
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| Anti-Angiogenesis/Angiogenesis in Cancer, Eye Disease, and Other Settings: VEGF Trap and the AngiopoietinsVelocImmune® (Human Monoclonal Antibodies) |
We have developed a novel mouse technology platform, calledResearch.VelocImmune A plentiful blood supply, for producing fully human monoclonal antibodies. TheVelocImmunemouse platform was generated by exploiting ourVelociGenetechnology platform (see below), in a process in which six megabases of mouse immune gene loci were replaced, or “humanized,” with corresponding human immune gene loci. TheVelocImmunemice can be used to generate efficiently fully human monoclonal antibodies to targets of therapeutic interest.VelocImmuneand our related technologies offer the potential to increase the speed and efficiency through which human monoclonal antibody therapeutics may be discovered and validated, thereby improving the overall efficiency of our early stage drug development activities. We are utilizing theVelocImmunetechnology to produce our next generation of drug
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candidates for preclinical development and are exploring possible additional licensing or collaborative arrangements with third parties related toVelocImmuneand related technologies.
Antibody Collaboration with the sanofi-aventis Group
In November 2007, we and sanofi-aventis entered into a global, strategic collaboration to discover, develop, and commercialize fully human monoclonal antibodies. The first therapeutic antibody to enter clinical development under the collaboration, REGN88, is an antibody to the Interleukin-6 receptor (IL-6R), which has started clinical trials in rheumatoid arthritis. The second is expected to be an antibody to Delta-like ligand-4 (Dll4) which is currently scheduled to commence clinical development in mid-2008. The collaboration is governed by a Discovery and Preclinical Development Agreement and a License and Collaboration Agreement. We received a non-refundable, up-front payment of $85.0 million from sanofi-aventis under the discovery agreement. In addition, sanofi-aventis will fund up to $475.0 million of our research for identifying and validating potential drug discovery targets and developing fully human monoclonal antibodies against these targets through December 31, 2012. Sanofi-aventis also has an option to extend the discovery program for up to an additional three years for further antibody development and preclinical activities.
For each drug candidate identified under the discovery agreement, sanofi-aventis has the option to license rights to the candidate under the license agreement. If it elects to do so, sanofi-aventis will co-develop the drug candidate with us through product approval. Development costs will be shared between the companies, with sanofi-aventis funding drug candidate development costs up front. We are responsible for reimbursing sanofi-aventis for half of the total development costs it paid for all collaboration products from our share of profits from commercialization of collaboration products to the extent they are sufficient for this purpose. Sanofi-aventis will lead commercialization activities for products developed under the license agreement, subject to our right to co-promote such products. The parties will equally share profits and losses from sales within the United States. The parties will share profits outside the United States on a sliding scale based on sales starting at 65% (sanofi-aventis)/35% (us) and ending at 55% (sanofi-aventis)/45% (us), and will share losses outside the United States at 55% (sanofi-aventis)/45% (us). In addition to profit sharing, we are entitled to receive up to $250.0 million in sales milestone payments, with milestone payments commencing after aggregate annual sales outside the United States exceed $1.0 billion on a rolling12-month basis.
License Agreement with AstraZeneca
In February 2007, we entered into a non-exclusive license agreement with AstraZeneca UK Limited that allows AstraZeneca to utilize ourVelocImmune® technology in its internal research programs to discover human monoclonal antibodies. Under the terms of the agreement, AstraZeneca made a $20.0 million non-refundable, up-front payment to us. AstraZeneca is required to nourish every tissue and organmake up to five additional annual payments of $20.0 million, subject to its ability to terminate the agreement after making the first three additional payments or earlier if the technology does not meet minimum performance criteria. We are entitled to receive a mid-single-digit royalty on any future sales of antibody products discovered by AstraZeneca using ourVelocImmunetechnology.
License Agreement with Astellas
In March 2007, we entered into a non-exclusive license agreement with Astellas Pharma Inc. that allows Astellas to utilize ourVelocImmunetechnology in its internal research programs to discover human monoclonal antibodies. Under the terms of the body. Diseases suchagreement, Astellas made a $20.0 million non-refundable, up-front payment to us. Astellas is required to make up to five additional annual payments of $20.0 million, subject to its ability to terminate the agreement after making the first three additional payments or earlier if the technology does not meet minimum performance criteria. We are entitled to receive a mid-single-digit royalty on any future sales of antibody products discovered by Astellas using ourVelocImmunetechnology.
VelociGene® and VelociMousetm (Target Validation)
OurVelociGeneplatform allows custom and precise manipulation of very large sequences of DNA to produce highly customized alterations of a specified target gene and accelerates the production of knock-out and transgenic
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expression models without using either positive/negative selection or isogenic DNA. In producing knock-out models, a color or fluorescent marker is substituted in place of the actual gene sequence, allowing for high-resolution visualization of precisely where the gene is active in the body, during normal body functioning, as diabeteswell as in disease processes. For the optimization of pre-clinical development and atherosclerosis wreak their havoc,toxicology programs,VelociGeneoffers the opportunity to humanize targets by replacing the mouse gene with the human homolog. Thus,VelociGeneallows scientists to rapidly identify the physical and biological effects of deleting or over-expressing the target gene, as well as to characterize and test potential therapeutic molecules.
TheVelociMousetechnology also allows for the direct and immediate generation of genetically altered mice from embryonic stem cells (ES cells), thereby avoiding the lengthy process involved in part, by destroying blood vessels (arteries, veins,generating and capillaries)breeding knockout mice from chimeras. Mice generated through this method are normal and compromising blood flow. Decreases in blood flow (known as ischemia) can result in non-healing skin ulcershealthy and gangrene, painful limbs that cannot tolerate exercise, loss of vision, and heart attacks. Inexhibit a 100% germ-line transmission. Furthermore, Regeneron’sVelociMiceare suitable for direct phenotyping or other cases, disease processes can damage blood vessels by breaking down vessel walls, resulting in defective and leaky vessels. Leaking vessels can lead to swelling and edema, as occurs in brain tumors following ischemic stroke, in diabetic retinopathy, and in arthritis and other inflammatory diseases. Finally, some disease processes, such as tumor growth, depend on the induction of new blood vessels.studies.
National Institutes of Health Grant
In September 2006, we were awarded a five-year grant from the National Institutes of Health (NIH) as part of the NIH’s Knockout Mouse Project. The goal of the Knockout Mouse Project is to build a comprehensive and broadly available resource of knockout mice to accelerate the understanding of gene function and human diseases. We use ourVelociGenetechnology to take aim at 3,500 of the most difficult genes to target and which are not currently the focus of other large-scale knockout mouse programs. We also agreed to grant a limited license to a consortium of research institutions, the other major participants in the Knockout Mouse Project, to use components of ourVelociGenetechnology in the Knockout Mouse Project. We are generating a collection of targeting vectors and targeted mouse ES cells which can be used to produce knockout mice. These materials will be made widely available to academic researchers without charge. We will receive a fee for each targeted ES cell line or targeting construct made by us or the research consortium and transferred to commercial entities.
Under the NIH grant, we are entitled to receive a minimum of $17.9 million over a five-year period. We will receive another $1.0 million to optimize our existing C57BL/6 ES cell line and its proprietary growth medium, both of which will be supplied to the research consortium for its use in the Knockout Mouse Project. We have the right to use, for any purpose, all materials generated by us and the research consortium.
Cell Line Expression Technologies
Many proteins that are of potential pharmaceutical value are proteins which are “secreted” from the cells into the bloodstream. Examples of secreted proteins include growth factors (such as insulin and growth hormone) and antibodies. Current technologies for the isolation of cells engineered to produce high levels of secreted proteins are both laborious and time consuming. We have developed enabling platforms for the high-throughput, rapid generation of high-producing cell lines for our Traps and ourVelocImmunehuman monoclonal antibodies.
Research Programs:
Oncology and Angiogenesis
In many clinical settings, positively or negatively regulating blood vessel growth could have important therapeutic benefits, as could the repair of damaged and leaky vessels. Thus, building new vessels, by a process known as angiogenesis, can improve circulation to ischemic limbs and the heart, aid in healing skin ulcers or other chronic wounds, and in establishing tissue grafts. In addition, repairing leaky vessels can reverse swelling and edema. Reciprocally, blocking tumor-induced angiogenesis can blunt tumor growth.
Vascular Endothelial Growth FactorVEGF was the first growth factor shown to be specific for blood vessels, by virtue of having its receptor specifically expressed on blood vessel cells. In 1994, we discovered a second family of angiogenic growth factors, termed the Angiopoietins, and we have received patents covering the members of this family. The Angiopoietins include naturally occurring positive and negative regulators of angiogenesis, as described in numerous scientific manuscripts published by our scientists and their collaborators. The Angiopoietins are being evaluated in preclinical research by us and our academic collaborators.
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Our preclinical studies have revealed that VEGF and the Angiopoietins normally function in a coordinated and collaborative manner during blood vessel growth. Thus, for example, the growth of new blood vessels to nourish ischemic tissue appears to require both these agents. In addition, Angiopoietin-1 seems to play a critical role in stabilizing the blood vessel wall, and in animal models administration of this growth factor can prevent or repair leaky vessels. In terms of blocking vessel growth, manipulationManipulation of both VEGF and Angiopoietins seems to be of value.
The approach of inhibiting angiogenesis as a mechanism of action for an oncology medicine was further validatedvalue in February 2004, when the FDA approved Genentech, Inc.’s VEGF inhibitor, Avastintm. Avastin is an antibody product designed to inhibit VEGF and interfere with the blood supply to cancerous tumors.blocking vessel growth. We exploited our Trap technology (which is described below) to develop a protein-based blocker of VEGF, referred to as the VEGF Trap.
Oncology. Cancer is a heterogeneous set of diseases and one of the leading causes of deathhave research programs focusing on several targets in the developed world. A mutation in any oneareas of dozens of normal genes can eventually lead a cell to become cancerous; however, a common feature of cancer cells is that they need to get nutrientsoncology and remove waste products, just as normal cells do. The vascular system is designed to supply nutrients and remove waste from normal tissues. Cancer cells can use the vascular system either by taking over preexisting blood vessels or by promoting the growth of new blood vessels. VEGF is secreted by many tumors to stimulateangiogenesis.
Tumors depend on the growth of new blood vessels (a process called “angiogenesis”) to support their continued growth. Therapies that block tumor angiogenesis, specifically those that block VEGF, the tumor. Countering the effectskey initiator of VEGF, thus blocking the blood supply
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tumor angiogenesis, recently have been validated in human cancer patients. However, anti-VEGF approaches do not work in all patients, and many tumors can become resistant to tumors, has been shown to provide therapeutic benefits.such therapies.
Diseases
In the December 21, 2006 issue of the Eye.journalNature, Age-Related Macular Degeneration (AMD) and Diabetic Retinopathy (DR) are twowe reported data from a preclinical study demonstrating that blocking an important cell signaling molecule, known as Delta-like Ligand 4 (Dll4), inhibited the growth of the leading causesexperimental tumors by interfering with their ability to produce a functional blood supply. The inhibition of adult blindnesstumor growth was seen in the developed world. In both conditions, severe visual loss is caused by a combination of retinal edema and neovascular proliferation. AMD is a leading cause of severe visual loss in people over the age of 55 in developed countries. It is estimated that, in the U.S., 6% of individuals aged 65-74 and 20% of those older than 75 are affected with AMD. DR is a major complication of diabetes mellitus that can lead to significant vision impairment. DR is characterized, in part, by vascular leakage, which results in the collection of fluid in the retina. When the macula, the central area that is responsible for fine visual acuity, is involved, loss of visual acuity occurs. This is referred to as Diabetic Macular Edema (DME). DME is the most prevalent cause of moderate visual loss in patients with diabetes.
VEGF both stimulates angiogenesis and increases vascular permeability, has been shown in preclinical studies to be a major pathogenic factor in both DR and AMD, and is believed to be involved in other medical problems affecting the eyes. Counteracting the effects of VEGF may provide a significant therapeutic benefit to patients suffering from these disorders.
Clinical Development. We discovered and are developing a protein-based product candidate designed to bind to VEGF called the VEGF Trap. As described above, we are currently developing the VEGF Trap in cancer indications in collaboration with sanofi-aventis. We have the exclusive right to develop and commercialize the VEGF Trap for the treatment of eye diseases utilizing local delivery to the eye, such as through intravitreal injections.
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| Trap Technology and Additional Traps |
Research. Our research on ciliary neurotrophic factor, or CNTF, led to the discovery that CNTF, although it is a neurotrophic factor, belongs to the “superfamily” of signaling molecules called cytokines. Cytokines are soluble proteins secreted by the cells of the body. In many cases, cytokines act as messengers to help regulate immune and inflammatory responses. In excess, cytokines can be harmful and have been linked to a variety of diseases. Blocking cytokinestumor types, including those that were resistant to blockade of VEGF, suggesting a novel anti-angiogenesis therapeutic approach. We plan in mid-2008 to commence Phase 1 clinical development of a fully human monoclonal antibody to Dll4 that was discovered using ourVelocImmunetechnology.
Metabolic and growth factors is a proven therapeutic approach with a number of medicines or product candidates already approved or in clinical development. The cytokine superfamily includes factors such as erythropoietin, thrombopoietin, granulocyte-colony stimulating factor, and the interleukins (or ILs).Related Diseases
During the 1990s, our scientists made a number of breakthroughs in understanding how receptors work for an entire family of cytokines, which had broad relevance for many other families of cytokines and growth
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factors. Based on these findings, we developed a new class of protein-based antagonists, called Traps, which could be designed to target and block specific cytokines and growth factors implicated in human disease. Examples include the VEGF Trap (designed to block VEGF and PlGF), the IL-1 Trap (designed to block both IL-1 alpha and IL-1 beta), the IL-4 Trap (designed to block IL-4), the IL-18 Trap (designed to block IL-18), and the IL-4/13 Trap (designed to block IL-4 and IL-13).
In preclinical studies, these Traps are more potent than other growth factor and cytokine antagonists, potentially allowing lower levels of these drug candidates to be used. Moreover, because these Traps are comprised entirely of natural human-derived protein sequences, they may be less likely to induce an immune reaction in humans. Because pathological levels of certain cytokines and growth factors seem to contribute to a variety of diseases, we believe our Cytokine Traps have the potential to be important therapeutic agents.
We have clinical programs underway for our IL-1 Trap and IL-4/13 Trap (see below) and a research program underway for an IL-18 Trap. IL-18 is thought to contribute to a number of inflammatory and immunological diseases and disorders. We also have patents covering additional Traps for IL-2, IL-3, IL-5, IL-6, IL-15, and others, which are being studied in earlier stage research programs. Our research also includes molecular and cellular research to improve or modify Trap technology, process development efforts to produce experimental and clinical research supplies, and in vivo and in vitro studies to further understand and demonstrate the efficacy of the Traps.
IL-1 Trap. We discovered and are developing a protein-based blocker of IL-1 called the IL-1 Trap in a number of diseases where IL-1 may play an important role, including rheumatoid arthritis, osteoarthritis,CIAS1-Associated Periodic Syndrome (CAPS), and certain systemic inflammatory diseases. An IL-1 receptor antagonist, Kineret® (a registered trademark of Amgen Inc.), has been approved by the FDA for the treatment of rheumatoid arthritis. Rheumatoid arthritis is a chronic disease in which the immune system attacks the tissue that lines and cushions joints. Over time, the cartilage, bone, and ligaments of the joint erode, leading to progressive joint deformity and joint destruction, generally in the hand, wrist, knee, and foot. Joints become painful and swollen and motion is limited. Over two million people, 1% of the U.S. population, are estimated to have rheumatoid arthritis, and 10% of those eventually become disabled. Women account for roughly two-thirds of these patients.
IL-1 also appears to play an important role inCIAS1-Associated Periodic Syndromes (CAPS). These rare genetic disorders, including Familial Cold Auto-Inflammatory Syndrome (FCAS), Muckle Wells Syndrome, and Neonatal Onset Multisystem Inflammatory Disorder (NOMID), affect a small group of people, estimated to be between several hundred to a few thousand. Patients with these disorders develop fever, joint aches, headaches, and rashes. In certain indications, these symptoms can be extremely serious. There are no currently approved therapies for CAPS.
IL-4/13 Trap. We discovered both an IL-4 Trap and an IL-4/13 Trap, which is a single molecule that can block both interleukin-4 and interleukin-13. Antagonists for IL-4 and IL-13 may be therapeutically useful in a number of allergy and asthma-related conditions, including as an adjunct to vaccines where blocking IL-4 and IL-13 may help to elicit more of the desired type of immune response to the vaccine. We are developing the IL-4/13 Trap in settings of asthma and allergy.
It has been estimated that one in 13 Americans suffers from allergies and one in 18 suffers from asthma. The number of people afflicted with these diseases has been growing at a fast rate. It is believed that IL-4 and IL-13 play a role in these diseases. These two cytokines are essential to the normal functioning of the immune system, creating a vital communication link between white blood cells. In the case of asthma and allergies, however, it is thought that excess levels of IL-4 and IL-13 causes over activity of the immune system, which contributes to disease initiation and progression.
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| Obesity and Metabolic Diseases |
Food intake and metabolism are regulated by complex interactions between diverse neural and hormonal signals that serve to maintain an optimal balance between energy intake, storage, and utilization. The hypothalamus, a small area at the base of the brain, is critically involved in the integration ofintegrating peripheral signals which reflect nutritional status and neural outputs which regulate appetite, food seeking behaviors, and energy expenditure. Obesity and related metabolicMetabolic disorders, such as type 2 diabetes, reflect a dysregulation in the systems which ordinarily tightly couple energy intake to energy expenditure. Our preclinical research program in this area encompasses the study of both central (neuropeptide) and peripheral (hormonal) regulators of food intake and metabolism in health and disease. AXOKINE® is a protein-based product candidate we discovered that is designedWe have identified several targets in these therapeutic areas and are evaluating potential antibodies to act on the area of the brain region regulating appetiteevaluate in preclinical studies.
Muscle Diseases and energy expenditure. We are continuing research and pre-clinical activities in support of AXOKINE, but no new clinical trials are planned at this time.Disorders
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| Muscle Atrophy and Related Disorders |
Muscle atrophy occurs in many neuromuscular diseases and also when muscle is unused, as often occurs during prolonged hospital stays and during convalescence. Currently, physicians have few options to treat subjects with muscle atrophy or other muscle conditions which afflict millions of people globally. Thus, a treatment that has beneficial effects on skeletal muscle could have significant clinical benefit. Our muscle research program is currently focused on conducting in vivo and in vitro experiments with the objective of demonstrating and further understanding the molecular pathways involved in muscle atrophy and hypertrophy, and discovering therapeutic candidates that can modulate these pathways. This work is being conducted in collaboration with scientists at The Procter & Gamble Company.
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| Cartilage Growth Factor System and Osteoarthritis |
Osteoarthritis results from the wearing down of the articular cartilage surfaces that cover joints. Thus, growth factors that specifically act on cartilage cells could have utility in osteoarthritis. We plan to begin clinical trials of the IL-1 Trap in osteoarthritis during 2005. In addition, our scientists have discovered a growth factor receptor system selectively expressed by cartilage cells, termed Regeneron Orphan Receptor 2 (ROR2). We have also demonstrated that this growth factor receptor system is requiredseveral molecules in late stage research and are evaluating them for normal cartilage development in mice. In addition, together with collaborators, we have demonstrated in preclinical studies that mutations in this growth factor receptor system cause inherited defects in cartilage development in humans. Thus, we believe this growth factor receptor system is a promising new target for cartilage diseases such as osteoarthritis, but we have not yet identified any therapeutic molecules from our research to advance to clinicalpossible further development.
Fibrotic diseases, such as cirrhosis, result from the excess production of fibrous extracellular matrix by certain cell types. We and our collaborators identified orphan receptors, termed Discoidin Domain Receptors 1 and 2 (DDR1 and DDR2), that are expressed by the activated cell types in fibrotic disease. Our work in this area is currently focused on determining whether selective inhibition or activation of DDR1 and DDR2 would be beneficial in the setting of fibrotic disease. Further, we are studying key signaling pathways which allow particular fibrosis-inducing cells to multiply. Inhibition of such pathways may be useful in preventing the development of fibrosis. These research activities are being conducted in collaboration with scientists at Procter & Gamble.
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| G-Protein Coupled ReceptorsOther Therapeutic Areas |
G-Protein Coupled Receptors have historically been among the most useful targets for pharmaceuticals. We use a genomics approach to discover new G-Protein Coupled Receptors and then we characterize these receptors in our disease models by examining their expression. Early stage research work on selected G-Protein Coupled Receptors is being conducted in collaboration with scientists at Procter & Gamble.
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Technology Platforms
In our discovery
We also have research programs focusing on ophthalmology, inflammatory and development activities, we utilize various technology platforms, many of which were developed or enhanced by us. Although the primary use of these technology platforms is for our own researchimmune diseases, bone and development programs, we are also exploring the possibility of exploiting these technologies commercially through, for example, direct licensing or sale of technology, or the establishment of research collaborations to discovercartilage, pain, and develop drug targets. In December 2002, we entered into an agreement with Serono S.A. to use our Velocigenetm technology platform to provide Serono with knock-out and transgenic mammalian models of gene function. Under the agreement, which was amended as of January 1, 2004 to expand the scope of services available under the Velocigene platform, Serono has agreed to pay us up to $4.0 million annually through December 2007, subject to early termination by Serono with not less than nine months advance notice.cardiovascular diseases.
Targeted Genomicstm. In contrast to basic genomics approaches, which attempt to identify every gene in a cell or genome, we use Targeted Genomics approaches to identify specific genes likely to be of therapeutic interest. These approaches do not depend on random gene sequencing, but rather on function-based approaches to specifically target the discovery of genes for growth factors, peptides, and their receptors that are most likely to have use for developing drug candidates. This technology led to our discovery of the Angiopoietin and Ephrin growth factor families for angiogenesis and vascular disorders, the MuSK growth factor receptor system for muscle disorders, and the Regeneron Orphan Receptor (ROR) growth factor receptor system that regulates cartilage formation.
Velocigenetm. A major challenge facing the biopharmaceutical industry in the post-genomic era is the efficient assignment of function to random gene sequences to enable the identification of validated drug targets. One way to help determine the function of a gene is to generate mammalian models in which the gene is removed (referred to as “knock-out mammalian models”), or is over-produced (referred to as “transgenic mammalian models”), or in which a color-producing gene is substituted for the gene of interest (referred to as “reporter knock-in mammalian models”) to identify which cells in the model system are expressing the gene. Until recently, technical hurdles involved in the generation of mammalian models restricted the ability to produce multiple models quickly and efficiently. We have developed proprietary technology that allows for the rapid and efficient production of models on a high throughput scale, enabling rapid assignment of function to gene sequences.
Designer Protein Therapeuticstm. In cases in which the natural gene product is not a product candidate, we utilize our Designer Protein Therapeutics platform to genetically engineer product candidates with the desired properties. We use these technologies to develop derivatives of growth factors and their receptors, which can allow for modified agonistic or antagonistic properties that may prove to be therapeutically useful. This technology platform has produced more than 10 patented proteins, including the VEGF Trap and the IL-1 Trap, which are currently in clinical testing, and several others in preclinical development.
Our Collaborative ProgramsManufacturing
We have collaboration and licensing agreements with various companies, including sanofi-aventis, Novartis Pharma AG, and Procter & Gamble. In addition, we conduct many research programs in collaboration with academic partners. In the future, we may enter into additional strategic collaborations or licensing agreements focusing on one or more of our product candidates, research programs, or technology platforms. Below are summaries of our major collaborations.
The sanofi-aventis Group. In September 2003, we entered into a collaboration agreement with the sanofi-aventis Group to jointly develop and commercialize the VEGF Trap in multiple oncology, ophthalmology, and possibly other indications throughout the world with the exception of Japan, where product rights remain with us. Sanofi-aventis made a non-refundable up-front payment of $80.0 million and purchased 2,799,552 newly issued unregistered shares of our Common Stock for $45.0 million.
In January 2005, we and sanofi-aventis amended the collaboration agreement to exclude from the scope of the collaboration the development and commercialization of the VEGF Trap for eye diseases through local delivery systems. In connection with the amendment, sanofi-aventis made a one-time payment to us of
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$25.0 million in January 2005 of which 50% is repayable to sanofi-aventis following commercialization of the VEGF Trap in accordance with the terms of the amendment.
Under the collaboration agreement, as amended, we and sanofi-aventis will share co-promotion rights and profits on sales, if any, of the VEGF Trap for disease indications included in our collaboration. In December 2004, we earned a $25.0 million payment from sanofi-aventis, which was received in January 2005, upon the achievement of an early-stage clinical milestone. We may also receive up to $360.0 million in additional milestone payments upon receipt of specified marketing approvals for up to eight VEGF Trap indications in Europe or the United States. Regeneron has agreed to continue to manufacture clinical supplies of the VEGF Trap at our plant in Rensselaer, New York. Sanofi-aventis has agreed to be responsible for providing commercial scale manufacturing capacity for the VEGF Trap.
Under the collaboration agreement, as amended, agreed upon development expenses incurred by both companies during the term of the agreement will be funded by sanofi-aventis. If the collaboration becomes profitable, we will reimburse sanofi-aventis for 50% of these development expenses, including 50% of the $25.0 million payment received in connection with the January 2005 amendment to our collaboration agreement, in accordance with a formula based on the amount of development expenses and our share of the collaboration profits, or at a faster rate at our option. Since inception of the collaboration through December 31, 2004, we and sanofi-aventis have incurred $86.5 million in development expenses related to the VEGF Trap program. In addition, if the first commercial sale of a VEGF Trap product for disease of the eye through local delivery systems predates the first commercial sale of a VEGF Trap product under the collaboration by two years, we will begin reimbursing sanofi-aventis for up to $7.5 million of VEGF Trap development expenses in accordance with a formula until the first commercial VEGF Trap sale under the collaboration occurs.
Sanofi-aventis has the right to terminate the agreement without cause with at least twelve months advance notice. Upon termination of the agreement for any reason, any remaining obligation to reimburse sanofi-aventis for 50% of the VEGF Trap development expenses will terminate and we will retain all rights to the VEGF Trap.
Novartis. In March 2003, we entered into a collaboration agreement with Novartis to jointly develop and commercialize the IL-1 Trap. Novartis made a non-refundable up-front payment of $27.0 million and purchased 7,527,050 newly issued unregistered shares of our common stock for $48.0 million.
Development expenses incurred in 2003 were shared equally by the Company and Novartis. We funded our share of 2003 development expenses through loans from Novartis. In March 2004, Novartis forgave its outstanding loans to us totaling $17.8 million, including accrued interest, based on Regeneron’s achieving a pre-defined development milestone, which was recognized as a research progress payment.
In February 2004, Novartis provided notice of its intention not to proceed with the joint development of the IL-1 Trap. In March 2004, Novartis agreed to pay the Company $42.75 million to satisfy its obligation to fund development costs for the IL-1 Trap for the nine month period following its notification and for the two months prior to that notice. We recorded the $42.75 million as other contract income in the first quarter of 2004. In addition, we recognized contract research and development revenue of $22.1 million, which represents the remaining amount of the March 2003 up-front payment from Novartis that had previously been deferred. Regeneron and Novartis each retain rights under the collaboration agreement to elect to collaborate in the future on the development and commercialization of certain other IL-1 antagonists.
Procter & Gamble. In May 1997, we entered into a long-term collaboration agreement with Procter & Gamble to discover, develop, and commercialize pharmaceutical products. In connection with the collaboration, Procter & Gamble made purchases of our Common Stock of $42.9 million in June 1997 and $17.1 million in August 2000. These purchases were in addition to a purchase by Procter & Gamble of $10.0 million of our common stock that was completed in March 1997. Procter & Gamble also agreed to provide funding in support of our research efforts related to the collaboration, of which we received $90.8 million through December 31, 2004. From 1997 to 1999, Procter & Gamble also provided research
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support for our AXOKINE program. As a result, Procter & Gamble will be entitled to receive a small royalty on any sales of AXOKINE.
In August 2000, Procter & Gamble made two non-recurring research progress payments to us totaling $3.5 million. Effective December 31, 2000, we and Procter & Gamble entered into a new long-term collaboration agreement, replacing the companies’ 1997 agreement. The new agreement extended Procter & Gamble’s obligation to fund our research under the new collaboration agreement through December 2005, with no further research obligations by either party thereafter, and focused the companies’ collaborative research on therapeutic areas that are of particular interest to Procter & Gamble, including muscle atrophy and muscle diseases, fibrotic diseases, and selected G-Protein Coupled Receptors. For each of these program areas, the parties contribute research activities and necessary intellectual property rights pursuant to mutually agreed upon plans and budgets established by operating committees. During the first five years of the agreement, neither party may independently perform research on targets included in the collaboration.
We and Procter & Gamble divided rights to the programs from the 1997 collaboration agreement that are no longer part of the companies’ collaboration. Procter & Gamble obtained rights to certain early stage programs. We have rights to all other research programs including exclusive rights to the VEGF Trap, the Angiopoietins, and our Orphan Receptors (RORs). Any product candidates that result from the new collaboration will continue to be jointly developed and marketed worldwide, with the companies equally sharing development costs and profits. Under the new agreement, beginning in 2001, research support from Procter & Gamble is $2.5 million per quarter (plus annual adjustments for inflation) through December 2005.
The new collaboration agreement expires on the later of December 31, 2005 or the termination of research, development, or commercial activities relating to compounds that meet predefined success criteria before that date. In addition, if either party successfully develops a compound covered under the agreement to a predefined development stage during the two-year period following December 31, 2005, the parties shall meet to determine whether to reconvene joint development of the compound under the agreement. The agreement is also subject to termination if either party enters bankruptcy, breaches its material obligations, or undergoes a change of control. In addition to termination rights, our new collaboration agreement with Procter & Gamble has an “opt-out” provision, whereby a party may decline to participate further in a research or product development program. In such cases, the opting-out party generally does not have any further funding obligation and will not have any rights to the product or program in question (but may be entitled to a royalty on any product sales). If Procter & Gamble opts out of a product development program, and we do not find a new partner, we would bear the full cost of the program.
Manufacturing
In 1993, we purchased our 104,000 square foot Rensselaer, New York manufacturing facility, and in 2003 completed a 19,500 square foot expansion.expansion of this facility. This facility is used to manufacture therapeutic candidates for our own preclinical and clinical studies. We also useused the facility to manufacture a product for Merck & Co., Inc. under a contract that as amended, expiresexpired in October 2006. In July 2002, we leased 75,000 square feet in a building near our Rensselaer facility which is beingwe have used primarily for the manufacture of Traps and for warehouse space. In June 2007, we exercised a purchase option on this building, which totals 272,000 square feet (including the 75,000 square feet we already leased), and completed the purchase of this property in October 2007. At December 31, 2004,2007, we employed 287207 people at these owned and leased manufacturingour Rensselaer facilities. As of December 31, 2004, thereThere were no impairment losses associated with long-lived assets.assets at these facilities as of December 31, 2007.
In 1995, we entered into a long-term manufacturing agreement with Merck (called, as amended, the Merck Agreement) to produce an intermediate for a Merck pediatric vaccine at our Rensselaer facility. We agreed to modify portions of our facility for manufacture of the Merck intermediate and to assist Merck in securing regulatory approval for manufacturing in the Rensselaer facility. In December 1999, we announced that the FDA had approved us as a contract manufacturer for the Merck intermediate. In February 2005, we and Merck extended the Merck Agreement through October 2006 and provided Merck an opportunity, upon twelve-months’ prior notice, to extend the Merck Agreement for an additional year through October 2007. Under the Merck Agreement, as amended, we are manufacturing intermediate for Merck for seven years, with certain minimum order quantities each year. The Merck Agreement may be terminated at any time by Merck upon Merck’s payment of a termination fee. Merck reimbursed us for the capital costs to modify the facility
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and for the cost of our activities performed on behalf of Merck prior to the start of production. Merck pays an annual facility fee of $1.0 million (plus annual adjustments for inflation), reimburses us for certain manufacturing costs, pays us a variable fee based on the quantity of intermediate supplied to Merck, and makes certain additional payments. We recognized contract manufacturing revenue related to the Merck Agreement of $18.1 million in 2004, $10.1 million in 2003, and $11.1 million in 2002.
Among the conditions for regulatory marketing approval of a medicine is the requirement that the prospective manufacturer’s quality control and manufacturing procedures conform to the GMPgood manufacturing practice (GMP) regulations of the health authority. In complying with standards set forth in these regulations, manufacturers must continue to expend time, money, and effort in the areaareas of production and quality control to ensure full technical compliance. Manufacturing establishments, both foreign and domestic, are also subject to inspections by or under the authority of the FDA and by other national, federal, state, and local agencies. If our manufacturing facilities fail
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to comply with FDA and other regulatory requirements, we will be required to suspend manufacturing. This willwould likely have a material adverse effect on our financial condition, results of operations, and cash flow.
Competition
There is
We face substantial competition in the biotechnology and pharmaceutical industries from pharmaceutical, biotechnology, and chemical companies.companies (see “Risk Factors —Even if our product candidates are approved for marketing their commercial success is highly uncertain because our competitors have received approval for products with the same mechanism of action, and competitors may get to the marketplace before we do with better or lower cost drugs or the market for our product candidates may be too small to support commercialization or sufficient profitability.”). Our competitors may include Genentech, Novartis, Pfizer Inc., EyetechBayer HealthCare, Onyx Pharmaceuticals, Inc., Abbott Laboratories, sanofi-aventis, Merck, Amgen Inc., Roche, and others. Many of our competitors have substantially greater research, preclinical, and clinical product development and manufacturing capabilities, and financial, marketing, and human resources than we do. Our smaller competitors may also be significant if they acquire or discover patentable inventions, form collaborative arrangements, or merge with large pharmaceutical companies. Even if we achieve product commercialization, one or more of our competitors may achieve product commercialization earlier than we do or obtain patent protection that dominates or adversely affects our activities. Our ability to compete will depend on how fast we can develop safe and effective product candidates, complete clinical testing and approval processes, and supply commercial quantities of the product to the market. Competition among product candidates approved for sale will also be based on efficacy, safety, reliability, availability, price, patent position, and other factors.
ARCALYSTTM. The availability of highly effective FDA approved TNF-antagonists such as Enbrel® (Immunex Corporation), Remicade® (Centocor, Inc.), and Humira® (Abbott) and the IL-1 receptor antagonist Kineret (Amgen), and other marketed therapies, makes it difficult to successfully develop and commercialize ARCALYSTTM. Even if ARCALYSTTM is ever approved for sale, it will be difficult for our drug to compete against these FDA approved drugs because doctors and patients will have significant experience using these effective medicines. Moreover, there are both small molecules and antibodies in development by third parties that are designed to block the synthesis of interleukin-1 or inhibit the signaling of interleukin-1. For example, Eli Lilly and Company, Novartis, and Xoma Ltd. are each developing antibodies to interleukin-1 and Amgen is developing an antibody to the interleukin-1 receptor. These drug candidates could offer competitive advantages over ARCALYSTTM. The successful development of these competing molecules could delay or impair our ability to successfully develop and commercialize ARCALYSTTM.
Aflibercept and VEGF Trap.Trap-Eye. Many companies are developing therapeutic molecules designed to block the actions of VEGF specifically and angiogenesis in general. A variety of approaches have been employed, including antibodies to VEGF, antibodies to the VEGF receptor, small molecule antagonists to the VEGF receptor tyrosine kinase, and other anti-angiogenesis strategies. Many of these alternative approaches may offer competitive advantages to our VEGF Trap in efficacy, side-effect profile, or formmethod of delivery. Additionally, manysome of these developmental molecules may beare either already approved for marketing or are at a more advanced stage of development than our product candidate.
In particular, Genentech has an approved VEGF antagonist, Avastin®, on the market for treating certain cancers and a number of pharmaceutical and biotechnology companies are working to develop competing VEGF antagonists, including Novartis, Pfizer, and Imclone Systems Incorporated. Many of these molecules are further along in February 2004, Genentech was granteddevelopment than aflibercept and may offer competitive advantages over our molecule. Novartis has an ongoing Phase 3 clinical development program evaluating an orally delivered VEGF tyrosine kinase inhibitor in different cancer settings. Each of Pfizer and Onyx Pharmaceuticals (together with its partner Bayer) has received approval byfrom the FDA to market and sell an oral medication that targets tumor cell growth and new vasculature formation that fuels the growth of tumors.
The market for eye disease products is also very competitive. Novartis and Genentech are collaborating on the commercialization and further development of a VEGF antibody fragment (Lucentis®) for the treatment of age-related macular degeneration (wet AMD) and other eye indications that was approved by the FDA in June 2006. Many other companies are working on the development of product candidates for the potential treatment of wet AMD that act by blocking VEGF, VEGF receptors, and through the use of soluble ribonucleic acids (sRNAs) that
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modulate gene expression. In addition, ophthalmologists are using off-label a third-party reformulated version of Genentech’s approved VEGF antagonist, Avastin, with success for the treatment of wet AMD. The National Eye Institute plans to initiate a Phase 3 trial to compare Lucentis to Avastin in the treatment of wet AMD. Avastin is also being evaluated in eye diseases in trials that have been initiated in the United Kingdom, Canada, Brazil, Mexico, Germany, Israel, and other areas.
REGN88. We are developing REGN88 for the treatment of rheumatoid arthritis as part of our global, strategic collaboration with sanofi-aventis to discover, develop, and commercialize fully human monoclonal antibodies. The availability of highly effective FDA approved TNF-antagonists such as Enbreltm® (Immunex), Remicade® (Centocor), and Humira® (Abbott), and other marketed therapies makes it difficult to successfully develop and commercialize REGN88. REGN88 is a human monoclonal antibody to VEGF in patients with colorectal cancer. The marketing approval for Avastin may make it more difficult for us to enroll patients intargeting the interleukin-6 receptor. Roche is developing an antibody against the interleukin-6 (IL-6) receptor. Roche’s antibody has completed Phase 3 clinical trials and is the subject of a filed Biologics License Application with the FDA for the treatment of rheumatoid arthritis. Roche’s IL-6 receptor antibody, other clinical candidates in development, and the drugs on the market to support the VEGF Trap oncology program.treat rheumatoid arthritis could offer competitive advantages over REGN88. This maycould delay or impair our ability to successfully develop and commercialize the VEGF Trap. Novartis has an ongoing phase 3 clinical development program evaluating a VEGF tyrosine kinase in different cancer settings.REGN88.
The VEGF Trap also faces significant competition in the treatment of eye diseases. For example, Eyetech Pharmaceuticals is collaborating with Pfizer to further develop and commercialize a VEGF inhibitor for eye diseases, which was recently approved by the FDA. Genentech and Novartis have a phase 3 program nearing completion that is evaluating a VEGF blocker in patients with eye diseases. Successful development of these competing VEGF blockers would also make it more difficult for us to enroll patients in clinical trials for the VEGF Trap in these indications and may delay or impair our ability to successfully develop and commercialize the VEGF Trap.
IL-1 Trap/ IL-4/13 Trap. Marketed products for the treatment of rheumatoid arthritis and asthma are available as either oral or inhaled medicines, whereas our Cytokine Traps currently are only planned for
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clinical trials as injectibles. The markets for both rheumatoid arthritis and asthma drugs are very competitive. Several new, highly successful medicines are available for these diseases. Examples include the TNF-antagonists Enbrel® (a registered trademark of Amgen), Remicade® (a registered trademark of Centocor), and Humira® (a registered trademark of Abbott), and the IL-1 receptor antagonist Kineret® (a registered trademark of Amgen), for rheumatoid arthritis, and the leukotriene-modifier Singulair® (a registered trademark of Merck), as well as various inexpensive corticosteroid medicines for asthma. The availability of highly effective FDA approved TNF-antagonists makes it more difficult to successfully develop the IL-1 Trap for the treatment of rheumatoid arthritis. It will be difficult to enroll patients with rheumatoid arthritis to participate in clinical trials of the IL-1 Trap, which may delay or impair our ability to successfully develop the drug candidate. In addition, even if the IL-1 Trap is ever approved for sale, it will be difficult for our drug to compete against these FDA approved TNF-antagonists because doctors and patients will have significant experience using these effective medicines.
Other Areas. Many pharmaceutical and biotechnology companies are attempting to discover new therapeutics for indications in which we invest substantial time and resources. Some are trying to develop small-molecule based therapeutics, similar in at least certain respects to our program with Procter & Gamble. In these and related areas, intellectual property rights have been sought and certain rights have been granted to competitors and potential competitors of ours, and we may be at a substantial competitive disadvantage in such areas as a result of, among other things, our lack of experience, trained personnel, and expertise. A number of corporate and academic competitors are involved in the discovery and development of novel therapeutics using tyrosine kinase receptors, orphan receptors, and compounds that are the focus of other research or development programs we are now conducting. These competitors include Amgen and Genentech, as well as many others. Many firms and entities are engaged in research and development in the areas of cytokines, interleukins, angiogenesis, obesity, and muscle conditions. Some of these competitors are currently conducting advanced preclinical and clinical research programs in these areas. These and other competitors may have established substantial intellectual property and other competitive advantages.
If a competitor announces a successful clinical study involving a product that may be competitive with one of our product candidates or anthe grant of marketing approval by a regulatory agency of the marketing offor a competitive product, suchthe announcement may have an adverse effect on our operations or future prospects or on the market price of our common stock.Common Stock.
We also compete with academic institutions, governmental agencies, and other public or private research organizations, which conduct research, seek patent protection, and establish collaborative arrangements for the development and marketing of products that would provide royalties or other consideration for use of their technology. These institutions are becoming more active in seeking patent protection and licensing arrangements to collect royalties or other consideration for use of the technology that they have developed. Products developed in this manner may compete directly with products we develop. We also compete with others in acquiring technology from suchthese institutions, agencies, and organizations.
Patents, Trademarks, and Trade Secrets
Our success depends, in part, on our ability to obtain patents, maintain trade secret protection, and operate without infringing on the proprietary rights of third parties.parties (see “Risk Factors —We may be restricted in our developmentand/or commercialization activities by, and could be subject to damage awards if we are found to have infringed, third party patents or other proprietary rights.”). Our policy is to file patent applications to protect technology, inventions, and improvements that we consider important to our business and operations. We are the nonexclusive licensee of a number of additional U.S. patents and patent applications. We also rely upon trade secrets, know-how, and continuing technological innovation in an effort to develop and maintain our competitive position. We or our licensors or collaborators have filed patent applications on various products and processes relating to Cytokine Traps, VEGF Trap, AXOKINE, and Angiopoietins,our product candidates as well as other technologies and inventions in the United States and in certain foreign countries. We intend to file additional patent applications, when appropriate, relating to improvements in
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these technologies and other specific products and processes. We plan to aggressively prosecute, enforce, and defend our patents and other proprietary technology.
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In July 2002, we announced that Amgen and Immunex Corporation (now part of Amgen) granted us a non-exclusive license to certain patents and patent applications which may be used in the development and commercialization of the IL-1 Trap. The license followed two other licensing arrangements under which we obtained a non-exclusive license to patents owned by ZymoGenetics, Inc. and Tularik Inc. for use in connection with the IL-1 Trap program. These license agreements would require us to pay royalties based on the net sales of the IL-1 Trap if and when it is approved for sale. In total, the royalty rate under these three agreements would be in the mid-single digits.
In August 2003, Merck granted us a non-exclusive license to certain patents and patent applications which may be used in the development and commercialization of AXOKINE. In consideration for the license, we issued to Merck 109,450 newly issued unregistered shares of our Common Stock and in August 2004, we made a cash payment to Merck of $0.6 million. We agreed to make an additional payment upon receipt of marketing approval for a product covered by the licensed patents and pay royalties, at staggered rates in the mid-single digits, based on the net sales, if any, of products covered by the licensed patents.
Patent law relating to the patentability and scope of claims in the biotechnology field is evolving and our patent rights are subject to this additional uncertainty. Others may independently develop similar products or processes to those developed by us, duplicate any of our products or processes or, if patents are issued to us, design around any products and processes covered by our patents. We expect to continue, when appropriate, to file product and process patent applications with respect to our inventions. However, we may not file any such applications or, if filed, the patents may not be issued. Patents issued to or licensed by us may be infringed by the products or processes of others.
Defense and enforcement of our intellectual property rights can be expensive and time consuming, even if the outcome is favorable to us. It is possible that patents issued to or licensed to us will be successfully challenged, that a court may find that we are infringing validly issued patents of third parties, or that we may have to alter or discontinue the development of our products or pay licensing fees to take into account patent rights of third parties.
Government Regulation
Regulation by government authorities in the United States and foreign countries is a significant factor in the research, development, manufacture, and marketing of our product candidates.candidates (see “Risk Factors —If we do not obtain regulatory approval for our product candidates, we will not be able to market or sell them.”). All of our product candidates will require regulatory approval before they can be commercialized. In particular, human therapeutic products are subject to rigorous preclinical and clinical trials and other pre-market approval requirements by the FDA and foreign authorities. Many aspects of the structure and substance of the FDA and foreign pharmaceutical regulatory practices have been reformed during recent years, and continued reform is under consideration in a number of forums.jurisdictions. The ultimate outcome and impact of such reforms and potential reforms cannot be predicted.
The activities required before a product candidate may be marketed in the United States begin with preclinical tests. Preclinical tests include laboratory evaluations and animal studies to assess the potential safety and efficacy of the product candidate and its formulations. The results of these studies must be submitted to the FDA as part of an Investigational New Drug Application, which must be reviewed by the FDA before proposed clinical testing can begin. Typically, clinical testing involves a three-phase process. In Phase I,1, trials are conducted with a small number of subjects to determine the early safety profile of the product candidate. In Phase II,2, clinical trials are conducted with subjects afflicted with a specific disease or disorder to provide enough data to evaluate the preliminary safety, tolerability, and efficacy of different potential doses of the product candidate. In Phase III,3, large-scale clinical trials are conducted with patients afflicted with the specific disease or disorder in order to provide enough data to understand the efficacy and safety profile of the product candidate, as required by the FDA. The results of the preclinical and clinical testing of a biologic product candidate are then submitted to the FDA in the form of a Biologics License Application, or BLA, for evaluation to determine whether the product candidate may be approved for commercial sale. In responding to a BLA, the FDA may grant marketing approval, request additional information, or deny the application.
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Any approval required by the FDA for any of our product candidates may not be obtained on a timely basis, or at all. The designation of a clinical trial as being of a particular phase is not necessarily indicative that such a trial will be sufficient to satisfy the parameters of a particular phase, and a clinical trial may contain elements of more than one phase notwithstanding the designation of the trial as being of a particular phase. The results of preclinical studies or early stage clinical trials may not predict long-term safety or efficacy of our compounds when they are tested or used more broadly in humans.
Approval of a product candidate by comparable regulatory authorities in foreign countries is generally required prior to commencement of marketing of the product in those countries. The approval procedure varies among countries and may involve additional testing, and the time required to obtain such approval may differ from that required for FDA approval.
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Various federal, state, and foreign statutes and regulations also govern or influence the research, manufacture, safety, labeling, storage, record keeping, marketing, transport, orand other aspects of suchpharmaceutical product candidates. The lengthy process of seeking these approvals and the compliance with applicable statutes and regulations require the expenditure of substantial resources. Any failure by us or our collaborators or licensees to obtain, or any delay in obtaining, regulatory approvals could adversely affect the manufacturing or marketing of our products and our ability to receive product or royalty revenue.
In addition to the foregoing, our present and future business will be subject to regulation under the United States Atomic Energy Act, the Clean Air Act, the Clean Water Act, the Comprehensive Environmental Response, Compensation and Liability Act, the National Environmental Policy Act, the Toxic Substances Control Act, the Resource Conservation and Recovery Act, national restrictions, and other presentcurrent and potential future local, state, federal, and foreign regulations.
EmployeesBusiness Segments
Through 2006, our operations were managed in two business segments: research and development, and contract manufacturing. The research and development segment includes all activities related to the discovery of pharmaceutical products for the treatment of serious medical conditions, and the development and commercialization of these discoveries. It also includes revenues and expenses related to (i) research and development activities conducted under our collaboration agreements with third parties and our grant from the NIH, and (ii) the supply of specified, ordered research materials using Regeneron-developed proprietary technology. The contract manufacturing segment included all revenues and expenses related to the commercial production of products under contract manufacturing arrangements. During 2006 and 2005, the Company manufactured a product for Merck under a contract that expired in October 2006. For financial information about these segments, see Note 20, “Segment Information”, beginning onpage F-36 in our Financial Statements. Due to the expiration of our manufacturing agreement with Merck, beginning in 2007, we only have a research and development business segment.
Employees
As of December 31, 2004,2007, we had 730682 full-time employees, of whom 115107 held a Ph.D. or M.D. degree or both. We believe that we have been successful in attracting skilled and experienced personnel in a highly competitive environment; however, competition for these personnel is intense. None of our personnel are covered by collective bargaining agreements and our management considers its relations with our employees to be good.
Available Information
We file annual, quarterly, and current reports, proxy statements, and other documents with the Securities and Exchange Commission, or SEC, under the Securities Exchange Act of 1934, or the Exchange Act. The public may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 450 Fifth100 F Street, NW,NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at1-800-SEC-0330. Also, the SEC maintains an Internet website that contains reports, proxy and information statements, and other information regarding issuers, including Regeneron, that file electronically with the SEC. The public can obtain any documents that we file with the SEC athttp://www.sec.gov.www.sec.gov.
We also make available free of charge on or through our Internet website(http://www.regn.com) our Annual Report onForm 10-K, Quarterly Reports onForm 10-Q, Current Reports onForm 8-K, and, if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.
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Item 2.1A. | PropertiesRisk Factors |
We conduct our research, development, manufacturing, and administrative activities at our owned and leased facilities. We currently lease approximately 220,000 square feet, and sublease approximately 16,000 square feet, of laboratory and office space in Tarrytown, New York. The sublease will convert to a direct lease with the landlord on December 31, 2005. We own a facility in Rensselaer, New York, consisting of
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two buildings totaling approximately 123,500 square feet of research, manufacturing, office, and warehouse space. We also lease an additional 75,000 square feet of manufacturing, office, and warehouse space in Rensselaer.
The following table summarizes the information regarding our current property leases:
| | | | | | | | | | | | | |
| | | | | | | Current Monthly | | | |
| | | Square | | | | | Base Rental | | | Renewal Option |
| Location | | Footage | | | Expiration | | Charges(1) | | | Available |
| | | | | | | | | | | |
| Tarrytown | | | 146,000 | | | December 31, 2007 | | $ | 188,000 | | | none |
| Tarrytown | | | 16,000 | | | December 31, 2007 | | $ | 25,000 | | | none |
| Tarrytown | | | 74,000 | | | December 31, 2009 | | $ | 145,000 | | | one 5-year term |
| Rensselaer | | | 75,000 | | | July 11, 2007 | | $ | 25,000 | | | two 5-year terms |
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(1) | Excludes additional rental charges for utilities, taxes, and operating expenses, as defined. |
We believe that our existing owned and leased facilities are adequate for ongoing, research, development, manufacturing, and administrative activities.
In the future, we may lease, operate, or purchase additional facilities in which to conduct expanded research and development activities and manufacturing and commercial operations.
In May 2003, purported class action securities lawsuits were commenced against Regeneron and certain of its officers and directors in the United States District Court for the Southern District of New York. A consolidated amended class action complaint was filed in October 2003. The complaint, which purports to be brought on behalf of a class consisting of investors in our publicly traded securities between March 28, 2000 and March 30, 2003, alleges that the defendants misstated or omitted material information concerning the safety and efficacy of AXOKINE, in violation of Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934, and Rule 10b-5 promulgated thereunder. Damages are sought in an unspecified amount. On February 1, 2005, the United States District Court for the Southern District of New York denied our motion to dismiss the consolidated amended complaint. We believe that the lawsuit is without merit and intend to continue to defend the action vigorously. Because we do not believe that a loss is probable, no legal reserve has been established. However, we cannot assure investors that we will be successful in defending this action, or that the amount of any settlement or judgment in this action will not exceed the coverage limits of our director and officer liability insurance policies. If we are not successful in defending this action, our business and financial condition could be adversely affected. In addition, whether or not we are successful, the defense of this action may divert the attention of our management and other resources that would otherwise be engaged in running our business.
From time to time we are a party to other legal proceedings in the course of our business. We do not expect any other legal proceedings to have a material adverse effect on our business or financial condition.
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Item 4. | Submission of Matters to a Vote of Security Holders |
On December 17, 2004, we conducted a Special Meeting of Shareholders pursuant to due notice. A quorum being present either in person or by proxy, the shareholders voted on the following matters:
1. To amend Regeneron’s 2000 Long-Term Incentive Plan to expressly authorize the Option Exchange Program described in the proxy statement dated November 29, 2004.
No other matters were voted on. The number of votes cast was:
| | | | | | | | | | | | | |
| | | For | | | Against | | | Abstain | |
| | | | | | | | | | |
| Approval of Amendment to the 2000 Long-Term Incentive Plan to Authorize the Option Exchange Program | | | 46,029,856 | | | | 16,697,527 | | | | 53,532 | |
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PART II
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Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Our Common Stock is quoted on The Nasdaq Stock Market under the symbol “REGN.” Our Class A Stock, par value $.001 per share, is not publicly quoted or traded.
The following table sets forth, for the periods indicated, the range of high and low sales prices for the Common Stock as reported by The Nasdaq Stock Market
| | | | | | | | | | |
| | | High | | | Low | |
| | | | | | | |
2003 | | | | | | | | |
| | First Quarter | | $ | 21.49 | | | $ | 7.40 | |
| | Second Quarter | | | 18.78 | | | | 5.77 | |
| | Third Quarter | | | 22.35 | | | | 12.22 | |
| | Fourth Quarter | | | 18.72 | | | | 11.80 | |
2004 | | | | | | | | |
| | First Quarter | | $ | 17.00 | | | $ | 12.80 | |
| | Second Quarter | | | 15.85 | | | | 8.53 | |
| | Third Quarter | | | 10.80 | | | | 6.76 | |
| | Fourth Quarter | | | 9.49 | | | | 6.75 | |
As of February 28, 2005, there were 616 shareholders of record of our Common Stock and 56 shareholders of record of our Class A Stock. The closing bid price for the Common Stock on that date was $6.11.
We have never paid cash dividends and do not anticipate paying any in the foreseeable future.
The information under the heading “Equity Compensation Plan Information” in our definitive proxy statement with respect to our 2005 Annual Meeting of Shareholders to be filed with the SEC is incorporated by reference into Item 12 of this Report on Form 10-K.
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Item 6. | Selected Financial Data |
The selected financial data set forth below for the years ended December 31, 2004, 2003, and 2002 and at December 31, 2004 and 2003 are derived from and should be read in conjunction with our audited financial statements, including the notes thereto, included elsewhere in this report. The selected financial data for the years ended December 31, 2001 and 2000 and at December 31, 2002, 2001, and 2000 are derived from our audited financial statements not included in this report.
| | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | | |
| | | 2004 | | | 2003 | | | 2002 | | | 2001 | | | 2000 | |
| | | | | | | | | | | | | | | | |
| | | (In thousands, except per share data) | |
Statement of Operations Data | | | | | | | | | | | | | | | | | | | | |
| Revenues | | | | | | | | | | | | | | | | | | | | |
| | Contract research and development | | $ | 113,157 | | | $ | 47,366 | | | $ | 10,924 | | | $ | 12,071 | | | $ | 36,478 | |
| | Research progress payments | | | 42,770 | | | | | | | | | | | | | | | | 6,200 | |
| | Contract manufacturing | | | 18,090 | | | | 10,131 | | | | 11,064 | | | | 9,902 | | | | 16,598 | |
| | | | | | | | | | | | | | | | |
| | | | 174,017 | | | | 57,497 | | | | 21,988 | | | | 21,973 | | | | 59,276 | |
| | | | | | | | | | | | | | | | |
| Expenses | | | | | | | | | | | | | | | | | | | | |
| | Research and development(1) | | | 136,095 | | | | 136,024 | | | | 124,953 | | | | 92,542 | | | | 65,134 | |
| | Contract manufacturing | | | 15,214 | | | | 6,676 | | | | 6,483 | | | | 6,509 | | | | 15,566 | |
| | General and administrative | | | 17,062 | | | | 14,785 | | | | 12,532 | | | | 9,607 | | | | 8,427 | |
| | | | | | | | | | | | | | | | |
| | | | 168,371 | | | | 157,485 | | | | 143,968 | | | | 108,658 | | | | 89,127 | |
| | | | | | | | | | | | | | | | |
| Income (loss) from operations | | | 5,646 | | | | (99,988 | ) | | | (121,980 | ) | | | (86,685 | ) | | | (29,851 | ) |
| | | | | | | | | | | | | | | | |
| Other income (expense) | | | | | | | | | | | | | | | | | | | | |
| | Other contract income | | | 42,750 | | | | | | | | | | | | | | | | | |
| | Investment income | | | 5,478 | | | | 4,462 | | | | 9,462 | | | | 13,162 | | | | 8,480 | |
| | Interest expense | | | (12,175 | ) | | | (11,932 | ) | | | (11,859 | ) | | | (2,657 | ) | | | (281 | ) |
| | | | | | | | | | | | | | | | |
| | | | 36,053 | | | | (7,470 | ) | | | (2,397 | ) | | | 10,505 | | | | 8,199 | |
| | | | | | | | | | | | | | | | |
| Net income (loss) before cumulative effect of a change in accounting principle | | | 41,699 | | | | (107,458 | ) | | | (124,377 | ) | | | (76,180 | ) | | | (21,652 | ) |
| Cumulative effect of adopting Staff Accounting Bulletin 101 (“SAB 101”)(2) | | | | | | | | | | | | | | | | | | | (1,563 | ) |
| | | | | | | | | | | | | | | | |
| Net income (loss) | | $ | 41,699 | | | $ | (107,458 | ) | | $ | (124,377 | ) | | $ | (76,180 | ) | | $ | (23,215 | ) |
| | | | | | | | | | | | | | | | |
| Net income (loss) per share, basic: | | | | | | | | | | | | | | | | | | | | |
| | Before cumulative effect of a change in accounting principle | | $ | 0.75 | | | $ | (2.13 | ) | | $ | (2.83 | ) | | $ | (1.81 | ) | | $ | (0.62 | ) |
| | Cumulative effect of adopting SAB 101 | | | | | | | | | | | | | | | | | | | (0.04 | ) |
| | | | | | | | | | | | | | | | |
| | Net income (loss) per share | | $ | 0.75 | | | $ | (2.13 | ) | | $ | (2.83 | ) | | $ | (1.81 | ) | | $ | (0.66 | ) |
| | | | | | | | | | | | | | | | |
| Net income (loss) per share, diluted | | $ | 0.74 | | | $ | (2.13 | ) | | $ | (2.83 | ) | | $ | (1.81 | ) | | $ | (0.66 | ) |
| | | | | | | | | | | | | | | | |
| |
(1) | Includes Income (Loss) in Amgen-Regeneron Partners of $134, ($63), ($27), ($1,002), and ($4,575) for the years ended December 31, 2004, 2003, 2002, 2001, and 2000, respectively. |
|
(2) | See Note 2 to our audited financial statements. |
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| | | | | | | | | | | | | | | | | | | | | |
| | | At December 31, | |
| | | | |
| | | 2004 | | | 2003 | | | 2002 | | | 2001 | | | 2000 | |
| | | | | | | | | | | | | | | | |
| | | (In thousands) | |
Balance Sheet Data | | | | | | | | | | | | | | | | | | | | |
| Cash, cash equivalents, marketable securities, and restricted marketable securities (current and non-current) | | $ | 348,912 | | | $ | 366,566 | | | $ | 295,246 | | | $ | 438,383 | | | $ | 154,370 | |
| Total assets | | | 473,108 | | | | 479,555 | | | | 391,574 | | | | 495,397 | | | | 208,274 | |
| Capital lease obligations and notes payable, long-term portion | | | 200,000 | | | | 200,000 | | | | 200,000 | | | | 200,150 | | | | 2,069 | |
| Stockholders’ equity | | | 182,543 | | | | 137,643 | | | | 145,981 | | | | 266,355 | | | | 182,130 | |
| |
Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Overview
We are a biopharmaceutical company that discovers, develops, and intends to commercialize pharmaceutical products for the treatment of serious medical conditions. We are currently conducting clinical programs for the VEGF Trap, IL-1 Trap, and IL-4/13 Trap, which are in various stages of development. In addition to our clinical programs, we have research programs focused on angiogenesis, metabolic diseases, muscle atrophy and related disorders, inflammatory conditions, and other diseases and disorders. We also use our Velocigene® and Trap technology platforms to discover and develop new product candidates and are developing our Velocimmunetm platform to create fully human, therapeutic antibodies.
Developing and commercializing new medicines entails significant risk and expense. Since inception we have not generated any sales or profits from the commercialization of any of our product candidates and may never receive such revenues. Before revenues from the commercialization of our product candidates can be realized, we (or our collaborators) must overcome a number of hurdles which include successfully completing research and development and obtaining regulatory approval from the FDA and regulatory authorities in other countries. In addition, the biotechnology and pharmaceutical industries are rapidly evolving and highly competitive, and new developments may render our products and technologies uncompetitive or obsolete.
From inception on January 8, 1988 through December 31, 2004, we had a cumulative loss of $489.8 million. In the absence of revenues from the commercialization of our product candidates or other sources, the amount, timing, nature, or source of which cannot be predicted, our losses will continue as we conduct our research and development activities. We expect to incur substantial losses over the next several years as we continue the clinical development of the VEGF Trap, IL-1 Trap, and IL-4/13 Trap; advance new product candidates into clinical development from our existing research programs; continue our research and development programs; and commercialize product candidates that receive regulatory approval, if any.
Our activities may expand over time and may require additional resources, and we expect our operating losses to be substantial over at least the next several years. Our losses may fluctuate from quarter to quarter and will depend, among other factors, on the progress of our research and development efforts, the timing of certain expenses, and the amount and timing of payments that we receive from collaborators.
As a company that does not expect to generate product revenues or profits over the next several years, management of cash flow is extremely important. The most significant use of our cash is for research and development activities, which include drug discovery, preclinical studies, clinical trials, and the manufacture of drug supplies for preclinical studies and clinical trials. In 2004, our research and development expenses totaled $136.1 million. We expect these expenses, exclusive of non-cash expenses related to grants of stock options, to increase 40-60% in 2005, depending on the progress of our clinical programs. The principal sources of cash to-date have been sales of common equity and convertible debt and funding from our collaborators in the form of up-front payments, research progress payments, payments for our research and development activities, and purchases of our common stock. We also receive payments for contract manufacturing.
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A primary driver of our expenses is our number of full-time employees. Our annual average headcount in 2004 was 721 compared to 675 in 2003 and 643 in 2002. In 2005, we expect our average headcount to increase to approximately 775, primarily to support our research and development programs.
The planning, execution, and results of our clinical programs are significant factors that can affect our operating and financial results. In our clinical programs, key events in 2004 and plans for 2005 are as follows:
| | | | |
Product Candidate | | 2004 Events | | 2005 Plans |
| | | | |
VEGF Trap — Oncology | | • Completed phase 1 subcutaneous single-agent trial in cancer | | • Commence additional single-agent and combination trials in cancer |
| | • Commenced phase 1 intravenous single-agent trial in cancer | | |
| | • Received Fast Track designation for VEGF Trap for specific niche cancer indication | | |
|
VEGF Trap — Eye Diseases | | • Completed treatment portion of phase 1 intravenous single-agent trial in neovascular age-related macular degeneration | | • Commence studies in eye diseases utilizing local delivery systems, such as intraocular injections |
| | • Completed treatment portion of phase 1 intravenous single-agent trial in diabetic macular edema | | |
|
IL-1 Trap | | • Planned for future trials in rheumatoid arthritis
• Completed treatment phase of single-dose patient tolerability studies to evaluate new formulations
• Commenced proof-of-concept study inCIAS1-Associated Periodic Syndrome (CAPS)
• Received FDA Orphan designation for the IL-1 Trap in treatment of CAPS | | • Commence clinical trial in rheumatoid arthritis
• Commence clinical trial in osteoarthritis
• Commence exploratory proof of concept trials in other indications
• Complete CAPS proof-of-concept study and commence additional trial in this indication
• Evaluate IL-1 Trap in other inflammatory conditions |
|
IL-4/13 Trap | | • Completed phase 1 trial in asthma | | • Commence clinical trial in asthma or allergy indication |
|
In September 2003, we entered into a collaboration agreement with the sanofi-aventis Group to collaborate on the development and commercialization of the VEGF Trap. Sanofi-aventis made a non-refundable up-front payment of $80.0 million and purchased 2,799,552 newly issued unregistered shares of our Common Stock for $45.0 million.
In January 2005, we and sanofi-aventis amended our collaboration agreement to exclude rights to develop and commercialize the VEGF Trap for eye diseases through local delivery systems. In connection with this amendment, sanofi-aventis made a $25.0 million non-refundable payment to us.
Under the collaboration agreement, as amended, we and sanofi-aventis will share co-promotion rights and profits on sales, if any, of the VEGF Trap for disease indications included in our collaboration. In December 2004, we earned a $25.0 million payment from sanofi-aventis, which was received in January 2005, upon the achievement of an early-stage clinical milestone. We may also receive up to $360.0 million in additional milestone payments upon receipt of specified marketing approvals for up to eight VEGF Trap indications in Europe or the United States. Regeneron has agreed to continue to manufacture clinical supplies of the VEGF
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Trap at our plant in Rensselaer, New York. Sanofi-aventis has agreed to be responsible for providing commercial scale manufacturing capacity for the VEGF Trap.
Under the collaboration agreement, agreed upon development expenses incurred by both companies during the term of the agreement will be funded by sanofi-aventis. If the collaboration becomes profitable, we will reimburse sanofi-aventis for 50% of the VEGF Trap development expenses, including 50% of the $25.0 million payment received in connection with the January 2005 amendment to our collaboration agreement, in accordance with a formula based on the amount of development expenses and our share of the collaboration profits, or at a faster rate at our option. Since inception of the collaboration through December 31, 2004, we and sanofi-aventis have incurred $86.5 million in development expenses related to VEGF Trap program. In addition, if the first commercial sale of a VEGF Trap product for disease of the eye through local delivery systems predates the first commercial sale of a VEGF Trap product under the collaboration by two years, we will begin reimbursing sanofi-aventis for up to $7.5 million of VEGF Trap development expenses in accordance with a formula until the first commercial VEGF Trap sale under the collaboration occurs.
Sanofi-aventis has the right to terminate the agreement without cause with at least twelve months advance notice. Upon termination of the agreement for any reason, any remaining obligation to reimburse sanofi-aventis for 50% of the VEGF Trap development expenses will terminate and we will retain all rights to the VEGF Trap.
In March 2003, we entered into a collaboration agreement with Novartis Pharma AG to jointly develop and commercialize the IL-1 Trap. Novartis made a non-refundable payment of $27.0 million and purchased 7,527,050 newly issued unregistered shares of our Common Stock for $48.0 million. In February 2004, Novartis provided notice of its intention not to proceed with the joint development of the IL-1 Trap, and subsequently paid us $42.75 million to satisfy its obligation to fund development costs for the nine month period following its notification and for the two months prior to that notice. All rights to the IL-1 Trap have reverted to Regeneron. Novartis and we retain rights under the collaboration agreement to elect to collaborate in the future on the development and commercialization of certain other IL-1 antagonists. In March 2004, we also achieved a pre-defined development milestone and Novartis forgave all its outstanding development expense loans to us, totaling $17.8 million.
Results of Operations
| |
| Years Ended December 31, 2004 and 2003 |
Revenues for the years ended December 31, 2004 and 2003 consist of the following:
| | | | | | | | | | | |
| | | 2004 | | | 2003 | |
| | | | | | | |
| | | (In millions) | |
| Contract research & development revenue | | | | | | | | |
| | Sanofi-aventis | | $ | 78.3 | | | $ | 14.3 | |
| | Novartis | | | 22.1 | | | | 21.4 | |
| | Procter & Gamble | | | 10.5 | | | | 10.6 | |
| | Other | | | 2.2 | | | | 1.1 | |
| | | | | | | |
| | | Total contract research & development revenue | | | 113.1 | | | | 47.4 | |
| | | | | | | |
| Research progress payments | | | | | | | | |
| | Sanofi-aventis | | | 25.0 | | | | — | |
| | Novartis | | | 17.8 | | | | — | |
| | | | | | | |
| | | Total research progress payments | | | 42.8 | | | | — | |
| | | | | | | |
| Contract manufacturing revenue | | | 18.1 | | | | 10.1 | |
| | | | | | | |
| | | Total revenue | | $ | 174.0 | | | $ | 57.5 | |
| | | | | | | |
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Our total revenue increased to $174.0 million in 2004 from $57.5 million in 2003 primarily due to higher revenues related to our collaboration with sanofi-aventis on the VEGF Trap and our prior collaboration with Novartis on the IL-1 Trap. Collaboration revenue earned from sanofi-aventis and Novartis is comprised of contract research and development revenue and research progress payments. Contract research and development revenue, as detailed below, consists partly of reimbursement for research and development expenses and partly of the recognition of revenue related to non-refundable, up-front payments. Non-refundable up-front payments are recorded as deferred revenue and recognized ratably over the period over which we are obligated to perform services in accordance with SAB 104 (see Critical Accounting Policies and Significant Judgments and Estimates). In the first quarter of 2004, Novartis provided notice of its intention not to proceed with the joint development of the IL-1 Trap and the $22.1 million remaining balance of the $27.0 million up-front payment received from Novartis in March 2003 was recognized as contract research and development revenue.
Sanofi-aventis and Novartis contract research & development revenues for 2004 and 2003 were as follows:
| | | | | | | | | | | | | | | | | | | | | | |
| | | Up-front Payment to Regeneron | |
| | | | | | | | |
| | | 2004 Regeneron | | | | | Amount | | | Deferred Revenue | | | Total Revenue | |
| | | Expense | | | Total | | | Recognized | | | at December 31, | | | Recognized | |
| | | Reimbursement | | | Payment | | | in 2004 | | | 2004 | | | in 2004 | |
| | | | | | | | | | | | | | | | |
| | | | | (In millions) | | | |
| Sanofi-aventis | | $ | 67.8 | | | $ | 80.0 | | | $ | 10.5 | | | $ | 65.8 | | | $ | 78.3 | |
| Novartis | | | — | | | | 27.0 | | | | 22.1 | | | | — | | | | 22.1 | |
| | | | | | | | | | | | | | | | |
| | Total | | $ | 67.8 | | | $ | 107.0 | | | $ | 32.6 | | | $ | 65.8 | | | $ | 100.4 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | Up-front Payment to Regeneron | |
| | | | | | | | |
| | | 2003 Regeneron | | | | | Amount | | | Deferred Revenue | | | Total Revenue | |
| | | Expense | | | Total | | | Recognized | | | at December 31, | | | Recognized | |
| | | Reimbursement | | | Payment | | | in 2004 | | | 2004 | | | in 2004 | |
| | | | | | | | | | | | | | | | |
| | | | | (In millions) | | | |
| Sanofi-aventis | | $ | 10.7 | | | $ | 80.0 | | | $ | 3.6 | | | $ | 76.4 | | | $ | 14.3 | |
| Novartis | | | 16.5 | | | | 27.0 | | | | 4.9 | | | | 22.1 | | | | 21.4 | |
| | | | | | | | | | | | | | | | |
| | Total | | $ | 27.2 | | | $ | 107.0 | | | $ | 8.5 | | | $ | 98.5 | | | $ | 35.7 | |
| | | | | | | | | | | | | | | | |
In December 2004, we earned a $25.0 million research progress payment from sanofi-aventis, which was received in January 2005, upon achievement of an early-stage VEGF Trap clinical milestone. In March 2004, Novartis forgave all its outstanding loans, including accrued interest, to Regeneron totaling $17.8 million, based upon Regeneron’s achieving a pre-defined IL-1 Trap development milestone. These amounts were recognized as research progress payments in 2004.
Contract manufacturing revenue relates to our long-term agreement with Merck to manufacture a vaccine intermediate at our Rensselaer, New York facility. Contract manufacturing revenue increased to $18.1 million in 2004 from $10.1 million in 2003, principally due to an increase in product shipments to Merck in 2004 compared to 2003. Revenue and the related manufacturing expense are recognized as product is shipped, after acceptance by Merck. Included in contract manufacturing revenue in 2004 and 2003 are $3.6 million and $1.7 million, respectively, of deferred revenue associated with capital improvement reimbursements paid by Merck prior to commencement of production. This deferred revenue is being recognized as product is shipped to Merck based on the total amount of product expected to be shipped over the life of the manufacturing agreement. In February 2005, we agreed to extend the manufacturing agreement by one year through October 2006 and provide Merck an opportunity, upon twelve months’ prior notice, to extend the agreement for an additional year through October 2007.
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| |
| Research and Development Expenses: |
Research and development expenses increased slightly to $136.1 million in 2004 from $136.0 million in 2003. The following table summarizes the major categories of our research and development expenses for the years ended December 31, 2004 and 2003:
| | | | | | | | | | |
| | | 2004 | | | 2003 | |
| | | | | | | |
| | | (In millions) | |
| Research and development expenses: | | | | | | | | |
| | Payroll and benefits | | $ | 43.6 | | | $ | 38.5 | |
| | Clinical trial expenses | | | 10.3 | | | | 25.0 | |
| | Clinical manufacturing costs(1) | | | 36.4 | | | | 29.8 | |
| | Research and preclinical development costs | | | 23.1 | | | | 19.6 | |
| | Occupancy and other operating costs | | | 22.7 | | | | 23.1 | |
| | | | | | | |
| Total research and development | | $ | 136.1 | | | $ | 136.0 | |
| | | | | | | |
| |
(1) | Represents the full cost of manufacturing drug for use in research, preclinical development and clinical trials, including related payroll and benefits, manufacturing materials and supplies, depreciation, and occupancy costs of our Rensselaer manufacturing facility. |
Payroll and benefits increased $5.1 million in 2004 compared with 2003 as we added research and development personnel to support our clinical and research programs, especially for the VEGF Trap and IL-1 Trap. Clinical trial expenses decreased $14.7 million in 2004 from 2003 due primarily to the completion of the double-blind treatment portion of our AXOKINE phase 3 clinical trial for the treatment of obesity in 2003, the completion of other AXOKINE trials in 2004, and the completion of our IL-4/13 Trap phase 1 trial in 2004. These decreases were partly offset by higher clinical trial expenses related to our VEGF Trap and IL-1 Trap clinical programs. Clinical manufacturing costs increased $6.6 million in 2004 compared to 2003 as we manufactured supplies of our clinical product candidates in our expanded Rensselaer manufacturing facility for the full year of 2004. Research and preclinical development costs increased $3.5 million due primarily to higher preclinical development costs related to our VEGF Trap program and higher research-related costs for outside services in 2004 than in 2003. Occupancy and other operating costs decreased slightly by $0.4 million in 2004 compared to 2003 primarily as a result of lower depreciation costs due to extending the lease on our Tarrytown, New York facilities in early 2004.
| |
| Contract Manufacturing Expenses: |
Contract manufacturing expenses increased to $15.2 million in 2004, compared to $6.7 million in 2003, primarily because more product was shipped to Merck in 2004 and the Company incurred unfavorable manufacturing costs, which were expensed in the period incurred, in 2004 compared to 2003.
| |
| General and Administrative Expenses: |
General and administrative expenses increased to $17.1 million in 2004 from $14.8 million in 2003, due primarily to a $1.4 million increase in professional fees, principally associated with accounting and other services related to our efforts to comply with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002. The remainder of the 2004 increase was principally due to increases in payroll and related costs associated, in part, with higher administrative headcount in 2004 to support the Company’s operations.
| |
| Other Income and Expense: |
In the first quarter of 2004, Novartis notified us of its decision to forego its right under our collaboration to jointly develop the IL-1 Trap and agreed to pay us $42.75 million to satisfy its obligation to fund development costs for the IL-1 Trap for the nine-month period following its notification and for the two
21
months prior to that notice. The $42.75 million was included in other contract income in the first quarter of 2004.
Investment income increased to $5.5 million in 2004 from $4.5 million in 2003 due primarily to higher effective interest rates on investment securities. Interest expense increased slightly to $12.2 million in 2004 from $11.9 million in 2003. Interest expense is attributable primarily to $200.0 million of convertible notes issued in October 2001, which mature in 2008 and bear interest at 5.5% per annum.
| |
| Years Ended December 31, 2003 and 2002 |
Revenues for the years ended December 31, 2003 and 2002 consist of the following:
| | | | | | | | | | | |
| | | 2003 | | | 2002 | |
| | | | | | | |
| | | (In millions) | |
| Contract research & development revenue | | | | | | | | |
| | Novartis | | $ | 21.4 | | | $ | — | |
| | Sanofi-aventis | | | 14.3 | | | | — | |
| | Procter & Gamble | | | 10.6 | | | | 10.5 | |
| | Other | | | 1.1 | | | | 0.4 | |
| | | | | | | |
| | | Total contract research & development revenue | | | 47.4 | | | | 10.9 | |
| Contract manufacturing revenue | | | 10.1 | | | | 11.1 | |
| | | | | | | |
| | | Total revenue | | $ | 57.5 | | | $ | 22.0 | |
| | | | | | | |
Our total revenue increased to $57.5 million in 2003 from $22.0 million in 2002 primarily from the recognition of $21.4 million of revenue related to our collaboration with Novartis on the IL-1 Trap and $14.3 million of revenue related to our collaboration with sanofi-aventis on the VEGF Trap. This collaboration revenue, as detailed below, consists partly of reimbursement for research and development expenses and partly of the recognition of revenue related to non-refundable up-front payments. Non-refundable up-front payments are recorded as deferred revenue and recognized ratably over the period over which we are obligated to perform services in accordance with SAB 104 (see Critical Accounting Policies and Significant Judgments and Estimates).
Sanofi-aventis and Novartis contract research & development revenues for 2003 were as follows:
| | | | | | | | | | | | | | | | | | | | | | |
| | | Up-front Payment to Regeneron | |
| | | | | | | | |
| | | 2003 Regeneron | | | | | Amount | | | Deferred Revenue | | | Total Revenue | |
| | | Expense | | | Total | | | Recognized | | | at December 31, | | | Recognized in | |
| | | Reimbursement | | | Payment | | | in 2003 | | | 2003 | | | 2003 | |
| | | | | | | | | | | | | | | | |
| | | | | (In millions) | | | |
| Novartis | | $ | 16.5 | | | $ | 27.0 | | | $ | 4.9 | | | $ | 22.1 | | | $ | 21.4 | |
| Sanofi-aventis | | | 10.7 | | | | 80.0 | | | | 3.6 | | | | 76.4 | | | | 14.3 | |
| | | | | | | | | | | | | | | | |
| | Total | | $ | 27.2 | | | $ | 107.0 | | | $ | 8.5 | | | $ | 98.5 | | | $ | 35.7 | |
| | | | | | | | | | | | | | | | |
Contract manufacturing revenue relates to our long-term agreement with Merck. Contract manufacturing revenue decreased to $10.1 million in 2003 from $11.1 million in 2002, due primarily to the receipt of a non-recurring $1.0 million payment in the third quarter of 2002 related to services we provided to Merck in prior years. Revenue and the related manufacturing expense are recognized as product is shipped, after acceptance by Merck. Included in contract manufacturing revenue in 2003 and 2002 are $1.7 million and $1.8 million, respectively, of deferred revenue associated with capital improvement reimbursements paid by Merck prior to commencement of production. This deferred revenue is being recognized as product is shipped to Merck based on the total amount of product expected to be shipped over the life of the agreement.
22
| |
| Research and Development Expenses: |
Research and development expenses increased to $136.0 million in 2003 from $125.0 million in 2002. The following table summarizes the major categories of our research and development expenses for the years ended December 31, 2003 and 2002:
| | | | | | | | | | |
| | | 2003 | | | 2002 | |
| | | | | | | |
| | | (In millions) | |
| Research and development expenses: | | | | | | | | |
| | Payroll and benefits | | $ | 38.5 | | | $ | 35.9 | |
| | Clinical trial expenses | | | 25.0 | | | | 33.9 | |
| | Clinical manufacturing costs(1) | | | 29.8 | | | | 17.3 | |
| | Research and preclinical development costs | | | 19.6 | | | | 18.4 | |
| | Occupancy and other operating costs | | | 23.1 | | | | 19.5 | |
| | | | | | | |
| Total research and development | | $ | 136.0 | | | $ | 125.0 | |
| | | | | | | |
| |
(1) | Represents the full cost of manufacturing drug for use in research, preclinical development and clinical trials, including related payroll and benefits, manufacturing materials and supplies, depreciation, and occupancy costs of our Rensselaer manufacturing facility. |
Payroll and benefits increased $2.6 million in 2003 compared with 2002 as we added research and regulatory personnel to support our clinical and research programs. Clinical trial expenses decreased $8.9 million in 2003 from 2002 due primarily to the completion of the double-blind treatment portion of the AXOKINE phase 3 trial in January of 2003. Clinical manufacturing costs increased $12.5 million in 2003 compared to 2002. In 2003 we completed an expansion to our Rensselaer, New York plant, and leased additional warehouse and manufacturing facilities nearby, to increase our capacity to manufacture supplies of our product candidates. As a result, we added manufacturing personnel, purchased more materials and supplies, and incurred higher depreciation and occupancy costs for our manufacturing facilities in 2003 compared to 2002. Research and preclinical development costs increased $1.2 million in 2003 compared to 2002 due primarily to expense recognized in connection with a license agreement granted to us by Merck in 2003 related to the development of AXOKINE. Occupancy and other operating costs increased $3.6 million in 2003 compared to 2002 due primarily to higher costs for the full year 2003 related to leasing additional lab and office space in Tarrytown in the third quarter of 2002, and higher depreciation costs associated with leasehold renovations completed in 2003.
| |
| Contract Manufacturing Expenses: |
Contract manufacturing expenses increased to $6.7 million in 2003, compared to $6.5 million in 2002, primarily because we shipped more product to Merck.
| |
| General and Administrative Expenses: |
General and administrative expenses increased to $14.8 million in 2003 from $12.5 million in 2002, due primarily to (i) a $1.0 million increase in payroll related costs, (ii) a $0.8 million increase in professional fees, principally associated with legal expenses for general corporate matters and the collaborations with sanofi-aventis and Novartis, and (iii) a $0.5 million increase in operating expenses including rent, utilities, supplies, and insurance.
| |
| Other Income and Expense: |
Investment income decreased to $4.5 million in 2003 from $9.5 million in 2002 due primarily to lower effective interest rates on investment securities. In addition, our levels of interest-bearing investments were lower for most of 2003 as we funded our operations. Interest expense was $11.9 million in both 2003 and 2002.
23
Interest expense is attributable primarily to $200.0 million of convertible notes issued in October 2001, which mature in 2008 and bear interest at 5.5% per annum.
Liquidity and Capital Resources
Since our inception in 1988, we have financed our operations primarily through offerings of our equity securities, a private placement of convertible debt, revenue earned under our past and present research and development and contract manufacturing agreements, including our agreements with Aventis, Novartis, Procter & Gamble, and Merck, and investment income.
| |
| Years Ended December 31, 2004 and 2003 |
At December 31, 2004, we had $348.9 million in cash, cash equivalents, and marketable securities compared with $366.6 million, which included $10.9 million of restricted marketable securities, at December 31, 2003. In January 2005, we received two $25.0 million payments from sanofi-aventis. One payment was related to a VEGF Trap clinical milestone that was earned in 2004. The second payment related to changes to our collaboration agreement with sanofi-aventis that were made in January 2005. Restricted marketable securities consisted of pledged U.S. government securities which were sufficient upon receipt of scheduled principal and interest payments to provide for the payment in full of the interest payments on the convertible senior subordinated notes through October 2004.
Net cash used in operations was $16.9 million in 2004 compared to $6.1 million in 2003. The increase in cash used in operations during 2004 was primarily due to the 2003 receipt of non-refundable up-front payments associated with the sanofi-aventis and Novartis collaborations, offset in part by higher 2004 receipts from (i) sanofi-aventis for contract research and development revenue and (ii) Novartis for its $42.75 million payment to us following its first quarter 2004 decision to forego its right under our collaboration to jointly develop the IL-1 Trap. The majority of cash used in operations in both 2004 and 2003 was to fund research and development, primarily related to our VEGF Trap and IL-1 Trap programs.
In September 2003, we entered into a collaboration agreement with sanofi-aventis to jointly develop and commercialize the VEGF Trap. Sanofi-aventis made a non-refundable up-front payment of $80.0 million which was recorded to deferred revenue and is being recognized as contract research and development revenue ratably over the period during which we expect to perform services. In 2004 and 2003, we recognized $10.5 million and $3.6 million of revenue, respectively, related to this up-front payment and we anticipate, based on current VEGF Trap product development plans, that we will recognize approximately $9.4 million of revenue over each of the next 7 years. Sanofi-aventis has agreed to fund all agreed upon development expenses incurred by both companies in connection with indications included in our collaboration during the term of the agreement. Sanofi-aventis funded $67.8 million of our VEGF Trap development costs in 2004 and $10.7 million in 2003, of which $13.9 million and $8.9 million, respectively, were included in accounts receivable as of December 31, 2004 and 2003. In addition, in December 2004 we earned a $25.0 million milestone payment from sanofi-aventis, which was also included in accounts receivable at December 31, 2004.
In March 2003, we entered into a collaboration agreement with Novartis to jointly develop and commercialize the IL-1 Trap. Novartis made a non-refundable up-front payment of $27.0 million which was initially recorded to deferred revenue. In 2003, we recognized $4.9 million of revenue related to this up-front payment. In the first quarter of 2004, Novartis provided notice of its intention not to proceed with the joint development of the IL-1 Trap and the remaining balance of the $27.0 million up-front payment, or $22.1 million, was recognized as contract research and development revenue. As described above, we also received a $42.75 million payment from Novartis in the first quarter of 2004 which was recognized as other contract income. In addition, in March 2004, Novartis forgave all its outstanding loans, including accrued interest, to Regeneron totaling $17.8 million, based upon Regeneron’s achieving a pre-defined IL-1 Trap development milestone. Development expenses incurred during 2003 were shared equally by Regeneron and Novartis. In 2003, Novartis agreed to reimburse us for $16.5 million of our IL-Trap development costs, of which $3.2 million was included in accounts receivable as of December 31, 2003.
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In 2003, we recorded a non-cash expense of $1.5 million associated with the issuance of our Common Stock in connection with a license agreement entered into with Merck.
In both 2004 and 2003, we made two semi-annual interest payments totaling $11.0 million per year on our convertible senior subordinated notes.
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| Cash Used in Investing Activities: |
Net cash used in investing activities decreased to $4.6 million in 2004 from $63.8 million in 2003, due primarily to a decrease in purchases of marketable securities, net of sales or maturities. In 2004, purchases of marketable securities exceeded sales or maturities by $9.5 million, whereas in 2003, purchases of marketable securities exceeded sales or maturities by $45.2 million. In addition, payments for capital expenditures decreased $23.5 million in 2004 compared to 2003, due primarily to the completion of our Rensselaer plant expansion in 2003.
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| Cash Provided by Financing Activities: |
Cash provided by financing activities decreased to $4.4 million in 2004 from $108.2 million in 2003, due primarily to the sale of Common Stock to sanofi-aventis and Novartis in 2003 in association with the collaboration agreements. Sanofi-aventis purchased 2,799,552 newly issued unregistered shares of our Common Stock for $45.0 million. Novartis purchased 7,527,050 newly issued unregistered shares of our Common Stock for $48.0 million. In addition, in accordance with our collaboration agreement with Novartis, we elected to fund our share of 2003 IL-1 Trap development expenses through a loan from Novartis that was forgiven in March 2004 upon Regeneron’s achieving a pre-defined IL-1 Trap development milestone. As of December 31, 2003, we had drawn $13.7 million, excluding interest, against this loan facility and we drew an additional $3.8 million during the first quarter of 2004 for expenses incurred during 2003.
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| Sanofi-aventis Agreement: |
In January 2005, we and sanofi-aventis amended our collaboration agreement to exclude rights to develop and commercialize the VEGF Trap for eye diseases through local delivery systems. In connection with this amendment, sanofi-aventis made a $25.0 million non-refundable payment to us.
Under the collaboration agreement, as amended, we and sanofi-aventis will share co-promotion rights and profits on sales, if any, of the VEGF Trap for disease indications included in our collaboration. In December 2004, we earned a $25.0 million payment from sanofi-aventis, which was received in January 2005, upon achievement of an early-stage clinical milestone. We may also receive up to $360.0 million in additional milestone payments upon receipt of specified marketing approvals for up to eight VEGF Trap indications in Europe or the United States.
We have agreed to continue to manufacture clinical supplies of the VEGF Trap at our plant in Rensselaer, New York. Sanofi-aventis has agreed to be responsible for providing commercial scale manufacturing capacity for the VEGF Trap. Under the collaboration agreement, as amended, agreed upon development expenses incurred by both companies during the term of the agreement, including costs associated with the manufacture of clinical drug supply, will be funded by sanofi-aventis. If the collaboration becomes profitable, we will reimburse sanofi-aventis for 50% of these development expenses, including 50% of the $25.0 million payment received in connection with the January 2005 amendment to our collaboration agreement, in accordance with a formula based on the amount of development expenses and our share of the collaboration profits, or at a faster rate at our option. In addition, if the first commercial sale of a VEGF Trap product for diseases of the eye through local delivery systems predates the first commercial sale of a VEGF Trap product under the collaboration, we will begin reimbursing sanofi-aventis for up to $7.5 million of VEGF Trap development expenses commencing two years after such initial commercialization outside the collaboration in accordance with a formula until the first commercial VEGF Trap sale under the collaboration occurs. Since inception of the collaboration agreement through December 31, 2004, we incurred and were subsequently reimbursed by sanofi-aventis for $78.1 million in development expenses related to the VEGF Trap
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program. In addition to expenses incurred by us, sanofi-aventis has incurred $8.4 million in development expenses through December 31, 2004 related to the VEGF Trap program.
We and sanofi-aventis plan to initiate multiple clinical studies in 2005 to evaluate the VEGF Trap as both a single-agent and in combination with other therapies in various cancer indications. During the third quarter of 2004, the FDA granted Fast Track designation to the VEGF Trap for a specific niche cancer indication. As a result of the FDA’s decision, we and sanofi-aventis plan to initiate a clinical trial in that indication in 2005.
In August 2003, Merck granted to us a non-exclusive license to certain patents and patent applications which may be used in the development and commercialization of AXOKINE. As consideration, we issued to Merck 109,450 newly issued unregistered shares of our Common Stock (the Merck Shares), valued at $1.5 million based on the fair market value of shares of our Common Stock on the agreement’s effective date. In August 2004, we repurchased from Merck, and subsequently retired, the Merck Shares for $0.9 million, based on the fair market value of the shares on August 19, 2004. We also made a cash payment of $0.6 million to Merck as required under the license agreement. The agreement requires us to make an additional payment to Merck upon receipt of marketing approval for a product covered by the licensed patents. In addition, we would be required to pay royalties, at staggered rates in the mid-single digits, based on the net sales of products covered by the licensed patents.
In 2001, we issued $200.0 million aggregate principal amount of convertible senior subordinated notes in a private placement and received proceeds, after deducting the initial purchasers’ discount and out-of pocket expenses, of $192.7 million. The notes bear interest at 5.5% per annum, payable semi-annually and mature in 2008. The notes are convertible into shares of our Common Stock at a conversion price of approximately $30.25 per share, subject to adjustment in certain circumstances. We may redeem some or all of the notes if the closing price of our Common Stock has exceeded 140% of the conversion price then in effect for a specified period of time.
As part of this transaction, we pledged $31.6 million of U.S. government securities which was sufficient upon receipt of scheduled principal and interest payments to provide for the payment in full of the first six scheduled interest payments on the notes when due, the last of which was paid in October 2004.
Our additions to property, plant, and equipment totaled $6.0 million in 2004, $16.9 million in 2003, and $45.9 million in 2002, including a total of $48.0 million in 2002 and 2003 related to the expansion of our manufacturing facilities in Rensselaer, New York, which was completed in 2003. In 2005, we expect to incur approximately $10 million in capital expenditures which primarily consists of equipment for our expanded manufacturing, research, and development activities.
Our total expenses for research and development from inception through December 31, 2004 have been approximately $857 million. We have entered into various agreements related to our activities to develop and commercialize product candidates and utilize our technology platforms, including collaboration agreements, such as with sanofi-aventis, Novartis, and Procter & Gamble, and agreements to use our Velocigenetm technology platform, such as with Serono S.A. We incurred expenses associated with these agreements, which include an allocable portion of general and administrative costs, of $75.3 million, $56.0 million and $11.9 million in 2004, 2003, and 2002, respectively.
We expect to continue to incur substantial funding requirements primarily for research and development activities (including preclinical and clinical testing). We currently anticipate that approximately 55%-65% of our expenditures for 2005 will be directed toward the preclinical and clinical development of product
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candidates, including the VEGF Trap, IL-1 Trap, and IL-4/13 Trap; approximately 20%-30% of our expenditures for 2005 will be applied to our basic research activities and the continued development of our novel technology platforms; and the remainder of our expenditures for 2005 will be used for capital expenditures and general corporate purposes.
In connection with our funding requirements, the following table summarizes our contractual obligations as of December 31, 2004 for leases and long-term debt. None of these obligations extend beyond 5 years.
| | | | | | | | | | | | | | | | | |
| | | | | Payments Due by Period | |
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| | | | | Less than | | | 1 to 3 | | | 4 to 5 | |
| | | Total | | | one year | | | years | | | years | |
| | | | | | | | | | | | | |
| | | (In millions) | |
| Convertible Senior Subordinated Notes Payable(1) | | $ | 244.0 | | | $ | 11.0 | | | $ | 22.0 | | | $ | 211.0 | |
| Operating Leases(2) | | | 17.7 | | | | 4.9 | | | | 9.2 | | | | 3.6 | |
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(1) | Includes amounts representing interest. |
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(2) | Excludes future contingent rental costs for utilities, real estate taxes, and operating expenses. In 2004, these costs were $6.0 million. |
The amount we need to fund operations will depend on various factors, including the status of competitive products, the success of our research and development programs, the potential future need to expand our professional and support staff and facilities, the status of patents and other intellectual property rights, the delay or failure of a clinical trial of any of our potential drug candidates, and the continuation, extent, and success of any collaborative research and development collaborations (including those with sanofi-aventis and Procter & Gamble). Clinical trial costs are dependent, among other things, on the size and duration of trials, fees charged for services provided by clinical trial investigators and other third parties, the costs for manufacturing the product candidate for use in the trials, supplies, laboratory tests, and other expenses. The amount of funding that will be required for our clinical programs depends upon the results of our research and preclinical programs and early-stage clinical trials, regulatory requirements, the clinical trials underway plus additional clinical trials that we decide to initiate, and the various factors that affect the cost of each trial as described above. In the future, if we are able to successfully develop, market, and sell certain of our product candidates, we may be required to pay royalties or otherwise share the profits generated on such sales in connection with our collaboration and licensing agreements. Also under the terms of the sanofi-aventis collaboration agreement, if the collaboration becomes profitable, we will reimburse sanofi-aventis for 50 percent of the VEGF Trap development expenses, including 50% of the $25.0 million payment received in connection with amending our collaboration agreement in January 2005, in accordance with a formula based on the amount of development expenses and our share of the collaboration profits, or at a faster rate at our option. In addition, if the first commercial sale of a VEGF Trap product for diseases of the eye through local delivery systems predates the first commercial sale of a VEGF Trap product under the collaboration, we will begin reimbursing sanofi-aventis for up to $7.5 million of VEGF Trap development expenses commencing two years after such initial commercialization outside the collaboration in accordance with a formula until the first commercial VEGF Trap sale under the collaboration occurs. Sanofi-aventis has the right to terminate the agreement without cause with at least twelve months advance notice. Upon termination of the agreement for any reason, any remaining obligation to reimburse sanofi-aventis for 50% of the VEGF Trap development expenses will terminate and we will retain all rights to the VEGF Trap.
We expect that expenses related to the filing, prosecution, defense, and enforcement of patent and other intellectual property claims will continue to be substantial as a result of patent filings and prosecutions in the United States and foreign countries.
We believe that our existing capital resources will enable us to meet operating needs through at least mid-2007. However, this is a forward-looking statement based on our current operating plan, and there may be a change in projected revenues or expenses that would lead to our capital being consumed significantly before such time. If there is insufficient capital to fund all of our planned operations and activities, we believe we would prioritize available capital to fund preclinical and clinical development of our product candidates. We
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have no off-balance sheet arrangements and do not guarantee the obligations of any other entity. As of December 31, 2004, we had no established banking arrangements through which we could obtain short-term financing or a line of credit. In the event we need additional financing for the operation of our business, we will consider collaborative arrangements and additional public or private financing, including additional equity financing. In January 2005, we filed a shelf registration statement on Form S-3 to sell, in one or more offerings, up to $200.0 million of equity or debt securities, together or separately, which registration statement was declared effective in February 2005. However, there is no assurance that we will be able to complete any such offerings of securities. Factors influencing the availability of additional financing include our progress in product development, investor perception of our prospects, and the general condition of the financial markets. We may not be able to secure the necessary funding through new collaborative arrangements or additional public or private offerings. If we cannot raise adequate funds to satisfy our capital requirements, we may have to delay, scale-back, or eliminate certain of our research and development activities or future operations. This could harm our business.
Critical Accounting Policies and Significant Judgments and Estimates
We recognize revenue from contract research and development and research progress payments in accordance with Staff Accounting Bulletin No. 104,Revenue Recognition(SAB 104) and Emerging Issues Task Force 00-21,Accounting for Revenue Arrangements with Multiple Deliverables(EITF 00-21). During the third quarter of 2003, we elected to change the method we use to recognize revenue under SAB 104 related to non-refundable collaborator payments, including up-front licensing payments, payments for development activities, and research progress (milestone) payments, to the Substantive Milestone Method, adopted retroactively to January 1, 2003. Under this method, we recognize revenue from non-refundable up-front license payments, not tied to achieving a specific performance milestone, ratably over the period over which we expect to perform services. The period over which we expect to perform services is estimated based on product development plans. These estimates are updated based on the results and progress of clinical trials and drug production and revisions to these estimates could result in changes to the amount of revenue recognized each year in the future. In addition, if a collaborator terminates the agreement in accordance with the terms of the contract, we would recognize the remainder of the up-front payment at the time of the termination. Payments for development activities are recognized as revenue as earned, ratably over the period of effort. Substantive at-risk milestone payments, which are based on achieving a specific performance milestone, are recognized as revenue when the milestone is achieved and the related payment is due, provided there is no future service obligation associated with that milestone. Previously, we had recognized revenue from non-refundable collaborator payments based on the percentage of costs incurred to date, estimated costs to complete, and total expected contract revenue. However, the revenue recognized was limited to the amount of non-refundable payments received. The change in accounting method was made because we believe that it better reflects the substance of our collaborative agreements and is more consistent with current practices in the biotechnology industry.
In connection with our VEGF Trap collaboration agreement with sanofi-aventis, in September 2003, we received a non-refundable up-front payment of $80.0 million which was recorded to deferred revenue and is being recognized as contract research and development revenue ratably over the period over which we are obligated to perform services. In the fourth quarter of 2004, we revised our estimate based on current VEGF Trap product development plans and extended the period over which we expect to be obligated to perform services under the collaboration by one year. As a result, we anticipate that we will recognize approximately $9.4 million of revenue related to the sanofi-aventis $80.0 million up-front payment over each of the next 7 years. Also, in connection with our collaboration agreement with Novartis, in the first quarter of 2004, Novartis provided notice of its intention not to proceed with the joint development of the IL-1 Trap. Accordingly, the remaining balance of the $27.0 million up-front payment, or $22.1 million, was recognized as contract research and development revenue.
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| Recognition of Deferred Revenue Related to Contract Manufacturing Agreement: |
We have entered into a contract manufacturing agreement with Merck under which we manufacture a vaccine intermediate at our Rensselaer, New York facility and perform services. We recognize contract manufacturing revenue from this agreement after the product is tested and approved by, and shipped (FOB Shipping Point) to, Merck, and as services are performed. In connection with the agreement, we agreed to modify portions of our Rensselaer facility to manufacture Merck’s vaccine intermediate and Merck agreed to reimburse us for the related capital costs. These capital cost payments were deferred and are recognized as revenue as product is shipped to Merck, based upon our estimate of Merck’s order quantities each year through the expected end of the agreement which, for 2004 and prior years, was October 2005. Since we commenced production of the vaccine intermediate in November 1999, our estimates of Merck’s order quantities each year have not been materially different from Merck’s actual orders.
In February 2005, we and Merck amended our contract manufacturing agreement by extending its term by one year through October 2006. In addition, we provided Merck the opportunity, upon twelve months’ prior notice, to extend the agreement for an additional year through October 2007. As a result, we will recognize the remaining deferred balance of Merck’s capital cost payments as of December 31, 2004, or $2.7 million, as revenue as product is shipped to Merck, based upon our revised estimate of Merck’s order quantities through October 2006.
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| Clinical Trial Accrual Estimates: |
For each clinical trial that we conduct, certain clinical trial costs, which are included in research and development expenses, are expensed based on the expected total number of patients in the trial, the rate at which patients enter the trial, and the period over which clinical investigators or contract research organizations are expected to provide services. We believe that this method best aligns the expenses we record with the efforts we expend on a clinical trial. During the course of a trial, we adjust our rate of clinical expense recognition if actual results differ from our estimates. No material adjustments to our past clinical trial accrual estimates were made during the years ended December 31, 2004, 2003, and 2002.
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| Depreciation of Property, Plant and Equipment: |
Property, plant, and equipment are stated at cost. Depreciation is provided on a straight-line basis over the estimated useful lives of the assets. Expenditures for maintenance and repairs which do not materially extend the useful lives of the assets are charged to expense as incurred. The cost and accumulated depreciation or amortization of assets retired or sold are removed from the respective accounts, and any gain or loss is recognized in operations. The estimated useful lives of property, plant, and equipment are as follows:
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Building and improvements | | 6-30 years |
Leasehold improvements | | Life of lease |
Laboratory and computer equipment | | 3-5 years |
Furniture and fixtures | | 5 years |
In some situations, the life of the asset may be extended or shortened if circumstances arise that would lead us to believe that the estimated life of the asset has changed. The life of leasehold improvements may change based on the extension of lease contracts with our landlords. Changes in the estimated lives of assets will result in an increase or decrease in the amount of depreciation recognized in future periods. Costs of construction of certain long-lived assets include capitalized interest which is amortized over the estimated useful life of the related asset.
Future Impact of Recently Issued Accounting Standards
In April 2004, the Emerging Issues Task Force issued Statement No. 03-6,Participating Securities and the Two — Class Method under FASB Statement No. 128, Earnings per Share(EITF 03-6). EITF 03-6 addresses a number of questions regarding the computation of earnings per share (EPS) by companies that have issued securities other than common stock that contractually entitle the holder to participate in dividends
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and earnings of the company when, and if, it declares dividends on its common stock. EITF 03-6 defines participation rights based solely on whether the holder would be entitled to receive any dividends if the entity declared them during the period and requires the use of the two-class method for computing basic EPS when participating convertible securities exist. In addition, EITF 03-6 expands the use of the two-class method to encompass other forms of participating securities and is effective for fiscal periods beginning after March 31, 2004. Since we have no participating securities, our adoption of EITF 03-6 did not have a material impact on our financial statements.
In November 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 151,Inventory Costs, an amendment of ARB 43, Chapter 4 (SFAS No. 151). SFAS No. 151 clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material by requiring that those items be recognized as current-period charges in all circumstances. SFAS No. 151 is effective for fiscal years beginning after June 15, 2005. We believe that the future adoption of SFAS No. 151 will not have a material impact on our financial statements.
In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123R,Share-Based Payment (SFAS No. 123R). SFAS No. 123R is a revision of SFAS No. 123,Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25,Accounting for Stock Issued to Employees, and its related implementation guidance. SFAS No. 123R establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. SFAS No. 123R focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions, and requires the recognition of compensation expense in an amount equal to the fair value of the share-based payment (including stock options and restricted stock) issued to employees. SFAS No. 123R is effective for fiscal periods beginning after June 15, 2005. We currently intend to adopt SFAS No. 123R effective July 1, 2005 using the modified prospective method. Under the modified prospective method, compensation cost is recognized beginning with the effective date based on (a) the requirements of SFAS No. 123R for all share-based payments granted after the effective date and (b) the requirements of SFAS No. 123 for all awards granted to employees prior to the effective date of SFAS No. 123R that remain unvested on the effective date. Although the impact of adopting SFAS No. 123R has not yet been quantified, we believe that the future adoption of this standard will have a material impact on our financial statements.
In December 2004, the FASB issued Statement of Financial Accounting Standards No. 153,Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29 (SFAS No. 153). SFAS No. 153 eliminates an exception for nonmonetary exchanges of similar productive assets under APB Opinion No. 29, and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. SFAS No. 153 is to be applied prospectively and is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. We believe that the future adoption of SFAS No. 153 will not have a material impact on our financial statements.
Risk Factors
We operate in an environment that involves a number of significant risks and uncertainties. We caution you to read the following risk factors, which have affected,and/or in the future could affect, our business, operating results, financial condition, and cash flows. The risks described below include forward-looking statements, and actual events and our actual results may differ substantially from those discussed in these forward-looking statements. Additional risks and uncertainties not currently known to us or that we currently deem immaterial may also impair
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our business operations. Furthermore, additional risks and uncertainties are discussed elsewheredescribed under other captions in this Annual Report on Form 10-Kreport and should be considered by our investors.
Risks Related to Our Financial Results and Need for Additional Financing
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| We have had a history of operating losses and we may never achieve profitability. If we continue to incur operating losses, we may be unable to continue our operations. |
We have had a history of operating losses and we may never achieve profitability. If we continue to incur operating losses, we may be unable to continue our operations.
From inception on January 8, 1988 through December 31, 2004,2007, we had a cumulative loss of $489.8$793.2 million. If we continue to incur operating losses and fail to become a profitable company, we may be
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unable to continue our operations. We have no products that are available for sale and do not know when we will have products available for sale, if ever. In the absence of revenue from the sale of products or other sources, the amount, timing, nature or source of which cannot be predicted, our losses will continue as we conduct our research and development activities.
We currently receive contract manufacturing revenue frommay need additional funding in the future, which may not be available to us, and which may force us to delay, reduce or eliminate our agreement with Merck and contract research andproduct development revenue from our agreements with Procter & Gamble and Serono. Our agreements with Procter & Gamble and Serono may expire in 2005. Our agreement with Merck is scheduled to expire before the end of 2006, unless extended for one additional year by Merck. We can provide no assurance that allprograms or any of these agreements will be extended. Failure to extend these agreements may negatively impact our business, financial condition or results of operations.commercialization efforts.
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| We will need additional funding in the future, which may not be available to us, and which may force us to delay, reduce or eliminate our product development programs or commercialization efforts. |
We will need to expend substantial resources for research and development, including costs associated with clinical testing of our product candidates. We believe our existing capital resources, including funding we are entitled to receive under our collaboration agreements, will enable us to meet operating needs through at least mid-2007;2012; however, one or more of our collaboration agreements may terminate, our projected revenue may decrease, or our expenses may increase and that would lead to our capital being consumed significantly before such time. We will likelymay require additional financing in the future and we may not be able to raise such additional funds. If we are able to obtain additional financing through the sale of equity or convertible debt securities, such sales may be dilutive to our shareholders. Debt financing arrangements may require us to pledge certain assets or enter into covenants that would restrict our business activities or our ability to incur further indebtedness and may contain other terms that are not favorable to our shareholders. If we are unable to raise sufficient funds to complete the development of our product candidates, we may face delay, reduction or elimination of our research and development programs or preclinical or clinical trials, in which case our business, financial condition or results of operations may be materially harmed.
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| We have a significant amount of debt and may have insufficient cash to satisfy our debt service and repayment obligations. In addition, the amount of our debt could impede our operations and flexibility. |
We have a significant amount of debt that is scheduled to mature in 2008.
We have $200.0 million of convertible debt and semi-annual interest payment obligations. This debt,that, unless converted to shares of our common stock,Common Stock, will mature in October 2008. We may be unable to generate sufficient cash flow or otherwise obtain funds necessary to make required payments on our debt. Even if we are able to meet our debt service obligations, the amount of debt we already have could hurt our ability to obtain any necessary financing in the future for working capital, capital expenditures, debt service requirements or other purposes. In addition, ourOur debt obligations could require us to use a substantialsignificant portion of our cash to pay principal and interest on our debt, instead of applying those funds to other purposes, such as research and development, working capital, and capital expenditures.
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| We intend to adopt, effective January 1, 2005, the fair market value based method of accounting for stock-based employee compensation. This is expected to materially increase our non-cash compensation expenses in our Statement of Operations commencing in 2005, primarily due to compensation costs related to stock options. |
We intend to adopt, effective January 1, 2005, the fair value based method of accounting for stock-based employee compensation under the provisions of SFAS Statement of Financial Accounting Standards No. 123 (SFAS No. 123),Accounting for Stock Based Compensation, as modified by Statement of Accounting Standards No. 148 (SFAS No. 148),Accounting for Stock Based Compensation — Transition and Disclosure, using the modified prospective method. SFAS Nos. 123/148 require that compensation expense in an amount equal to the fair market value of the share-based payment (including stock option awards) be recognized over the vesting period of the awards. We expect to begin recognizing this compensation cost in the first quarter of 2005. The impact of adopting SFAS Nos. 123/148 in 2005 has not yet been quantified. However, had we adopted SFAS Nos. 123/148 effective January 1, 2004, our net income would have decreased by approximately $33.6 million and our basic net income per share would have decreased from $0.75 per share to $0.15 per share.
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In addition, in December 2004, the FASB issued SFAS No. 123R,Share-Based Payment, which is a revision of SFAS No. 123 and supersedes APB Opinion No. 25,Accounting for Stock Issued to Employees. SFAS No. 123R requires the recognition of compensation expense in an amount equal to the fair value of share-based payments (including stock options) issued to employees. We will be required to adopt SFAS No. 123R effective for the quarter beginning July 1, 2005. The impact of adopting SFAS No. 123R has not yet been quantified.debt.
The expected negative impact on our income (loss) as a result of adopting SFAS No. 123/148 commencing January 1, 2005, and subsequently adopting SFAS No. 123R commencing July 1, 2005, may materially negatively affect our stock price.
Risks Related to Development of Our Product Candidates
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| Successful development of any of our product candidates is highly uncertain. |
Successful development of any of our product candidates is highly uncertain.
Only a small minority of all research and development programs ultimately result in commercially successful drugs. We have never developed a drug that has been approved for marketing and sale, and we may never succeed in developing an approved drug. Even if clinical trials demonstrate safety and effectiveness of any of our product candidates for a specific disease and the necessary regulatory approvals are obtained, the commercial success of any of our product candidates will depend upon their acceptance by patients, the medical community, and third-party payorspayers and on our and our partners’ ability to successfully manufacture and commercialize our product candidates. Our product candidates are delivered either by intravenous infusion or by intravitreal or subcutaneous injections, which are generally less well received by patients than tablet or capsule delivery. If our products are not successfully commercialized, we will not be able to recover the significant investment we have made in developing such products and our business would be severely harmed.
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| Clinical trials required for our product candidates are expensive and time-consuming, and their outcome is highly uncertain. If any of our drug trials are delayed or achieve unfavorable results, we will have to delay or may be unable to obtain regulatory approval for our product candidates. |
We are studying our lead product candidates, aflibercept, VEGF Trap-Eye, and ARCALYSTTM, in a wide variety of indications. We are studying aflibercept in a variety of cancer settings, the VEGF Trap-Eye in different eye diseases and ophthalmologic indications, and ARCALYSTTM in a variety of systemic inflammatory disorders.
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Many of these current trials are exploratory studies designed to identify what diseases and uses, if any, are best suited for our product candidates. It is likely that our product candidates will not demonstrate the requisite efficacyand/or safety profile to support continued development for most of the indications that are being, or are planned to be, studied. In fact, our product candidates may not demonstrate the requisite efficacy and safety profile to support the continued development for any of the indications or uses.
Clinical trials required for our product candidates are expensive and time-consuming, and their outcome is highly uncertain. If any of our drug trials are delayed or achieve unfavorable results, we will have to delay or may be unable to obtain regulatory approval for our product candidates.
We must conduct extensive testing of our product candidates before we can obtain regulatory approval to market and sell them. We need to conduct both preclinical animal testing and human clinical trials. Conducting these trials is a lengthy, time-consuming, and expensive process. These tests and trials may not achieve favorable results for many reasons, including, among others, failure of the product candidate to demonstrate safety or efficacy, the development of serious or life-threatening adverse events (or side effects) caused by or connected with exposure to the product candidate, difficulty in enrolling and maintaining subjects in the clinical trial, lack of sufficient supplies of the product candidate or comparator drug, and the failure of clinical investigators, trial monitors and other consultants, or trial subjects to comply with the trial plan or protocol. A clinical trial may fail because it did not include a sufficient number of patients to detect the endpoint being measured or reach statistical significance. A clinical trial may also fail because the dose(s) of the investigational drug included in the trial were either too low or too high to determine the optimal effect of the investigational drug in the disease setting. For example, we intend to studyare studying higher doses of the IL-1 TrapARCALYSTTM in different diseases after a previous phasePhase 2 trial using lower doses of the IL-1 TrapARCALYSTTM in subjects with rheumatoid arthritis failed to achieve its primary endpoint. Additional clinical trial risks and examples of our prior clinical trials which did not achieve favorable results are described in the risk factor below entitled “A previous phase 3 study evaluating AXOKINE demonstrated modest average weight loss over a 12-month period. In addition, a completed phase 2 study evaluating the IL-1 Trap in patients with rheumatoid arthritis failed to achieve its primary endpoint.”
We will need to reevaluate any drug candidate that does not test favorably and either conduct new trials, which are expensive and time consuming, or abandon the drug development program. Even if we obtain positive results from preclinical or clinical trials, we may not achieve the same success in future trials. Many companies in the biopharmaceutical industry, including us, have suffered significant setbacks in clinical trials, even after promising results have been obtained in earlier trials. The failure of clinical trials to demonstrate safety and effectiveness for the desired indication(s) could harm the development of the product candidate(s), and our business, financial condition, and results of operations may be materially harmed.
The data from the Phase 3 clinical program for ARCALYSTTM in CAPS (Cryopyrin-Associated Periodic Syndromes) may be inadequate to support regulatory approval for commercialization of ARCALYSTTM.
We submitted a completed BLA to the FDA for ARCALYSTTM in CAPS in the second quarter of 2007. However, the efficacy and safety data from the Phase 3 clinical program included in the BLA may be inadequate to support approval for commercialization of ARCALYSTTM. The FDA and other regulatory agencies may have varying interpretations of our clinical trial data, which could delay, limit, or prevent regulatory approval or clearance.
Further, before a product candidate is approved for marketing, our manufacturing facilities must be inspected by the FDA and the FDA will not approve the product for marketing if we or our third party manufacturers are not in compliance with current good manufacturing practices. Even if the FDA and similar foreign regulatory authorities do grant marketing approval for ARCALYSTTM, they may pose restrictions on the use or marketing of the product, or may require us to conduct additional post-marketing trials. These restrictions and requirements would likely result in increased expenditures and lower revenues and may restrict our ability to commercialize ARCALYSTTM profitably.
In addition to the FDA and other regulatory agency regulations in the United States, we are subject to a variety of foreign regulatory requirements governing human clinical trials, marketing and approval for drugs, and commercial sales and distribution of drugs in foreign countries. The foreign regulatory approval process includes all of the risks associated with FDA approval as well as country-specific regulations. Whether or not we obtain FDA approval for a product in the United States, we must obtain approval by the comparable regulatory authorities of foreign countries before we can commence clinical trials or marketing of ARCALYSTTM in those countries.
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Serious complications or side effects have occurred, and may continue to occur, in clinical trials of some of our product candidates which could lead to delay or discontinuation of development and severely harm our business.
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| The development of serious or life-threatening side effects with any of our product candidates would lead to delay or discontinuation of development, which could severely harm our business. |
During the conduct of clinical trials, patients report changes in their health, including illnesses, injuries, and discomforts, to their study doctor. Often, it is not possible to determine whether or not the drug candidate being studied caused these conditions. Various illnesses, injuries, and discomforts have been reported from time-to-time during clinical trials of our product candidates. Although our current drug candidates appeared to be generally well tolerated in clinical trials conducted to date, itIt is possible as we test any of themour drug candidates in larger, longer, and more extensive clinical programs, illnesses, injuries, and discomforts that were observed in earlier trials, as well as conditions that did not occur or went undetected in smaller previous trials, will be reported by patients. Many times, side effects are only detectable after investigational drugs are tested in large scale, phasePhase 3 clinical trials or, in some cases, after they are made available to patients after approval. If additional clinical experience indicates that any of our product candidates has many side effects or causes serious or life-threatening side effects, the development of the product candidate may fail or be delayed, which would severely harm our business.
Our VEGF Trapaflibercept (VEGF Trap) is being studied for the potential treatment of certain types of cancer and our VEGF Trap-Eye candidate is being studied in diseases of the eye. There are many potential safety concerns associated with significant blockade of vascular endothelial growth factor, or VEGF. These serious and potentially life-threatening risks, based on the clinical and preclinical experience of systemically delivered VEGF inhibitors, including the systemic delivery of the VEGF Trap, include bleeding, intestinal perforation, hypertension, and proteinuria. These serious side effects and other serious side effects have been reported in our systemic VEGF Trap studies in cancer and diseases of the eye. In addition, patients given infusions of any protein, including the VEGF Trap delivered through intravenous administration, may develop severe hypersensitivity reactions referred toor infusion reactions. Other VEGF blockers have reported side effects that became evident only after large scale trials or after marketing approval and large number of patients were treated. These include side effects that we have not yet seen in our trials such as infusion reactions.heart attack and stroke. These and other complications or side effects could harm the development of the VEGF Trapaflibercept for either the treatment of cancer or the VEGF Trap-Eye for the treatment of diseases of the eye.
Although the IL-1 Trap was generally well tolerated and was not associated with any drug-related serious adverse events in the phase 2 rheumatoid arthritis study completed in 2003,
It is possible that safety or tolerability concerns may arise as we continue to test higher doses of the IL-1 TrapARCALYSTTM in patients with rheumatoid arthritis and other inflammatory diseases and disorders. Like TNF-antagonistscytokine antagonists such as Enbrel® (a registered trademark of Amgen)Kineret® (Amgen), Enbrel® (Immunex), and Remicade® (a registered trademark of Centocor)Remicade® (Centocor), the IL-1 TrapARCALYSTTM affects the immune defense system of the body by blocking some of its functions. Therefore, thereARCALYSTTM may beinterfere with the body’s ability to fight infections. Treatment with Kineret® (Amgen), a medication that works through the inhibition of IL-1, has been associated with an increased risk forof serious infections, to developand serious infections have been reported in patients treatedtaking ARCALYSTTM. One subject with adult Still’s diseases in a study of ARCALYSTTM developed an infection in his elbow with mycobacterium intracellulare. The patient was on chronic glucocorticoid treatment for Still’s disease. The infection occurred after an intraarticular glucocorticoid injection into the IL-1 Trap.elbow and subsequent local exposure to a suspected source of mycobacteria. One patient with polymayalgia rheumatica in another study developed bronchitis/sinusitis, which resulted in hospitalization. One patient in an open-label study of ARCALYSTTM in CAPS developed sinusitis and streptococcus pneumoniae meningitis and subsequently died. In addition, patients given infusions of the IL-1 Trap delivered through intravenous administrationARCALYSTTM have developed hypersensitivity reactions referred to asor infusion reactions. These andor other complications or side effects could harmimpede or result in us abandoning the development of ARCALYSTTM.
Our product candidates in development are recombinant proteins that could cause an immune response, resulting in the IL-1 Trap.creation of harmful or neutralizing antibodies against the therapeutic protein.
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| Our product candidates in development are recombinant proteins that could cause an immune response, resulting in the creation of harmful or neutralizing antibodies against the therapeutic protein. |
In addition to the safety, efficacy, manufacturing, and regulatory hurdles faced by our product candidates, the administration of recombinant proteins frequently causes an immune response, resulting in the creation of antibodies against the therapeutic protein. The antibodies can have no effect or can totally neutralize the effectiveness of the protein, or require that higher doses be used to obtain a therapeutic effect. In some cases, the antibody can cross react with the patient’s own proteins, resulting in an “auto-immune” type disease. Whether antibodies will be created can often not be predicted from preclinical or clinical experiments, and their detection or appearance is often delayed, so that there can be no assurance that neutralizing antibodies will not be createddetected at a later date, — in some cases even after pivotal clinical trials have been completed. Approximately two-thirdsOf the clinical study subjects who
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received ARCALYSTTM for rheumatoid arthritis and other indications, fewer than 5% of patients developed antibodies and no side effects related to antibodies were observed. Using a very sensitive test, approximately 40% of the subjects who received AXOKINEpatients in the completed phase 3CAPS pivotal study developed neutralizing antibodies. In addition, subjects who received the IL-1 Trap in clinical trials have developed antibodies. Ittested positive at least once for low levels of antibodies to ARCALYSTTM. Again, no side effects related to antibodies were observed and there were no observed effects on drug efficacy or drug levels. However, it is possible that as we continue to test theaflibercept and VEGF TrapTrap-Eye with more sensitive assays in different patient populations and larger clinical trials, we will find that subjects given theaflibercept and VEGF Trap willTrap-Eye develop antibodies to these product candidates, and may also experience side effects related to the product candidate.
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| A previous phase 3 study evaluating AXOKINE demonstrated modest average weight loss over a 12-month period. In addition, a completed phase 2 study evaluating the IL-1 Trap in patients with rheumatoid arthritis failed to achieve its primary endpoint. |
In March 2003, we reported data from the 12-month treatment period of our initial phase 3 pivotal trial of AXOKINE. Although the phase 3 study met its primary endpoints and individuals achieved a medically meaningful weight loss, the average weight loss was small and limited byantibodies, which could adversely impact the development of antibodies.such candidates.
In October 2003, we reported results from the first phase 2 trial of our IL-1 Trap in rheumatoid arthritis. We plan to conduct large-scale rheumatoid arthritis trials of the IL-1 Trap in a larger patient population, testing higher doses than were tested in the previous phase 2 trial for a longer period of time. We plan to study higher doses of the IL-1 Trap through subcutaneous injections and intravenous delivery. However, higher doses may not lead to better results than were demonstrated in the previous phase 2 trial. In addition, safety or tolerability concerns may arise which limit our ability to deliver higher doses of the IL-1 Trap to patients. The dose levels that will be tested are substantially higher than the dose levels of other biological therapeutics currently approved for the treatment of rheumatoid arthritis. The higher doses may affect the safety and/or tolerability of the IL-1 Trap, which may limit its commercial potential if the product candidate is ever approved for marketing and sale.
We intend to study our lead product candidates, the VEGF Trap and IL-1 Trap, in a wide variety of indications in so-called “proof of concept” studies. We intend to study the VEGF Trap in a variety of cancer settings and ophthalmologic indications and the IL-1 Trap in a wide variety of inflammatory disorders. The specific indications were selected based on available pre-clinical and clinical data from medical publications, our product candidates, and competitive agents. The purpose of these exploratory “proof of concept” studies is to identify what diseases, if any, are best suited for treatment with these product candidates. However, it is likely that our product candidates will not demonstrate the requisite efficacy and/or safety profile to support continued development for most of the indications that are to be studied in these “proof of concepts” studies. In fact, our product candidates may not demonstrate the requisite efficacy and safety profile to support the continued development for any of the indications studied in these early-stage trials.
Regulatory and Litigation Risks
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| If we do not obtain regulatory approval for our product candidates, we will not be able to market or sell them. |
We cannot sell or market products without regulatory approval. If we do not obtain and maintain regulatory approval for our product candidates, the value of our company and our results of operations will be harmed. In the United States, we must obtain and maintain approval from the United States Food and Drug Administration (FDA) for each drug we intend to sell. Obtaining FDA approval is typically a lengthy and expensive process, and approval is highly uncertain. Foreign governments also regulate drugs distributed in their country and approval in any country is likely to be a lengthy and expensive process, and approval is highly uncertain. None of our product candidates has ever received regulatory approval to be marketed and sold in the United States or any other country. We may never receive regulatory approval for any of our product candidates.
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| If the testing or use of our products harms people, we could be subject to costly and damaging product liability claims. We could also face costly and damaging claims arising from employment law, securities law, environmental law or other applicable laws governing our operations. |
The testing, manufacturing, marketing, and sale of drugs for use in people expose us to product liability risk. We are currently involved in a product liability lawsuit brought by a subject who participated in a clinical trial of one of our drug candidates. Any informed consent or waivers obtained from people who sign up for our clinical trials may not protect us from liability or the cost of litigation. Our product liability insurance may not cover all potential liabilities or may not completely cover any liability arising from any such litigation. Moreover, we may not have access to liability insurance or be able to maintain our insurance on acceptable terms.
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In May 2003, purported class action securities lawsuits were commenced against us and certain of our officers and directors in the United States District Court for the Southern District of New York. A consolidated amended class action complaint was filed in October 2003. The complaint, which purports to be brought on behalf of a class consisting of investors in our publicly traded securities between March 28, 2000 and March 30, 2003, alleges that the defendants misstated or omitted material information concerning the safety and efficacy of AXOKINE, in violation of Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. Damages are sought in an unspecified amount. On February 1, 2005, the United States District Court of the Southern District for New York denied our motion to dismiss the consolidated amended complaint. We believe the lawsuit is without merit and intend to continue to defend the action vigorously. Because we do not believe that a loss is probable, no legal reserve has been established. However, we cannot assure investors that we will be successful in defending this action, or that the amount of any settlement or judgment in this action will not exceed the coverage limits of our director and officers liability insurance policies. If we are not successful in defending this action, our business and financial condition could be adversely affected. In addition, whether or not we are successful, the defense of this action may divert attention of our management and other resources that would otherwise be engaged in running our business.
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| Our operations may involve hazardous materials and are subject to environmental, health, and safety laws and regulations. We may incur substantial liability arising from our activities involving the use of hazardous materials. |
As a biopharmaceutical company with significant manufacturing operations, we are subject to extensive environmental, health, and safety laws and regulations, including those governing the use of hazardous materials. Our research and development and manufacturing activities involve the controlled use of chemicals, viruses, radioactive compounds, and other hazardous materials. The cost of compliance with environmental, health, and safety regulations is substantial. If an accident involving these materials or an environmental discharge were to occur, we could be held liable for any resulting damages, or face regulatory actions, which could exceed our resources or insurance coverage.
Risks Related to Our Dependence on Third Parties
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| On February 27, 2004, Novartis Pharma AG provided notice to us that they would not participate in the continued development and commercialization of the IL-1 Trap under our collaboration agreement. This may harm our ability to develop and commercialize the IL-1 Trap. |
We relied heavily on Novartis to provide their expertise, resources, funding, manufacturing capacity, clinical expertise, and commercial infrastructure to support the IL-1 Trap program. Novartis’ decision to withdraw from participating in the development and commercialization of the IL-1 Trap may delay or disrupt the IL-1 Trap program. We do not have the resources and skills to replace those of Novartis, which could result in significant delays in the development and potential commercialization of the IL-1 Trap. In addition, we will have to fund the development and commercialization of the IL-1 Trap without Novartis’ long-term commitment, which will require substantially greater expenditures on our part.
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| If our collaboration with sanofi-aventis for the VEGF Trap is terminated, our business operations and our ability to develop, manufacture, and commercialize the VEGF Trap in the time expected, or at all, would be harmed. |
We rely heavily on sanofi-aventis to assist with the development of the VEGF Trap. If the VEGF Trap program continues, we will rely on sanofi-aventis to assist with funding the VEGF Trap program, providing commercial manufacturing capacity, enrolling and monitoring clinical trials, obtaining regulatory approval, particularly outside the United States, and providing sales and marketing support. While we cannot assure you that the VEGF Trap will ever be successfully developed and commercialized, if sanofi-aventis does not perform its obligations in a timely manner, or at all, our ability to develop, manufacture, and commercialize the VEGF Trap will be significantly adversely affected. Sanofi-aventis has the right to terminate its collaboration agreement with us at any time. If sanofi-aventis were to terminate its collaboration agreement
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with us, we might not have the resources or skills to replace those of our partner, which could cause significant delays in the development and/or manufacture of the VEGF Trap and result in substantial additional costs to us. We have no sales, marketing or distribution capabilities and would have to develop or outsource these capabilities. Termination of the sanofi-aventis collaboration agreement would create new and additional risks to the successful development of the VEGF Trap.
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| Our collaborators and service providers may fail to perform adequately in their efforts to support the development, manufacture, and commercialization of our drug candidates. |
We depend upon third-party collaborators, including sanofi-aventis and service providers such as clinical research organizations, outside testing laboratories, clinical investigator sites, and third party manufacturers and product packagers and labelers, to assist us in the development of our product candidates. If any of our existing collaborators or service providers breaches or terminates its agreement with us or does not perform its development or manufacturing services under an agreement in a timely manner or at all, we would experience additional costs, delays, and difficulties in the development or ultimate commercialization of our product candidates.
Risks Related to the Manufacture of Our Product Candidates
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| We have limited manufacturing capacity, which could inhibit our ability to successfully develop or commercialize our drugs. |
Before approving a new drug or biologic product, the FDA requires that the facilities at which the product will be manufactured be in compliance with current good manufacturing practices, or cGMP requirements. Manufacturing product candidates in compliance with these regulatory requirements is complex, time-consuming, and expensive. To be successful, our products must be manufactured for development, following approval, in commercial quantities, in compliance with regulatory requirements, and at competitive costs. If we or any of our product collaborators or third-party manufacturers, fillers or labelers are unable to maintain regulatory compliance, the FDA can impose regulatory sanctions, including, among other things, refusal to approve a pending application for a new drug or biologic product, or revocation of a pre-existing approval. As a result, our business, financial condition, and results of operations may be materially harmed.
Our manufacturing facility is likely to be inadequate to produce sufficient quantities of product for commercial sale. We intend to rely on our corporate collaborators, as well as contract manufacturers, to produce the large quantities of drug material needed for commercialization of our products. We rely entirely on third party manufacturers for filling and finishing services. We will have to depend on these manufacturers to deliver material on a timely basis and to comply with regulatory requirements. If we are unable to supply sufficient material on acceptable terms, or if we should encounter delays or difficulties in our relationships with our corporate collaborators or contract manufacturers, our business, financial condition, and results of operations may be materially harmed.
We may expand our own manufacturing capacity to support commercial production of active pharmaceutical ingredients, or API, for our product candidates. This will require substantial additional funds, and we will need to hire and train significant numbers of employees and managerial personnel to staff our facility. Start-up costs can be large and scale-up entails significant risks related to process development and manufacturing yields. We may be unable to develop manufacturing facilities that are sufficient to produce drug material for clinical trialsformulate or commercial use. In addition, we may be unable to secure adequate filling and finishing services to support our products. As a result, our business, financial condition, and results of operations may be materially harmed.
We may be unable to obtain key raw materials and supplies for the manufacture of our product candidates. In addition, we may face difficulties in developing or acquiring production technology and managerial personnel to manufacture sufficient quantities of our product candidates at reasonable costs and in compliance with applicable quality assurance and environmental regulations and governmental permitting requirements.
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| If any of our clinical programs are discontinued, we may face costs related to the unused capacity at our manufacturing facilities. |
We have large-scale manufacturing operations in Rensselaer, New York. Under a long-term manufacturing agreement with Merck, which expires in October 2006 unless extended for one additional year by Merck, we produce an intermediate for a Merck pediatric vaccine at our facility in Rensselaer, New York. We also use our facilities to produce API for our own clinical and preclinical candidates. If we no longer use our facilities to manufacture the Merck intermediate or clinical candidates are discontinued, we would have to absorb overhead costs and inefficiencies.
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| Certain of our raw materials are single-sourced from third parties; third-party supply failures could adversely affect our ability to supply our products. |
Certain raw materials necessary for manufacturing and formulation of our product candidates are provided by single-source unaffiliated third-party suppliers. We would be unable to obtain these raw materials for an indeterminate period of time if these third-party single-source suppliers were to cease or interrupt production or otherwise fail to supply these materials or products to us for any reason, including due to regulatory requirements or action, due to adverse financial developments at or affecting the supplier or due to labor shortages or disputes. This, in turn, could materially and adversely affect our ability to manufacture our product candidates in a way that is suitable for use in clinical trials, which could materially and adversely affect our business and future prospects.or commercial use.
Also, certain of the raw materials required in the manufacturing and the formulation of our clinical candidates may be derived from biological sources, including mammalian tissues, bovine serum, and human serum albumin. There are certain European regulatory restrictions on using these biological source materials. If we are required to substitute these sources to comply with European regulatory requirements, our clinical development activities may be delayed or interrupted.
Risks Related to Commercialization of Products
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| If we are unable to establish sales, marketing, and distribution capabilities, or enter into agreements with third parties to do so, we will be unable to successfully market and sell future products. |
We have no sales or distribution personnel or capabilities and have only a small staff with marketing capabilities. If we are unable to obtain those capabilities, either by developing our own organizations or entering into agreements with service providers, we will not be able to successfully sell any products that we may obtain regulatory approval for and bring to market in the future. In that event, we will not be able to generate significant revenue, even if our product candidates are approved. We cannot guarantee that we will be able to hire the qualified sales and marketing personnel we need or that we will be able to enter into marketing or distribution agreements with third-party providers on acceptable terms, if at all. Under the terms of our collaboration agreement with sanofi-aventis, we currently rely on sanofi-aventis for sales, marketing, and distribution of the VEGF Trap, should it be approved in the future by regulatory authorities for marketing. We will have to rely on a third party or devote significant resources to develop our own sales, marketing, and distribution capabilities for our other product candidates, and we may be unsuccessful in developing our own sales, marketing, and distribution organization.
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| We may be unable to formulate or manufacture our product candidates in a way that is suitable for clinical or commercial use. |
Changes in product formulations and manufacturing processes may be required as product candidates progress in clinical development and are ultimately commercialized. For example, we are currently testing a new formulation of the VEGF Trap-Eye. If we are unable to develop suitable product formulations or manufacturing processes to support large scale clinical testing of our product candidates, including theaflibercept, VEGF Trap, IL-1 Trap,Trap-Eye, ARCALYSTTM, and IL-4/13 Trap,REGN88, we may be unable to supply necessary materials for our clinical trials, which would delay the development of our product candidates. Similarly, if we are unable to supply sufficient quantities of our product or develop product formulations suitable for commercial use, we will not be able to successfully commercialize our product candidates. For example, we
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are in the process of developing formulations that would allow delivery of higher doses of the IL-1 Trap to test in clinical trials. The dose levels that will be tested are substantially higher than the dose levels of other biological therapeutics currently approved for treatment of rheumatoid arthritis. Separate new formulations will be used for subcutaneous and intravenous administration of the higher dose therapeutic. If we are unable to develop or manufacture such a higher dose formulation that can be produced in a cost-effective manner, potential future IL-1 Trap sales and profitability may be limited.
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| Even if our product candidates are ever approved, their commercial success is highly uncertain because our competitors may get to the marketplace before we do with better or lower cost drugs or the market for our product candidates may be too small to support commercialization or sufficient profitability. |
There is substantial competition in the biotechnology and pharmaceutical industries from pharmaceutical, biotechnology, and chemical companies. Many of our competitors have substantially greater research, preclinical and clinical product development and manufacturing capabilities, and financial, marketing, and human resources than we do. Our smaller competitors may also enhance their competitive position if they acquire or discover patentable inventions, form collaborative arrangements or merge with large pharmaceutical companies. Even if we achieve product commercialization, our competitors have achieved, and may continue to achieve, product commercialization before our products are approved for marketing and sale.
Genentech has an approved VEGF antagonist on the market for treating certain cancers and many different pharmaceutical and biotechnology companies are working to develop competing VEGF antagonists, including Novartis, Eyetech Pharmaceuticals, and Pfizer. Many of these molecules are further along in development than the VEGF Trap and may offer competitive advantages over our molecule. Novartis has an ongoing phase 3 clinical development program evaluating an orally delivered VEGF tyrosine kinase in different cancer settings. If this phase 3 product candidate is safer and more efficacious than Genentech’s approved VEGF antibody in these cancer settings, it will make it more difficult for us to successfully develop and commercialize the VEGF Trap. The marketing approval for Genentech’s VEGF antagonist, Avastintm, may make it more difficult for us to enroll patients in clinical trials to support the VEGF Trap and to obtain regulatory approval of the VEGF Trap in these cancer settings. This may delay or impair our ability to successfully develop and commercialize the VEGF Trap. In addition, even if the VEGF Trap is ever approved for sale for the treatment of certain cancers, it will be difficult for our drug to compete against Avastin and, if approved by the FDA, the Novartis phase 3 tyrosine kinase, because doctors and patients will have significant experience using these medicines.
The market for eye diseases is also very competitive. Eyetech Pharmaceuticals and Pfizer are marketing an approved VEGF inhibitor for age-related macular degeneration. Novartis and Genentech are collaborating on another VEGF inhibitor for the treatment of eye diseases that is in phase 3 development. The marketing approval of the Eyetech/ Pfizer VEGF inhibitor and the potential approval of the Novarits/ Genentech VEGF antibody makes it more difficult for us to successfully develop the VEGF Trap in eye diseases. In addition, even if the VEGF Trap is ever approved for sale for the treatment of eye diseases, it will be difficult for our drug to compete against the Eyetech/ Pfizer drug and, if approved by the FDA, the Novartis/ Genentech phase 3 VEGF antibody, because doctors and patients will have significant experience using these medicines.
The markets for both rheumatoid arthritis and asthma are both very competitive. Several highly successful medicines are available for these diseases. Examples include the TNF-antagonists Enbrel® (a registered trademark of Amgen), Remicade® (a registered trademark of Centocor), and Humira® (a registered trademark of Abbott Laboratories) for rheumatoid arthritis, the IL-1 receptor antagonist Kineret® (a registered trademark of Amgen), and the leukotriene-modifier Singulair® (a registered trademark of Merck), as well as various inexpensive corticosteroid medicines for asthma. The availability of highly effective FDA approved TNF-antagonists and other marketed therapies makes it more difficult to successfully develop the IL-1 Trap for the treatment of rheumatoid arthritis, since it will be difficult to enroll patients with rheumatoid arthritis to participate in clinical trials of the IL-1 Trap. This may delay or impair our ability to successfully develop the drug candidate. In addition, even if the IL-1 Trap is ever approved for sale, it will be difficult for our drug to compete against these FDA approved TNF-antagonists because doctors and patients will have significant experience using these effective medicines. Moreover, these approved therapeutics may
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offer competitive advantages over the IL-1 Trap, such as requiring fewer injections. In addition, there are both small molecules and antibodies in development by third parties that are designed to block the synthesis of interleukin-1 or inhibit the signaling of interleukin-1. For example, Vertex Pharmaceuticals Incorporated is developing an oral cytokine inhibitor of interleukin-1 beta converting enzyme (ICE). These drug candidates could offer competitive advantages over the IL-1 Trap. The successful development of these competing molecules could delay or impair our ability to successfully develop and commercialize the IL-1 Trap.
We are developing the IL-1 Trap for the treatment of a spectrum of rare diseases associated with mutations in theCIAS1gene. These rare genetic disorders affect a small group of people, estimated to be between several hundred and a few thousand. There may be too few patients with these genetic disorders to profitably commercialize the IL-1 Trap in this indication.
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| The successful commercialization of our product candidates will depend on obtaining coverage and reimbursement for use of these products from third-party payors. |
Sales of biopharmaceutical products largely depend on the reimbursement of patients’ medical expenses by government health care programs and private health insurers. Without the financial support of the governments or third-party payors, the market for any biopharmaceutical product will be limited. These third-party payors increasingly challenge the price and examine the cost-effectiveness of products and services. Significant uncertainty exists as to the reimbursement status of any new therapeutic, particularly if there exist lower-cost standards of care. Third-party payors may not reimburse sales of our products, which would harm our business.
Risk Related to Employees
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| We are dependent on our key personnel and if we cannot recruit and retain leaders in our research, development, manufacturing, and commercial organizations, our business will be harmed. |
We are highly dependent on our executive officers. If we are not able to retain any of these persons or our Chairman, our business may suffer. In particular, we depend on the services of Roy Vagelos, M.D., the Chairman of our Board of Directors, Leonard Schleifer, M.D., Ph.D., our President and Chief Executive Officer, and George D. Yancopoulos, M.D., Ph.D., our Executive Vice President, Chief Scientific Officer and President, Regeneron Research Laboratories. There is intense competition in the biotechnology industry for qualified scientists and managerial personnel in the development, manufacture, and commercialization of drugs. We may not be able to continue to attract and retain the qualified personnel necessary for developing our business.
Risks Related to Intellectual Property
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| If we cannot protect the confidentiality of our trade secrets or our patents are insufficient to protect our proprietary rights, our business and competitive position will be harmed. |
If we cannot protect the confidentiality of our trade secrets or our patents are insufficient to protect our proprietary rights, our business and competitive position will be harmed.
Our business requires using sensitive and proprietary technology and other information that we protect as trade secrets. We seek to prevent improper disclosure of these trade secrets through confidentiality agreements. If our trade secrets are improperly exposed, either by our own employees or our collaborators, it would help our competitors and adversely affect our business. We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that our rights are covered by valid and enforceable patents or are effectively maintained as trade secrets. The patent position of biotechnology companies involves complex legal and factual questions and, therefore, enforceability cannot be predicted with certainty. Our patents may be challenged, invalidated, or circumvented. Patent applications filed outside the United States may be challenged by third parties who file an opposition. Such opposition proceedings are increasingly common in the European Union and are costly to defend. We have patent applications that are being opposed and it is likely that we will need to defend additional patent applications in the future. Our patent rights may not provide us with a proprietary position or competitive advantages against competitors. Furthermore, even if the outcome is favorable to us, the enforcement of our intellectual property rights can be extremely expensive and time consuming.
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| We may be restricted in our development and/or commercialization activities by third party patents. |
We may be restricted in our development and/or commercialization activities by, and could be subject to damage awards if we are found to have infringed, third party patents or other proprietary rights.
Our commercial success depends significantly on our ability to operate without infringing the patents and other proprietary rights of third parties. Other parties may allege that they have blocking patents to our Trap products in clinical development, either because they claim to hold proprietary rights to fusion proteins or proprietary rights to componentsthe composition of the Trapa product or the way it is manufactured. manufactured or used. Moreover, other parties may allege that they have blocking patents to antibody products made using ourVelocImmunetechnology, either because of the way the antibodies are discovered or produced or because of a proprietary position covering an antibody or the antibody’s target.
We are aware of certain United Statespatents and foreign patents relating to particular IL-4 and IL-13 receptors. Our IL-4/13 Trap includes portions of the IL-4 and IL-13 receptors. In addition, we are aware of a broad patent heldpending applications owned by Genentech relating to proteins fused tothat claim certain immunoglobulin domains. Our Trap product candidates include proteins fused to immunoglobulin domains.chimeric VEGF receptor compositions. Although we do not believe that weaflibercept or the VEGF Trap-Eye infringes any valid claim in these patents or patent applications, Genentech could initiate a lawsuit for patent infringement and assert that its patents are infringing valid and enforceable third party patents,cover aflibercept or the holders of these patentsVEGF Trap-Eye. Genentech may sue us for infringementbe motivated to initiate such a lawsuit at some point in an effort to impair our ability to develop and sell aflibercept or the VEGF Trap-Eye, which
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represents a potential competitive threat to Genentech’s VEGF-binding products and product candidates. An adverse determination by a court may find that we are infringing one or more validly issued patents, which mayin any such potential patent litigation would likely materially harm our business.business by requiring us to seek a license, which may not be available, or resulting in our inability to manufacture, develop and sell aflibercept or the VEGF Trap-Eye or in a damage award.
We are aware of patents and pending applications owned by Roche that claim antibodies to the interleukin-6 receptor and methods of treating rheumatoid arthritis with such antibodies. We are developing REGN88, an antibody to the interleukin-6 receptor, for the treatment of rheumatoid arthritis. Although we do not believe that REGN88 infringes any valid claim in these patents or patent applications, Roche could initiate a lawsuit for patent infringement and assert its patents are valid and cover REGN88.
Further, we are aware of a number of other third party patent applications that, if granted, with claims as currently drafted, may cover our current or planned activities. We cannot assure you that our productsand/or actions in manufacturing and selling our product candidates will not infringe such patents.
In December 2003, we entered into a non-exclusive license agreement with Cellectis Inc. that granted us certain rights in a family of patents relating to homologous recombination. Cellectis now claims that agreements we entered into relating to ourVelocImmunemice with AstraZeneca, Astellas, and sanofi-aventis are outside of the scope of our license from Cellectis. We disagree with Cellectis’ position and are in discussions with Cellectis regarding this matter. If we are not able to resolve this dispute, Cellectis may commence a lawsuit against us and ourVelocImmunelicensees alleging infringement of Cellectis’ patents.
Any patent holders could sue us for damages and seek to prevent us from manufacturing, selling, or developing our drug candidates, and a court may find that we are infringing validly issued patents of third parties. In the event that the manufacture, use, or sale of any of our clinical candidates infringes on the patents or violates other proprietary rights of third parties, we may be prevented from pursuing product development, manufacturing, and commercialization of our drugs and may be required to pay costly damages. Such a result may materially harm our business, financial condition, and results of operations. Legal disputes are likely to be costly and time consuming to defend.
We seek to obtain licenses to patents when, in our judgment, such licenses are needed. If any licenses are required, we may not be able to obtain such licenses on commercially reasonable terms, if at all. The failure to obtain any such license could prevent us from developing or commercializing any one or more of our product candidates, which could severely harm our business.
Regulatory and Litigation Risks
If we do not obtain regulatory approval for our product candidates, we will not be able to market or sell them.
We cannot sell or market products without regulatory approval. If we do not obtain and maintain regulatory approval for our product candidates, the value of our company and our results of operations will be harmed. In the United States, we must obtain and maintain approval from the United States Food and Drug Administration (FDA) for each drug we intend to sell. Obtaining FDA approval is typically a lengthy and expensive process, and approval is highly uncertain. Foreign governments also regulate drugs distributed in their country and approval in any country is likely to be a lengthy and expensive process, and approval is highly uncertain. None of our product candidates has ever received regulatory approval to be marketed and sold in the United States or any other country. We may never receive regulatory approval for any of our product candidates.
Before approving a new drug or biologic product, the FDA requires that the facilities at which the product will be manufactured be in compliance with current good manufacturing practices, or cGMP requirements. Manufacturing product candidates in compliance with these regulatory requirements is complex, time-consuming, and expensive. To be successful, our products must be manufactured for development, following approval, in commercial quantities, in compliance with regulatory requirements, and at competitive costs. If we or any of our product collaborators or third-party manufacturers, product packagers, or labelers are unable to maintain regulatory compliance, the FDA can impose regulatory sanctions, including, among other things, refusal to approve a pending
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application for a new drug or biologic product, or revocation of a pre-existing approval. As a result, our business, financial condition, and results of operations may be materially harmed.
If the testing or use of our products harms people, we could be subject to costly and damaging product liability claims.
The testing, manufacturing, marketing, and sale of drugs for use in people expose us to product liability risk. Any informed consent or waivers obtained from people who sign up for our clinical trials may not protect us from liability or the cost of litigation. Our product liability insurance may not cover all potential liabilities or may not completely cover any liability arising from any such litigation. Moreover, we may not have access to liability insurance or be able to maintain our insurance on acceptable terms.
Our operations may involve hazardous materials and are subject to environmental, health, and safety laws and regulations. We may incur substantial liability arising from our activities involving the use of hazardous materials.
As a biopharmaceutical company with significant manufacturing operations, we are subject to extensive environmental, health, and safety laws and regulations, including those governing the use of hazardous materials. Our research and development and manufacturing activities involve the controlled use of chemicals, viruses, radioactive compounds, and other hazardous materials. The cost of compliance with environmental, health, and safety regulations is substantial. If an accident involving these materials or an environmental discharge were to occur, we could be held liable for any resulting damages, or face regulatory actions, which could exceed our resources or insurance coverage.
Changes in the securities laws and regulations have increased, and are likely to continue to increase, our costs.
The Sarbanes-Oxley Act of 2002, which became law in July 2002, has required changes in some of our corporate governance, securities disclosure and compliance practices. In response to the requirements of that Act, the SEC and the NASDAQ Stock Market have promulgated rules and listing standards covering a variety of subjects. Compliance with these rules and listing standards has increased our legal costs, and significantly increased our accounting and auditing costs, and we expect these costs to continue. These developments may make it more difficult and more expensive for us to obtain directors’ and officers’ liability insurance. Likewise, these developments may make it more difficult for us to attract and retain qualified members of our board of directors, particularly independent directors, or qualified executive officers.
In future years, if we are unable to conclude that our internal control over financial reporting is effective, the market value of our common stock could be adversely affected.
As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the SEC adopted rules requiring public companies to include a report of management on the Company’s internal control over financial reporting in their annual reports onForm 10-K that contains an assessment by management of the effectiveness of our internal control over financial reporting. In addition, the independent registered public accounting firm auditing our financial statements must attest to and report on the effectiveness of our internal control over financial reporting. Our independent registered public accounting firm provided us with an unqualified report as to the effectiveness of our internal control over financial reporting as of December 31, 2007, which report is included in this Annual Report onForm 10-K. However, we cannot assure you that management or our independent registered public accounting firm will be able to provide such an unqualified report as of future year-ends. In this event, investors could lose confidence in the reliability of our financial statements, which could result in a decrease in the market value of our common stock. In addition, if it is determined that deficiencies in the design or operation of internal controls exist and that they are reasonably likely to adversely affect our ability to record, process, summarize, and report financial information, we would likely incur additional costs to remediate these deficiencies and the costs of such remediation could be material.
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Risks Related to Our Reliance on Third Parties
If our antibody collaboration with sanofi-aventis is terminated, our business operations and our ability to discover, develop, manufacture, and commercialize our pipeline of product candidates in the time expected, or at all, would be materially harmed.
We rely heavily on the funding from sanofi-aventis to support our target discovery and antibody research and development programs. Sanofi-aventis has committed to pay up to $475.0 million between 2008 and 2012 to fund our efforts to identify and validate drug discovery targets and pre-clinically develop fully human monoclonal antibodies against such targets. In addition, sanofi-aventis funds almost all of the development expenses incurred by both companies in connection with the clinical development of antibodies that sanofi-aventis elects to co-develop with us. We rely on sanofi-aventis to fund these activities. In addition, with respect to those antibodies that sanofi-aventis elects to co-develop with us, such as REGN88, we rely on sanofi-aventis to lead much of the clinical development efforts and assist with obtaining regulatory approval, particularly outside the United States. We also rely on sanofi-aventis to lead the commercialization efforts to support all of the antibody products that are co-developed by sanofi-aventis and us. If sanofi-aventis does not elect to co-develop the antibodies that we discover or opts-out of their development, we would be required to fund and oversee on our own the clinical trials, any regulatory responsibilities, and the ensuing commercialization efforts to support our antibody products. Sanofi-aventis may terminate the collaboration for our material breach or, in the case of the discovery agreement, if certain minimal criteria for the discovery program are not achieved by December 31, 2010. If sanofi-aventis terminates the antibody collaboration or fails to comply with its payment obligations thereunder, our business, financial condition, and results of operations would be materially harmed. We would be required to either expend substantially more resources than we have anticipated to support our research and development efforts, which could require us to seek additional funding that might not be available on favorable terms or at all, or materially cut back on such activities. While we cannot assure you that any of the antibodies from this collaboration will ever be successfully developed and commercialized, if sanofi-aventis does not perform its obligations with respect to antibodies that it elects to co-develop, our ability to develop, manufacture, and commercialize these antibody product candidates will be significantly adversely affected.
If our collaboration with sanofi-aventis for aflibercept (VEGF Trap) is terminated, or sanofi-aventis materially breaches its obligations thereunder, our business, operations and financial condition, and our ability to develop, manufacture, and commercialize aflibercept in the time expected, or at all, would be materially harmed.
We rely heavily on sanofi-aventis to lead much of the development of aflibercept. Sanofi-aventis funds all of the development expenses incurred by both companies in connection with the aflibercept program. If the aflibercept program continues, we will rely on sanofi-aventis to assist with funding the aflibercept program, provide commercial manufacturing capacity, enroll and monitor clinical trials, obtain regulatory approval, particularly outside the United States, and lead the commercialization of aflibercept. While we cannot assure you that aflibercept will ever be successfully developed and commercialized, if sanofi-aventis does not perform its obligations in a timely manner, or at all, our ability to develop, manufacture, and commercialize aflibercept in cancer indications will be significantly adversely affected. Sanofi-aventis has the right to terminate its collaboration agreement with us at any time upon twelve months advance notice. If sanofi-aventis were to terminate its collaboration agreement with us, we would not have the resources or skills to replace those of our partner, which could require us to seek additional funding that might not be available on favorable terms or at all, and could cause significant delays in the developmentand/or manufacture of aflibercept and result in substantial additional costs to us. We have limited commercial capabilities and would have to develop or outsource these capabilities. Termination of the sanofi-aventis collaboration agreement would create substantial new and additional risks to the successful development and commercialization of aflibercept.
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If our collaboration with Bayer HealthCare for the VEGF Trap-Eye is terminated, or Bayer HealthCare materially breaches its obligations thereunder, our business, operations and financial condition, and our ability to develop and commercialize the VEGF Trap-Eye in the time expected, or at all, would be materially harmed.
We rely heavily on Bayer HealthCare to assist with the development of the VEGF Trap-Eye. Under our agreement with them, Bayer HealthCare is required to fund approximately half of the development expenses incurred by both companies in connection with the global VEGF Trap-Eye development program. If the VEGF Trap-Eye program continues, we will rely on Bayer HealthCare to assist with funding the VEGF Trap-Eye development program, lead the development of the VEGF Trap-Eye outside the United States, obtain regulatory approval outside the United States, and provide all sales, marketing and commercial support for the product outside the United States. In particular, Bayer HealthCare has responsibility for selling VEGF Trap-Eye outside the United States using its sales force. While we cannot assure you that the VEGF Trap-Eye will ever be successfully developed and commercialized, if Bayer HealthCare does not perform its obligations in a timely manner, or at all, our ability to develop, manufacture, and commercialize the VEGF Trap-Eye outside the United States will be significantly adversely affected. Bayer HealthCare has the right to terminate its collaboration agreement with us at any time upon six or twelve months advance notice, depending on the circumstances giving rise to termination. If Bayer HealthCare were to terminate its collaboration agreement with us, we would not have the resources or skills to replace those of our partner, which could require us to seek additional finding that might not be available on favorable terms or at all, and could cause significant delays in the developmentand/or commercialization of the VEGF Trap-Eye outside the United States and result in substantial additional costs to us. We have limited commercial capabilities and would have to develop or outsource these capabilities outside the United States. Termination of the Bayer HealthCare collaboration agreement would create substantial new and additional risks to the successful development and commercialization of the VEGF Trap-Eye.
Our collaborators and service providers may fail to perform adequately in their efforts to support the development, manufacture, and commercialization of our drug candidates.
We depend upon third-party collaborators, including sanofi-aventis, Bayer HealthCare, and service providers such as clinical research organizations, outside testing laboratories, clinical investigator sites, and third-party manufacturers and product packagers and labelers, to assist us in the manufacture and development of our product candidates. If any of our existing collaborators or service providers breaches or terminates its agreement with us or does not perform its development or manufacturing services under an agreement in a timely manner or at all, we could experience additional costs, delays, and difficulties in the manufacture, development or ultimate commercialization of our product candidates.
Risks Related to the Manufacture of Our Product Candidates
We have limited manufacturing capacity, which could inhibit our ability to successfully develop or commercialize our drugs.
Our manufacturing facility is likely to be inadequate to produce sufficient quantities of product for commercial sale. We intend to rely on our corporate collaborators, as well as contract manufacturers, to produce the large quantities of drug material needed for commercialization of our products. We rely entirely on third-party manufacturers for filling and finishing services. We will have to depend on these manufacturers to deliver material on a timely basis and to comply with regulatory requirements. If we are unable to supply sufficient material on acceptable terms, or if we should encounter delays or difficulties in our relationships with our corporate collaborators or contract manufacturers, our business, financial condition, and results of operations may be materially harmed.
We must expand our own manufacturing capacity to support the planned growth of our clinical pipeline. Moreover, we may expand our manufacturing capacity to support commercial production of active pharmaceutical ingredients, or API, for our product candidates. This will require substantial additional expenditures, and we will need to hire and train significant numbers of employees and managerial personnel to staff our facility.Start-up costs can be large andscale-up entails significant risks related to process development and manufacturing yields. We may
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be unable to develop manufacturing facilities that are sufficient to produce drug material for clinical trials or commercial use. This may delay our clinical development plans and interfere with our efforts to commercialize our products. In addition, we may be unable to secure adequate filling and finishing services to support our products. As a result, our business, financial condition, and results of operations may be materially harmed.
We may be unable to obtain key raw materials and supplies for the manufacture of our product candidates. In addition, we may face difficulties in developing or acquiring production technology and managerial personnel to manufacture sufficient quantities of our product candidates at reasonable costs and in compliance with applicable quality assurance and environmental regulations and governmental permitting requirements.
If any of our clinical programs are discontinued, we may face costs related to the unused capacity at our manufacturing facilities.
We have large-scale manufacturing operations in Rensselaer, New York. We use our facilities to produce bulk product for clinical and preclinical candidates for ourselves and our collaborations. If our clinical candidates are discontinued, we will have to absorb one hundred percent of related overhead costs and inefficiencies.
Certain of our raw materials are single-sourced from third parties; third-party supply failures could adversely affect our ability to supply our products.
Certain raw materials necessary for manufacturing and formulation of our product candidates are provided by single-source unaffiliated third-party suppliers. We would be unable to obtain these raw materials for an indeterminate period of time if these third-party single-source suppliers were to cease or interrupt production or otherwise fail to supply these materials or products to us for any reason, including due to regulatory requirements or action, due to adverse financial developments at or affecting the supplier, or due to labor shortages or disputes. This, in turn, could materially and adversely affect our ability to manufacture our product candidates for use in clinical trials, which could materially and adversely affect our business and future prospects.
Also, certain of the raw materials required in the manufacturing and the formulation of our clinical candidates may be derived from biological sources, including mammalian tissues, bovine serum, and human serum albumin. There are certain European regulatory restrictions on using these biological source materials. If we are required to substitute for these sources to comply with European regulatory requirements, our clinical development activities may be delayed or interrupted.
Risks Related to Commercialization of Products
If we are unable to establish sales, marketing, and distribution capabilities, or enter into agreements with third parties to do so, we will be unable to successfully market and sell future products.
We have no sales or distribution personnel or capabilities and have only a small staff with commercial capabilities. If we are unable to obtain those capabilities, either by developing our own organizations or entering into agreements with service providers, we will not be able to successfully sell any products that we may obtain regulatory approval for and bring to market in the future. In that event, we will not be able to generate significant revenue, even if our product candidates are approved. We cannot guarantee that we will be able to hire the qualified sales and marketing personnel we need or that we will be able to enter into marketing or distribution agreements with third-party providers on acceptable terms, if at all. Under the terms of our collaboration agreement with sanofi-aventis, we currently rely on sanofi-aventis for sales, marketing, and distribution of aflibercept in cancer indications, should it be approved in the future by regulatory authorities for marketing. We will have to rely on a third party or devote significant resources to develop our own sales, marketing, and distribution capabilities for our other product candidates, including the VEGF Trap-Eye in the United States, and we may be unsuccessful in developing our own sales, marketing, and distribution organization.
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Even if our product candidates are approved for marketing, their commercial success is highly uncertain because our competitors have received approval for products with the same mechanism of action, and competitors may get to the marketplace before we do with better or lower cost drugs or the market for our product candidates may be too small to support commercialization or sufficient profitability.
There is substantial competition in the biotechnology and pharmaceutical industries from pharmaceutical, biotechnology, and chemical companies. Many of our competitors have substantially greater research, preclinical and clinical product development and manufacturing capabilities, and financial, marketing, and human resources than we do. Our smaller competitors may also enhance their competitive position if they acquire or discover patentable inventions, form collaborative arrangements, or merge with large pharmaceutical companies. Even if we achieve product commercialization, our competitors have achieved, and may continue to achieve, product commercialization before our products are approved for marketing and sale.
Genentech has an approved VEGF antagonist, Avastin® (Genentech), on the market for treating certain cancers and many different pharmaceutical and biotechnology companies are working to develop competing VEGF antagonists, including Novartis, OSI Pharmaceuticals, and Pfizer. Many of these molecules are farther along in development than aflibercept and may offer competitive advantages over our molecule. Novartis has an ongoing Phase 3 clinical development program evaluating an orally delivered VEGF tyrosine kinase inhibitor in different cancer settings. Each of Pfizer and Onyx Pharmaceuticals (together with its partner Bayer HealthCare) has received approval from the FDA to market and sell an oral medication that targets tumor cell growth and new vasculature formation that fuels the growth of tumors. The marketing approvals for Genentech’s VEGF antagonist, Avastin® (Genentech), and their extensive, ongoing clinical development plan for Avastin® (Genentech) in other cancer indications, make it more difficult for us to enroll patients in clinical trials to support aflibercept and to obtain regulatory approval of aflibercept in these cancer settings. This may delay or impair our ability to successfully develop and commercialize aflibercept. In addition, even if aflibercept is ever approved for sale for the treatment of certain cancers, it will be difficult for our drug to compete against Avastin® (Genentech) and the FDA approved kinase inhibitors, because doctors and patients will have significant experience using these medicines. In addition, an oral medication may be considerably less expensive for patients than a biologic medication, providing a competitive advantage to companies that market such products.
The market for eye disease products is also very competitive. Novartis and Genentech are collaborating on the commercialization and further development of a VEGF antibody fragment (Lucentis®) for the treatment of age-related macular degeneration (wet AMD) and other eye indications that was approved by the FDA in June 2006. Many other companies are working on the development of product candidates for the potential treatment of wet AMD that act by blocking VEGF, VEGF receptors, and through the use of soluble ribonucleic acids (sRNAs) that modulate gene expression. In addition, ophthalmologists are using off-label a third-party reformatted version of Genentech’s approved VEGF antagonist, Avastin®, with success for the treatment of wet AMD. The National Eye Institute recently has received funding for a Phase 3 trial to compare Lucentis® (Genentech) to Avastin® (Genentech) in the treatment of wet AMD. The marketing approval of Lucentis® (Genentech) and the potential off-label use of Avastin® (Genentech) make it more difficult for us to enroll patients in our clinical trials and successfully develop the VEGF Trap-Eye. Even if the VEGF Trap-Eye is ever approved for sale for the treatment of eye diseases, it may be difficult for our drug to compete against Lucentis® (Genentech), because doctors and patients will have significant experience using this medicine. Moreover, the relatively low cost of therapy with Avastin® (Genentech) in patients with wet AMD presents a further competitive challenge in this indication.
The availability of highly effective FDA approved TNF-antagonists such as Enbrel® (Immunex), Remicade® (Centocor), and Humira® (Abbott), and the IL-1 receptor antagonist Kineret® (Amgen), and other marketed therapies makes it more difficult to successfully develop and commercialize ARCALYSTTM. This is one of the reasons we discontinued the development of ARCALYSTTM in adult rheumatoid arthritis. In addition, even if ARCALYSTTM is ever approved for sale, it will be difficult for our drug to compete against these FDA approved TNF-antagonists in indications where both are useful because doctors and patients will have significant experience using these effective medicines. Moreover, in such indications these approved therapeutics may offer competitive advantages over ARCALYSTTM, such as requiring fewer injections.
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There are both small molecules and antibodies in development by other companies that are designed to block the synthesis of interleukin-1 or inhibit the signaling of interleukin-1. For example, Eli Lilly and Company, Xoma Ltd., and Novartis are each developing antibodies to interleukin-1 and Amgen is developing an antibody to the interleukin-1 receptor. Novartis has commenced advanced clinical testing of its IL-1 antibody in Muckle-Wells Syndrome, which is part of the group of rare genetic diseases called CAPS. Novartis’ IL-1 antibody and these other drug candidates could offer competitive advantages over ARCALYSTTM. The successful development of these competing molecules could delay or impair our ability to successfully develop and commercialize ARCALYSTTM. For example, we may find it difficult to enroll patients in clinical trials for ARCALYSTTM if the companies developing these competing interleukin-1 inhibitors commence clinical trials in the same indications.
We are developing ARCALYSTTM for the treatment of a group of rare diseases associated with mutations in the NLRP3 gene. These rare genetic disorders affect a small group of people, estimated to be in the hundreds. There may be too few patients with these genetic disorders to profitably commercialize ARCALYSTTM in this indication.
We are developing REGN88 for the treatment of rheumatoid arthritis. The availability of highly effective FDA approved TNF-antagonists such as Enbrel® (Immunex), Remicade® (Centocor), and Humira® (Abbott), and other marketed therapies makes it more difficult to successfully develop and commercialize REGN88. REGN88 is a human monoclonal antibody targeting the interleukin-6 receptor. Roche is developing an antibody against the interleukin-6 (IL-6) receptor. Roche’s antibody has completed Phase 3 clinical trials and is the subject of a filed Biologics License Application with the FDA. Roche’s IL-6 receptor antibody, other clinical candidates in development, and drugs now or in the future on the market to treat rheumatoid arthritis could offer competitive advantages over REGN88. This could delay or impair our ability to successfully develop and commercialize REGN88.
The successful commercialization of our product candidates will depend on obtaining coverage and reimbursement for use of these products from third-party payers and these payers may not agree to cover or reimburse for use of our products.
Our products, if commercialized, may be significantly more expensive than traditional drug treatments. Our future revenues and profitability will be adversely affected if United States and foreign governmental, private third-party insurers and payers, and other third-party payers, including Medicare and Medicaid, do not agree to defray or reimburse the cost of our products to the patients. If these entities refuse to provide coverage and reimbursement with respect to our products or provide an insufficient level of coverage and reimbursement, our products may be too costly for many patients to afford them, and physicians may not prescribe them. Many third-party payers cover only selected drugs, making drugs that are not preferred by such payer more expensive for patients, and require prior authorization or failure on another type of treatment before covering a particular drug. Payers may especially impose these obstacles to coverage on higher-priced drugs, as our product candidates are likely to be.
We are seeking approval to market ARCALYSTTM for the treatment of a group of rare genetic disorders called CAPS. There may be too few patients with CAPS to profitably commercialize ARCALYSTTM. Physicians may not prescribe ARCALYSTTM and CAPS patients may not be able to afford ARCALYSTTM if third party payers do not agree to reimburse the cost of ARCALYSTTM therapy and this would adversely affect our ability to commercialize ARCALYSTTM profitably.
In addition to potential restrictions on coverage, the amount of reimbursement for our products may also reduce our profitability. In the United States, there have been, and we expect will continue to be, actions and proposals to control and reduce healthcare costs. Government and other third-party payers are challenging the prices charged for healthcare products and increasingly limiting, and attempting to limit, both coverage and level of reimbursement for prescription drugs.
Since our products, including ARCALYSTTM, will likely be too expensive for most patients to afford without health insurance coverage, if our products are unable to obtain adequate coverage and reimbursement by third-party payers our ability to successfully commercialize our product candidates may be adversely impacted. Any limitation on the use of our products or any decrease in the price of our products will have a material adverse effect on our ability to achieve profitability.
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In certain foreign countries, pricing, coverage and level of reimbursement of prescription drugs are subject to governmental control, and we may be unable to negotiate coverage, pricing, and reimbursement on terms that are favorable to us. In some foreign countries, the proposed pricing for a drug must be approved before it may be lawfully marketed. The requirements governing drug pricing vary widely from country to country. For example, the European Union provides options for its member states to restrict the range of medicinal products for which their national health insurance systems provide reimbursement and to control the prices of medicinal products for human use. A member state may approve a specific price for the medicinal product or it may instead adopt a system of direct or indirect controls on the profitability of the company placing the medicinal product on the market. Our results of operations may suffer if we are unable to market our products in foreign countries or if coverage and reimbursement for our products in foreign countries is limited.
Risk Related to Employees
We are dependent on our key personnel and if we cannot recruit and retain leaders in our research, development, manufacturing, and commercial organizations, our business will be harmed.
We are highly dependent on certain of our executive officers. If we are not able to retain any of these persons or our Chairman, our business may suffer. In particular, we depend on the services of P. Roy Vagelos, M.D., the Chairman of our board of directors, Leonard Schleifer, M.D., Ph.D., our President and Chief Executive Officer, George D. Yancopoulos, M.D., Ph.D., our Executive Vice President, Chief Scientific Officer and President, Regeneron Research Laboratories, and Neil Stahl, Ph.D., our Senior Vice President, Research and Development Sciences. There is intense competition in the biotechnology industry for qualified scientists and managerial personnel in the development, manufacture, and commercialization of drugs. We may not be able to continue to attract and retain the qualified personnel necessary for developing our business.
Risks Related to Our Common Stock
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| Our stock price is extremely volatile. |
Our stock price is extremely volatile.
There has been significant volatility in our stock price and generally in the market prices of biotechnology companies’ securities. Various factors and events may have a significant impact on the market price of our common stock. These factors include, by way of example:
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| | • | progress, delays, or adverse results in clinical trials; |
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| | • | announcement of technological innovations or product candidates by us or competitors; |
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| | • | fluctuations in our operating results; |
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| | • | public concern as to the safety or effectiveness of our product candidates; |
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| | • | developments in our relationship with collaborative partners; |
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| | • | developments in the biotechnology industry or in government regulation of healthcare; |
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| | • | large sales of our common stock by our executive officers, directors, or significant shareholders; |
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| | • | arrivals and departures of key personnel; and |
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| | • | general market conditions. |
The trading price of our common stockCommon Stock has been, and could continue to be, subject to wide fluctuations in response to these and other factors, including the sale or attempted sale of a large amount of our common stockCommon Stock in the market. Broad market fluctuations may also adversely affect the market price of our Common Stock.
Future sales of our common stock.stock by our significant shareholders or us may depress our stock price and impair our ability to raise funds in new share offerings.
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| Future sales of our common stock by our significant shareholders or us may depress our stock price and impair our ability to raise funds in new share offerings. |
A small number of our shareholders beneficially own a substantial amount of our common stock. As of February 22, 2005,December 31, 2007, our seven largest shareholders which include sanofi-aventis and Novartis, beneficially owned 54.5%54.0% of our outstanding shares of Common
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Stock, and Class A stock, assuming, in the case of Leonard S. Schleifer, M.D. Ph.D., Ph.D, our chief executive officer,Chief Executive Officer, and P. Roy Vagelos, M.D., our Chairman, the conversion of their Class A Stock into Common Stock and the exercise of all options held by himthem which are exercisable within 60 days of February 22, 2005.December 31, 2007. As of that date, NovartisDecember 31, 2007, sanofi-aventis beneficially owned 7,527,05014,799,552 shares of Common Stock, representing approximately 13.4%19.3% of the shares of Common Stock and Class A stock then outstanding. Under our registration rights agreement with Novartis, these shares of Common Stock may generally not be sold or otherwise transferred by Novartis until after March 28, 2005. Commencing after March 28, 2005, Novartis has certain registration rights with respect to these shares. As of February 22, 2005, sanofi-aventis owned 2,799,552 shares of Common Stock, representing approximately 5.0% of the shares of Common Stock and Class A stock then outstanding. Under our stock purchaseinvestor agreement with sanofi-aventis, sanofi-aventis may not sell these shares may generally not be sold or otherwise transferred until after September 5, 2005,December 20, 2012 except under limited circumstances and for one year after that date, sanofi-aventis may sell no more than 250,000 shares in any calendar quarter. After September 5, 2006, sanofi-aventis may sell no more than 500,000 shares in any calendar quarter. Accordingly, in 2005 and thereafter, assubject to earlier termination rights of these restrictions upon the occurrence of certain events. Notwithstanding these restrictions, on transfer applicable to the shares of Common Stock owned by Novartis and sanofi-aventis expire, these shares will be freely tradeable in the public market, subject, in the case of sanofi-aventis, to the foregoing continuing contractual sales volume restrictions. If Novartis orif sanofi-aventis, or our other significant shareholders or we, sell substantial amounts of our Common Stock in the public market, or the perception that such sales may occur exists, the market price of our Common Stock could fall. Sales of Common Stock by our significant shareholders, including sanofi-aventis, and Novartis, also might make it more difficult for us to raise funds by selling equity or equity-related securities in the future at a time and price that we deem appropriate.
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| Our existing shareholders may be able to exert significant influence over matters requiring shareholder approval. |
Our existing shareholders may be able to exert significant influence over matters requiring shareholder approval.
Holders of Class A stock,Stock, who are generally the shareholders who purchased their stock from us before our initial public offering, are entitled to ten votes per share, while holders of Common Stock are entitled to one vote per share. As of February 22, 2005,December 31, 2007, holders of Class A stockStock held 4.2% of all shares of Common Stock and Class A stock then outstanding, and had 30.5%22.8% of the combined voting power of all shares of Common Stock and Class A stock.Stock then outstanding. These shareholders, if acting together, would be in a position to significantly influence the election of our directors and to effect or prevent certain corporate transactions that require majority or supermajority approval of the combined classes, including mergers and other business combinations. This may result in our company taking corporate actions that you may not consider to be in your best interest and may affect the price of our common stock.Common Stock. As of February 22, 2005:December 31, 2007:
| | |
| | • | our current executive officers and directors beneficially owned 13.3%12.6% of our outstanding shares of Common Stock, assuming conversion of their Class A Stock into Common Stock and the exercise of all options held by such persons which are exercisable within 60 days of December 31, 2007, and 27.7% of the combined voting power of our outstanding shares of Common Stock and Class A stock and 33.4% of the combined voting power of our shares of Common Stock, and Class A stock, assuming the exercise of all options held by such persons which are exercisable within 60 days of February 22, 2005;December 31, 2007; and |
| |
| | • | our seven largest shareholders beneficially owned 54.5%54.0% of our outstanding shares of Common Stock, assuming, in the case of Leonard S. Schleifer, M.D., Ph.D., our Chief Executive Officer, and P. Roy Vagelos, M.D., our Chairman, the conversion of their Class A Stock into Common Stock and the exercise of all options held by them which are exercisable within 60 days of December 31, 2007. In addition, these seven shareholders held 58.0% of the combined voting power of our outstanding shares of Common Stock and Class A stock and 60.1% of the combined voting power of our shares of Common Stock, and Class A stock, assuming in the case of Leonard S. Schleifer, M.D., Ph.D, our chief executive officer, the exercise of all options held by himour Chief Executive Officer and our Chairman which are exercisable within 60 days of February 22, 2005.December 31, 2007. |
Pursuant to an investor agreement, sanofi-aventis has agreed to vote its shares, at sanofi-aventis’ election, either as recommended by our board of directors or proportionally with the votes cast by our other shareholders, except with respect to certain change of control transactions, liquidation or dissolution, stock issuances equal to or exceeding 10% of the then outstanding shares or voting rights of Common Stock and Class A Stock, and new equity compensation plans or amendments if not materially consistent with our historical equity compensation practices.
The anti-takeover effects of provisions of our charter, by-laws, and our rights agreement, and of New York corporate law and the contractual “standstill” provisions in our investor agreement with sanofi-aventis, could deter, delay, or prevent an acquisition or other “change in control” of us and could adversely affect the price of our common stock.Common Stock.
Our amended and restated certificate of incorporation, our by-laws our rights agreement and the New York Business Corporation Law contain various provisions that could have the effect of delaying or preventing
41
a change in control of our company or our management that shareholders may consider favorable or beneficial. Some of these provisions could discourage proxy contests and make it more difficult for you and other shareholders to elect directors and take
25
other corporate actions. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock. These provisions include:
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| | • | authorization to issue “blank check” preferred stock, which is preferred stock that can be created and issued by the board of directors without prior shareholder approval, with rights senior to those of our common shareholders; |
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| | • | a staggered board of directors, so that it would take three successive annual meetings to replace all of our directors; |
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| | • | a requirement that removal of directors may only be effected for cause and only upon the affirmative vote of at least eighty percent (80%) of the outstanding shares entitled to vote for directors, as well as a requirement that any vacancy on the board of directors may be filled only by the remaining directors; |
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| | • | any action required or permitted to be taken at any meeting of shareholders may be taken without a meeting, only if, prior to such action, all of our shareholders consent, the effect of which is to require that shareholder action may only be taken at a duly convened meeting; |
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| | • | any shareholder seeking to bring business before an annual meeting of shareholders must provide timely notice of this intention in writing and meet various other requirements; and |
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| | • | under the New York Business Corporation Law, in addition to certain restrictions which may apply to “business combinations” involving the Company and an “interested shareholder”, a plan of merger or consolidation of the Company must be approved by2/3 two-thirds of the votes of all outstanding shares entitled to vote thereon. See the risk factor immediately above captioned“Our existing shareholders may be able to exert significant influence over matters requiring shareholder approval.” |
We
Until the later of the fifth anniversaries of the expiration or earlier termination of our antibody collaboration agreements with sanofi-aventis or our aflibercept collaboration with sanofi-aventis, sanofi-aventis will be bound by certain “standstill” provisions, which contractually prohibit sanofi-aventis from acquiring more than certain specified percentages of the Company’s Class A Stock and Common Stock (taken together) or otherwise seeking to obtain control of the Company.
In addition, we have a shareholder rights plan which could make it more difficult forChange in Control Severance Plan and our chief executive officer has an employment agreement that provides severance benefits in the event our officers are terminated as a third party to acquire us withoutresult of a change in control of the support of our board of directors and principal shareholders. In addition, manyCompany. Many of our stock options issued under our 2000 Long-Term Incentive Plan may become fully vested in connection with a “change in control” of the Company,our company, as defined in the plan.
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Item 7A.1B. | Unresolved Staff Comments |
None.
We conduct our research, development, manufacturing, and administrative activities at our owned and leased facilities. We currently lease approximately 232,000 square feet of laboratory and office facilities in Tarrytown, New York under operating lease agreements. In December 2006, we entered into a new operating lease agreement for approximately 221,000 square feet of laboratory and office space at the Company’s current Tarrytown location. The new lease includes approximately 27,000 square feet that we currently occupy (the “retained facilities”) and approximately 194,000 square feet to be located in new facilities that are under construction and expected to be completed in mid-2009. In October 2007, we amended the December 2006 operating lease agreement to increase the amount of new space we will lease from approximately 194,000 square feet to approximately 230,000 square feet, for an amended total under the new lease of approximately 257,000 square feet. The term of the lease is expected to commence in mid-2008 and will expire approximately 16 years later. Under the new lease we also have various options and rights on additional space at the Tarrytown site, and will continue to lease our present facilities until the new facilities are ready for occupancy. In addition, the lease contains three renewal options to extend the term of the lease by five years each and early termination options for our retained facilities only. The lease provides
26
for monthly payments over the term of the lease related to our retained facilities, the costs of construction and tenant improvements for our new facilities, and additional charges for utilities, taxes, and operating expenses.
In November 2007 we entered into a new operating sublease for approximately 10,000 square feet of office space in Tarrytown, New York. The lease expires in September 2009 and we have the option to extend the term for two additional terms of three months each.
We own a facility in Rensselaer, New York, consisting of two buildings totaling approximately 123,500 square feet of research, manufacturing, office, and warehouse space. In June 2007, we exercised a purchase option on a 272,000 square foot building in Rensselaer, New York. Prior to the purchase, which was completed in October 2007, the Company leased approximately 75,000 square feet of manufacturing, office, and warehouse space in that building.
The following table summarizes the information regarding our current property leases:
| | | | | | | | | | | | | |
| | | | | | | | Current Monthly
| | | |
| | | Square
| | | | | Base Rental
| | | Renewal Option
|
Location | | Footage | | | Expiration | | Charges (1) | | | Available |
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| Tarrytown (2) | | | 205,000 | | | June, 2009 (3) | | $ | 311,000 | | | None |
| Tarrytown (2) | | | 230,000 | | | June, 2024 (3) | | | | | | Three 5-year terms |
| Tarrytown | | | 27,000 | | | June, 2024 (3) | | $ | 54,000 | | | Three 5-year terms |
| Tarrytown (4) | | | 10,000 | | | September, 2009 | | $ | 22,000 | | | Two 3-month terms |
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| (1) | | Excludes additional rental charges for utilities, taxes, and operating expenses, as defined. |
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| (2) | | Upon completion of the new facilities, as described above, we will release the 205,000 square feet of space in our current facility and take over 230,000 square feet in the newly constructed buildings. |
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| (3) | | Estimated based upon expected completion of our new facilities, as described above. |
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| (4) | | Relates to sublease in Tarrytown, New York as described above. |
We believe that our existing owned and leased facilities are adequate for ongoing, research, development, manufacturing, and administrative activities.
In the future, we may lease, operate, or purchase additional facilities in which to conduct expanded research and development activities and manufacturing and commercial operations.
From time to time, we are a party to legal proceedings in the course of our business. We do not expect any such current legal proceedings to have a material adverse effect on our business or financial condition.
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| Item 4. | Submission of Matters to a Vote of Security Holders |
No matters were submitted to a vote of our security holders during the last quarter of the fiscal year ended December 31, 2007.
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PART II
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| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities |
Our Common Stock is quoted on The NASDAQ Stock Market under the symbol “REGN.” Our Class A Stock, par value $.001 per share, is not publicly quoted or traded.
The following table sets forth, for the periods indicated, the range of high and low sales prices for the Common Stock as reported by The NASDAQ Stock Market:
| | | | | | | | | |
| | | High | | | Low | |
| |
2006 | | | | | | | | |
| First Quarter | | $ | 18.00 | | | $ | 14.35 | |
| Second Quarter | | | 16.69 | | | | 10.97 | |
| Third Quarter | | | 17.00 | | | | 10.88 | |
| Fourth Quarter | | | 24.85 | | | | 15.27 | |
2007 | | | | | | | | |
| First Quarter | | $ | 22.84 | | | $ | 17.87 | |
| Second Quarter | | | 28.74 | | | | 17.55 | |
| Third Quarter | | | 21.78 | | | | 13.55 | |
| Fourth Quarter | | | 24.90 | | | | 16.77 | |
As of February 15, 2008, there were 515 shareholders of record of our Common Stock and 42 shareholders of record of our Class A Stock.
We have never paid cash dividends and do not anticipate paying any in the foreseeable future.
The information under the heading “Equity Compensation Plan Information” in our definitive proxy statement with respect to our 2008 Annual Meeting of Shareholders to be filed with the SEC is incorporated by reference into Item 12 of this Report onForm 10-K.
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STOCK PERFORMANCE GRAPH
Set forth below is a line graph comparing the cumulative total shareholder return on Regeneron’s Common Stock with the cumulative total return of (i) The Nasdaq Pharmaceuticals Stocks Index and (ii) The Nasdaq Stock Market (U.S.) Index for the period from December 31, 2002 through December 31, 2007. The comparison assumes that $100 was invested on December 31, 2002 in our Common Stock and in each of the foregoing indices. All values assume reinvestment of the pre-tax value of dividends paid by companies included in these indices. The historical stock price performance of our Common Stock shown in the graph below is not necessarily indicative of future stock price performance.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 12/31/2002 | | | 12/31/2003 | | | 12/31/2004 | | | 12/31/2005 | | | 12/31/2006 | | | 12/31/2007 |
| Regeneron | | | $ | 100.00 | | | | $ | 79.47 | | | | $ | 49.76 | | | | $ | 85.90 | | | | $ | 108.43 | | | | $ | 130.47 | |
| Nasdaq Pharm | | | | 100.00 | | | | | 146.59 | | | | | 156.13 | | | | | 171.93 | | | | | 168.29 | | | | | 176.97 | |
| Nasdaq US | | | | 100.00 | | | | | 149.52 | | | | | 162.72 | | | | | 166.18 | | | | | 182.57 | | | | | 197.98 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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| Item 6. | Selected Financial Data |
The selected financial data set forth below for the years ended December 31, 2007, 2006, and 2005 and at December 31, 2007 and 2006 are derived from and should be read in conjunction with our audited financial statements, including the notes thereto, included elsewhere in this report. The selected financial data for the years ended December 31, 2004 and 2003 and at December 31, 2005, 2004, and 2003 are derived from our audited financial statements not included in this report.
| | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2007 | | | 2006 | | | 2005 | | | 2004 | | | 2003 | |
| | | (In thousands, except per share data) | |
| |
Statement of Operations Data | | | | | | | | | | | | | | | | | | | | |
| Revenues | | | | | | | | | | | | | | | | | | | | |
| Contract research and development | | $ | 96,603 | | | $ | 51,136 | | | $ | 52,447 | | | $ | 113,157 | | | $ | 47,366 | |
| Research progress payments | | | | | | | | | | | | | | | 42,770 | | | | | |
| Contract manufacturing | | | | | | | 12,311 | | | | 13,746 | | | | 18,090 | | | | 10,131 | |
| Technology licensing | | | 28,421 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | 125,024 | | | | 63,447 | | | | 66,193 | | | | 174,017 | | | | 57,497 | |
| | | | | | | | | | | | | | | | | | | | | |
| Expenses | | | | | | | | | | | | | | | | | | | | |
| Research and development | | | 201,613 | | | | 137,064 | | | | 155,581 | | | | 136,095 | | | | 136,024 | |
| Contract manufacturing | | | | | | | 8,146 | | | | 9,557 | | | | 15,214 | | | | 6,676 | |
| General and administrative | | | 37,865 | | | | 25,892 | | | | 25,476 | | | | 17,062 | | | | 14,785 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | 239,478 | | | | 171,102 | | | | 190,614 | | | | 168,371 | | | | 157,485 | |
| | | | | | | | | | | | | | | | | | | | | |
| Income (loss) from operations | | | (114,454 | ) | | | (107,655 | ) | | | (124,421 | ) | | | 5,646 | | | | (99,988 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Other income (expense) | | | | | | | | | | | | | | | | | | | | |
| Other contract income | | | | | | | | | | | 30,640 | | | | 42,750 | | | | | |
| Investment income | | | 20,897 | | | | 16,548 | | | | 10,381 | | | | 5,478 | | | | 4,462 | |
| Interest expense | | | (12,043 | ) | | | (12,043 | ) | | | (12,046 | ) | | | (12,175 | ) | | | (11,932 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| | | | 8,854 | | | | 4,505 | | | | 28,975 | | | | 36,053 | | | | (7,470 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Net income (loss) before cumulative effect of a change in accounting principle | | | (105,600 | ) | | | (103,150 | ) | | | (95,446 | ) | | | 41,699 | | | | (107,458 | ) |
| Cumulative effect of adopting Statement of Accounting Standards No. 123R (“SFAS 123R”) | | | | | | | 813 | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Net income (loss) | | $ | (105,600 | ) | | $ | (102,337 | ) | | $ | (95,446 | ) | | $ | 41,699 | | | $ | (107,458 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Net income (loss) per share, basic: | | | | | | | | | | | | | | | | | | | | |
| Net income (loss) before cumulative effect of a change in accounting principle | | $ | (1.59 | ) | | $ | (1.78 | ) | | $ | (1.71 | ) | | $ | 0.75 | | | $ | (2.13 | ) |
| Cumulative effect of adopting SFAS 123R | | | | | | | 0.01 | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Net income (loss) | | $ | (1.59 | ) | | $ | (1.77 | ) | | $ | (1.71 | ) | | $ | 0.75 | | | $ | (2.13 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Net income (loss) per share, diluted | | $ | (1.59 | ) | | $ | (1.77 | ) | | $ | (1.71 | ) | | $ | 0.74 | | | $ | (2.13 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| | | At December 31, | |
| | | 2007 | | | 2006 | | | 2005 | | | 2004 | | | 2003 | |
| | | (In thousands) | |
| |
Balance Sheet Data | | | | | | | | | | | | | | | | | | | | |
| Cash, cash equivalents, restricted cash, marketable securities, and restricted marketable securities (current and non-current) | | $ | 846,279 | | | $ | 522,859 | | | $ | 316,654 | | | $ | 348,912 | | | $ | 366,566 | |
| Total assets | | | 936,258 | | | | 585,090 | | | | 423,501 | | | | 473,108 | | | | 479,555 | |
| Notes payable — current portion | | | 200,000 | | | | | | | | | | | | | | | | | |
| Notes payable — long-term portion | | | | | | | 200,000 | | | | 200,000 | | | | 200,000 | | | | 200,000 | |
| Stockholders’ equity | | | 460,267 | | | | 216,624 | | | | 114,002 | | | | 182,543 | | | | 137,643 | |
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| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Overview
We are a biopharmaceutical company that discovers, develops, and intends to commercialize pharmaceutical products for the treatment of serious medical conditions. We currently have four clinical development programs, including three late-stage clinical programs: ARCALYSTtm (rilonacept; also known as IL-1 Trap) in various inflammatory indications, aflibercept (VEGF Trap) in oncology, and the VEGF Trap-Eye formulation in eye diseases using intraocular delivery. Aflibercept is being developed in oncology in collaboration with sanofi-aventis. The VEGF Trap-Eye is being developed in collaboration with Bayer HealthCare LLC. Our fourth clinical development program is REGN88, an antibody to the Interleukin-6 receptor (IL-6R) that entered clinical development in patients with rheumatoid arthritis in the fourth quarter of 2007. We expect that our next generation of product candidates will be based on our proprietary technologies for developing human monoclonal antibodies. Our antibody program is being conducted in collaboration with sanofi-aventis. Our preclinical research programs are in the areas of oncology and angiogenesis, ophthalmology, metabolic and related diseases, muscle diseases and disorders, inflammation and immune diseases, bone and cartilage, pain, and cardiovascular diseases.
Developing and commercializing new medicines entails significant risk and expense. Since inception we have not generated any sales or profits from the commercialization of any of our product candidates and we may never receive such revenues. Before revenues from the commercialization of our product candidates can be realized, we (or our collaborators) must overcome a number of hurdles which include successfully completing research and development and obtaining regulatory approval from the FDA and regulatory authorities in other countries. In addition, the biotechnology and pharmaceutical industries are rapidly evolving and highly competitive, and new developments may render our products and technologies uncompetitive or obsolete.
From inception on January 8, 1988 through December 31, 2007, we had a cumulative loss of $793.2 million. In the absence of revenues from the commercialization of our product candidates or other sources, the amount, timing, nature, and source of which cannot be predicted, our losses will continue as we conduct our research and development activities. We expect to incur substantial losses over the next several years as we continue the clinical development of the VEGF Trap-Eye and ARCALYSTtm; advance new product candidates into clinical development from our existing research programs utilizing our technology for designing fully human monoclonal antibodies; continue our research and development programs; and commercialize product candidates that receive regulatory approval, if any. Also, our activities may expand over time and require additional resources, and we expect our operating losses to be substantial over at least the next several years. Our losses may fluctuate from quarter to quarter and will depend on, among other factors, the progress of our research and development efforts, the timing of certain expenses, and the amount and timing of payments that we receive from collaborators.
As a company that does not expect to be profitable over the next several years, management of cash flow is extremely important. The most significant use of our cash is for research and development activities, which include drug discovery, preclinical studies, clinical trials, and the manufacture of drug supplies for preclinical studies and clinical trials. We are reimbursed for some of these research and development activities by our collaborators. Our principal sources of cash to-date have been from sales of common equity and convertible debt and from funding from our collaborators in the form of up-front payments, research progress payments, and payments for our research and development activities.
In 2007, our research and development expenses totaled $201.6 million. In 2008, we expect these expenses to increase substantially as we (i) expand our research and preclinical and clinical development activities in connection with our new antibody collaboration with sanofi-aventis, (ii) expand our Phase 3 VEGF Trap-Eye clinical program and our ARCALYSTtm and aflibercept clinical programs, and (iii) increase our research and development headcount. Due to our new antibody collaboration with sanofi-aventis, we expect a greater proportion of our research and development expenses to be funded by our collaborators in 2008 than in 2007.
A primary driver of our expenses is our number of full-time employees. Our annual average headcount in 2007 was 627 compared with 573 in 2006 and 696 in 2005. In 2007 our average headcount increased primarily to support our expanded development programs for the VEGF Trap-Eye and ARCALYSTtm and our plans to move our first antibody candidate into clinical trials. In 2006, our average headcount decreased primarily as a result of reductions
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made in the fourth quarter of 2005 and mid-year in 2006. These workforce reductions were associated with narrowing the focus of our research and development efforts, substantial improvements in manufacturing productivity, the June 2005 expiration of our collaboration with Procter & Gamble, and the completion of contract manufacturing for Merck in October 2006. In 2008, we expect our average headcount to increase to approximately 825-875 primarily to support the expansion of our research and development activities as described above, especially in connection with our new antibody collaboration with sanofi-aventis.
The planning, execution, and results of our clinical programs are significant factors that can affect our operating and financial results. In our clinical programs, key events in 2007 and plans for 2008 are as follows:
| | | | |
Product Candidate | | 2007 Events | | 2008 Events/Plans |
|
ARCALYSTtm (rilonacept; also known as IL-1 Trap) | | • Completed the 24-week open-label safety extension phase of the Phase 3 trial in CAPS
• FDA accepted BLA submission for CAPS
• Granted Orphan Drug designation in CAPS in European Union
• Reported positive results in exploratory proof-of-concept study in patients with chronic active gout
• Initiated Phase 2 trial evaluating safety and efficacy of ARCALYSTtm in preventing gout-induced flares in patients initiating allopurinol therapy | | • Receive FDA review decision on BLA submission for CAPS (expected at the end of February 2008)
• If marketing approval is obtained, launch ARCALYSTtm commercially in CAPS
• Evaluate ARCALYSTtm in certain other disease indications in which IL-1 may play an important role |
|
|
| Aflibercept (VEGF Trap — Oncology) | | • Sanofi-aventis initiated four Phase 3 trials of aflibercept in combination with standard chemotherapy regimens
• NCI/CTEP initiated 10 studies of aflibercept
• Reported interim results from Phase 2 single-agent trials in advanced ovarian cancer and in non-small cell lung adenocarcinoma
• Initiated Japanese Phase 1 trial of aflibercept in combination with another investigational agent in patients with solid malignancies | | • Sanofi-aventis to initiate a fifth Phase 3 study of aflibercept in combination with standard chemotherapy regimen
• Report final data from Phase 2 single-agent trials in advanced ovarian cancer and in non-small cell lung adenocarcinoma
• Complete enrollment of Phase 2 single-agent study in symptomatic malignant ascites (SMA)
• Report interim data from the SMA Phase 2 trial
• NCI/CTEP to begin to report data from trials
• NCI/CTEP to initiate additional exploratory safety and efficacy studies |
|
|
| VEGF Trap-Eye (intravitreal injection) | | • Initiated first Phase 3 trial in wet AMD in patients in the U.S. and Canada
• Reported positive primary endpoint results and preliminary extended treatment results of Phase 2 trial in wet AMD
• Reported positive results in Phase 1 trial in DME | | • Initiate second Phase 3 trial in wet AMD in the European Union and certain other countries around the world
• Explore additional eye disease indications |
|
|
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| | | | |
Product Candidate | | 2007 Events | | 2008 Events/Plans |
|
| Antibodies | | • Entered global, strategic collaboration agreement with sanofi-aventis to discover, develop, and commercialize fully human monoclonal antibodies
• Initiated Phase 1 trial for REGN88 in rheumatoid arthritis | | • Initiate Phase 1 trial for the Dll4 antibody in oncology
• Report data for Phase 1 trial of REGN88 in rheumatoid arthritis
• Advance a third antibody candidate into clinical development |
|
|
Collaborations
Our current collaboration agreements with sanofi-aventis and Bayer HealthCare, and our expired agreement with The Procter & Gamble Company, are summarized below.
The sanofi-aventis Group
Aflibercept
In September 2003, we entered into a collaboration agreement with Aventis Pharmaceuticals Inc. (predecessor to sanofi-aventis U.S.) to collaborate on the development and commercialization of aflibercept in all countries other than Japan, where we retained the exclusive right to develop and commercialize aflibercept. Sanofi-aventis made a non-refundable, up-front payment of $80.0 million and purchased 2,799,552 newly issued unregistered shares of our Common Stock for $45.0 million.
In January 2005, we and sanofi-aventis amended the collaboration agreement to exclude, from the scope of the collaboration, the development and commercialization of aflibercept for intraocular delivery to the eye. In connection with this amendment, sanofi-aventis made a $25.0 million non-refundable payment to us.
In December 2005, we and sanofi-aventis amended our collaboration agreement to expand the territory in which the companies are collaborating on the development of aflibercept to include Japan. In connection with this amendment, sanofi-aventis agreed to make a $25.0 million non-refundable, up-front payment to us, which was received in January 2006. Under the collaboration agreement, as amended, we and sanofi-aventis will share co-promotion rights and profits on sales, if any, of aflibercept outside of Japan for disease indications included in our collaboration. In Japan, we are entitled to a royalty of approximately 35% on annual sales of aflibercept. We may also receive up to $400.0 million in milestone payments upon receipt of specified marketing approvals. This total includes up to $360.0 million in milestone payments related to the receipt of marketing approvals for up to eight aflibercept oncology and other indications in the United States or the European Union. Another $40.0 million of milestone payments relate to receipt of marketing approvals for up to five aflibercept oncology indications in Japan.
We have agreed to manufacture clinical supplies of aflibercept at our plant in Rensselaer, New York. Sanofi-aventis has agreed to be responsible for providing commercial scale manufacturing capacity for aflibercept.
Under the collaboration agreement, as amended, agreed upon worldwide development expenses incurred by both companies during the term of the agreement will be funded by sanofi-aventis. If the collaboration becomes profitable, we will be obligated to reimburse sanofi-aventis for 50% of aflibercept development expenses, including 50% of the $25.0 million payment received in connection with the January 2005 amendment to our collaboration agreement, in accordance with a formula based on the amount of development expenses and our share of the collaboration profits and Japan royalties, or at a faster rate at our option. Since inception of the collaboration through December 31, 2007, we and sanofi-aventis have incurred $306.8 million in agreed upon development expenses related to the aflibercept program. In addition, if the first commercial sale of an aflibercept product for intraocular delivery to the eye predates the first commercial sale of an aflibercept product under the collaboration by two years, we will begin reimbursing sanofi-aventis for up to $7.5 million of aflibercept development expenses in accordance with a formula until the first commercial aflibercept sale under the collaboration occurs.
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Sanofi-aventis has the right to terminate the agreement without cause with at least twelve months advance notice. Upon termination of the agreement for any reason, any remaining obligation to reimburse sanofi-aventis for 50% of aflibercept development expenses will terminate and we will retain all rights to aflibercept.
Antibodies
In November 2007, we and sanofi-aventis entered into a global, strategic collaboration to discover, develop, and commercialize fully human monoclonal antibodies. The first therapeutic antibody to enter clinical development under the collaboration, REGN88, is an antibody to the Interleukin-6 receptor (IL-6R), which has started clinical trials in rheumatoid arthritis. The second is expected to be an antibody to Delta-like ligand-4 (Dll4), which is currently slated to enter clinical development in mid-2008.
The collaboration is governed by a Discovery and Preclinical Development Agreement and a License and Collaboration Agreement. We received a non-refundable, up-front payment of $85.0 million from sanofi-aventis under the discovery agreement. In addition, sanofi-aventis will fund up to $475.0 million of our research for identifying and validating potential drug discovery targets and developing fully human monoclonal antibodies against such targets through December 31, 2012, subject to specified funding limits of $75.0 million for the period from the collaboration’s inception through December 31, 2008, and $100.0 million annually in each of the next four years. The discovery agreement will expire on December 31, 2012; however, sanofi-aventis has an option to extend the agreement for up to an additional three years for further antibody development and preclinical activities. We will lead the design and conduct of research activities, including target identification and validation, antibody development, research and preclinical activities through filing of an Investigational New Drug Application, toxicology studies, and manufacture of preclinical and clinical supplies.
For each drug candidate identified under the discovery agreement, sanofi-aventis has the option to license rights to the candidate under the license agreement. If it elects to do so, sanofi-aventis will co-develop the drug candidate with us through product approval. Under the license agreement, agreed upon worldwide development expenses incurred by both companies during the term of the agreement will be funded by sanofi-aventis, except that 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 (called Shared Phase 3 Trial Costs) will be shared 80% by sanofi-aventis and 20% by us. If the collaboration becomes profitable, we will be obligated to reimburse sanofi-aventis for 50% of development expenses that were fully funded by sanofi-aventis (or half of $0.7 million as of December 31, 2007) and 30% of Shared Phase 3 Trial Costs, in accordance with a defined formula based on the amounts of these expenses and our share of the collaboration profits from commercialization of collaboration products. If sanofi-aventis does not exercise its option to license rights to a particular drug candidate under the license agreement, we will retain the exclusive right to develop and commercialize such drug candidate, and sanofi-aventis will receive a royalty on sales, if any.
Sanofi-aventis will lead commercialization activities for products developed under the license agreement, subject to our right to co-promote such products. The parties will equally share profits and losses from sales within the United States. The parties will share profits outside the United States on a sliding scale based on sales starting at 65% (sanofi-aventis)/35% (us) and ending at 55% (sanofi-aventis)/45% (us), and losses outside the United States at 55% (sanofi-aventis)/45% (us). In addition to profit sharing, we are 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 rolling12-month basis.
We are obligated to use commercially reasonable efforts to supply clinical requirements of each drug candidate under the collaboration until commercial supplies of that drug candidate are being manufactured.
With respect to each antibody product which enters development under the license agreement, sanofi-aventis or we may, by giving twelve months notice, opt-out of further developmentand/or commercialization of the product, in which event the other party retains exclusive rights to continue the developmentand/or commercialization of the product. We may also opt-out of the further development of an antibody product if we give notice to sanofi-aventis within thirty days of the date that sanofi-aventis enters joint development of such antibody product under the license agreement. Each of the discovery agreement and the license agreement contains other termination provisions, including for material breach by the other party and, in the case of the discovery agreement, a
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termination right for sanofi-aventis under certain circumstances, including if certain minimal criteria for the discovery program are not achieved. Prior to December 31, 2012, sanofi-aventis has the right to terminate the discovery agreement without cause with at least three months advance written notice; however, except under defined circumstances, sanofi-aventis would be obligated to immediately pay to us the full amount of unpaid research funding during the remaining term of the research agreement through December 31, 2012. Upon termination of the collaboration in its entirety, our obligation to reimburse sanofi-aventis for development costs out of any future profits from collaboration products will terminate.
In December 2007, we sold sanofi-aventis 12 million newly issued, unregistered shares of Common Stock at an aggregate cash price of $312.0 million, or $26.00 per share of Common Stock. As a condition to the closing of this transaction, sanofi-aventis entered into an investor agreement with us. Under the investor agreement, sanofi-aventis has three demand rights to require us to use all reasonable efforts to conduct a registered underwritten public offering with respect to shares of the Common Stock beneficially owned by sanofi-aventis immediately after the closing of the transaction. Until the later of the fifth anniversaries of the expiration or earlier termination of the license and collaboration agreement and the existing collaboration agreement with sanofi-aventis for the development and commercialization of aflibercept, sanofi-aventis will be bound by certain “standstill” provisions. These provisions include an agreement not to acquire more than a specified percentage of the outstanding shares of Class A Stock and Common Stock. The percentage is currently 25% and will increase to 30% after December 20, 2011. Sanofi-aventis has also agreed not to dispose of any shares of Common Stock that were beneficially owned by sanofi-aventis immediately after the closing of the transaction until December 20, 2012, subject to certain limited exceptions. Following December 20, 2012, sanofi-aventis will be permitted to sell shares of Common Stock (i) in a registered underwritten public offering undertaken pursuant to the demand registration rights granted to sanofi- aventis and described above, subject to the underwriter’s broad distribution of securities sold, (ii) pursuant to Rule 144 under the Securities Act and transactions exempt from registration under the Securities Act, subject to a volume limitation of one million shares of Common Stock every three months and a prohibition on selling to beneficial owners, or persons that would become beneficial owners as a result of such sale, of 5% or more of the outstanding shares of Common Stock and (iii) into an issuer tender offer, or a tender offer by a third party that is recommended or not opposed by our Board of Directors. Sanofi-aventis has agreed to vote, and cause its affiliates to vote, all shares of our voting securities they are entitled to vote, at sanofi-aventis’ election, either as recommended by our Board of Directors or proportionally with the votes cast by our other shareholders, except with respect to certain change of control transactions, liquidation or dissolution, stock issuances equal to or exceeding 10% of the then outstanding shares or voting rights of Common Shares, and new equity compensation plans or amendments if not materially consistent with our historical equity compensation practices. The rights and restrictions under the investor agreement are subject to termination upon the occurrence of certain events.
Bayer HealthCare LLC
In October 2006, we entered into a license and collaboration agreement with Bayer HealthCare to globally develop, and commercialize outside the United States, the VEGF Trap-Eye. Under the terms of the agreement, Bayer HealthCare made a non-refundable, up-front payment to us of $75.0 million. In August 2007, we received a $20.0 million milestone payment from Bayer HealthCare following dosing of the first patient in the Phase 3 study of the VEGF Trap-Eye in wet AMD, and are eligible to receive up to $90.0 million in additional development and regulatory milestones related to the VEGF Trap-Eye program. We are also eligible to receive up to an additional $135.0 million in sales milestones when and if total annual sales of the VEGF Trap-Eye outside the United States achieve certain specified levels starting at $200.0 million.
We will share equally with Bayer HealthCare in any future profits arising from the commercialization of the VEGF Trap-Eye outside the United States. If the VEGF Trap-Eye is granted marketing authorization in a major market country outside the United States and the collaboration becomes profitable, we will be obligated to reimburse Bayer HealthCare out of our share of the collaboration profits for 50% of the agreed upon development expenses that Bayer HealthCare has incurred (or half of $25.4 million at December 31, 2007) in accordance with a formula based on the amount of development expenses that Bayer HealthCare has incurred and our share of the collaboration profits, or at a faster rate at our option. Within the United States, we are responsible for any future commercialization of the VEGF Trap-Eye and retain exclusive rights to any future profits from commercialization.
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Agreed upon development expenses incurred by both companies in 2007 under a global development plan were shared as follows: The first $50.0 million was shared equally and we were solely responsible for up to the next $40.0 million. Neither party was reimbursed for any development expenses that it incurred prior to 2007.
In 2008, agreed upon VEGF Trap-Eye development expenses incurred by both companies under a global development plan will be shared as follows: Up to the first $70.0 million will be shared equally, we are solely responsible for up to the next $30.0 million, and over $100.0 million will be shared equally. In 2009 and thereafter, all development expenses will be shared equally. We are also obligated to use commercially reasonable efforts to supply clinical and commercial product requirements.
Bayer HealthCare has the right to terminate the agreement without cause with at least six months or twelve months advance notice depending on defined circumstances at the time of termination. In the event of termination of the agreement for any reason, we retain all rights to the VEGF Trap-Eye.
For the period from the collaboration’s inception in October 2006 through September 30, 2007, all up-front licensing, milestone, and cost-sharing payments received or receivable from Bayer HealthCare had been fully deferred and included in deferred revenue for financial statement purposes. In the fourth quarter of 2007, we and Bayer HealthCare approved a global development plan for the VEGF Trap-Eye in wet AMD. The plan includes estimated development steps, timelines, and costs, as well as the projected responsibilities of each of the companies. In addition, in the fourth quarter of 2007, we and Bayer HealthCare reaffirmed the companies’ commitment to a DME development program and had initial estimates of development costs for the VEGF Trap-Eye in DME. As a result, effective in the fourth quarter of 2007, we determined the appropriate accounting policy for payments from Bayer HealthCare and cost-sharing of our and Bayer HealthCare’s VEGF Trap-Eye development expenses, and the financial statement classifications and periods in which past and future payments from Bayer HealthCare (including the $75.0 million up-front payment and development and regulatory milestone payments) and cost-sharing of VEGF Trap-Eye development expenses will be recognized in our Statement of Operations.
The Procter & Gamble Company
In May 1997, we entered into a long-term collaboration with Procter & Gamble to discover, develop, and commercialize pharmaceutical products, and Procter & Gamble agreed to provide funding in support of our research efforts related to the collaboration. In accordance with the companies’ collaboration agreement, Procter & Gamble was obligated to fund our research on therapeutic areas that were of particular interest to Procter & Gamble through December 2005, with no further research obligations by either party thereafter. Under the collaboration agreement, research support from Procter & Gamble was $2.5 million per quarter, plus annual adjustments for inflation, through December 2005.
In June 2005, we and Procter & Gamble amended our collaboration agreement. Under the terms of the modified agreement, the two companies agreed that the research activities being pursued under the collaboration agreement were completed on June 30, 2005, six months prior to the December 31, 2005 expiration date in the collaboration agreement. Procter & Gamble agreed to make a one-time $5.6 million payment to Regeneron, which was received in July 2005, and to fund our research under the agreement through the second quarter of 2005. We agreed to pay Procter & Gamble approximately $1.0 million to acquire certain capital equipment owned by Procter & Gamble and located at our facilities. We and Procter & Gamble divided rights to research programs and preclinical product candidates that were developed during the research term of the collaboration. Neither party has the right to participate in the development or commercialization of the other party’s product candidates. We are entitled to receive royalties based on any future product sales of a Procter & Gamble preclinical candidate arising from the collaboration, and Procter & Gamble is entitled to receive a small royalty on any sales of a single Regeneron candidate that is not currently being developed. Neither party is entitled to receive either royalties or other payments based on any other products arising from the collaboration.
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Other Agreements
AstraZeneca
In February 2007, we entered into a non-exclusive license agreement with AstraZeneca UK Limited that allows AstraZeneca to utilize ourVelocImmunetechnology in its internal research programs to discover human monoclonal antibodies. Under the terms of the agreement, AstraZeneca made a $20.0 million non-refundable, up-front payment to us. AstraZeneca is required to make up to five additional annual payments of $20.0 million, subject to its ability to terminate the agreement after making the first three additional payments or earlier if the technology does not meet minimum performance criteria. We are entitled to receive a mid-single-digit royalty on any future sales of antibody products discovered by AstraZeneca using ourVelocImmunetechnology.
Astellas
In March 2007, we entered into a non-exclusive license agreement with Astellas Pharma Inc. that allows Astellas to utilize ourVelocImmunetechnology in its internal research programs to discover human monoclonal antibodies. Under the terms of the agreement, Astellas made a $20.0 million non-refundable, up-front payment to us. Astellas is required to make up to five additional annual payments of $20.0 million, subject to its ability to terminate the agreement after making the first three additional payments or earlier if the technology does not meet minimum performance criteria. We are entitled to receive a mid-single-digit royalty on any future sales of antibody products discovered by Astellas using ourVelocImmunetechnology.
National Institutes of Health
In September 2006, we were awarded a five-year grant from the National Institutes of Health (NIH) as part of the NIH’s Knockout Mouse Project. The goal of the Knockout Mouse Project is to build a comprehensive and broadly available resource of knockout mice to accelerate the understanding of gene function and human diseases. We use ourVelociGene® technology to take aim at 3,500 of the most difficult genes to target and which are not currently the focus of other large-scale knockout mouse programs. We also agreed to grant a limited license to a consortium of research institutions, the other major participants in the Knockout Mouse Project, to use components of ourVelociGenetechnology in the Knockout Mouse Project. We are generating a collection of targeting vectors and targeted mouse embryonic stem cells (ES cells) which can be used to produce knockout mice. These materials will be made widely available to academic researchers without charge. We will receive a fee for each targeted ES cell line or targeting construct made by us or the research consortium and transferred to commercial entities.
Under the NIH grant, we are entitled to receive a minimum of $17.9 million over a five-year period. We will receive another $1.0 million to optimize our existing C57BL/6 ES cell line and its proprietary growth medium, both of which will be supplied to the research consortium for its use in the Knockout Mouse Project. We have the right to use, for any purpose, all materials generated by us and the research consortium.
Accounting for Stock-based Employee Compensation
Effective January 1, 2005, we adopted the fair value based method of accounting for stock-based employee compensation under the provisions of Statement of Financial Accounting Standards No. (SFAS) 123,Accounting for Stock-Based Compensation, using the modified prospective method as described in SFAS 148,Accounting for Stock-Based Compensation — Transition and Disclosure. As a result, in 2005, we recognized compensation expense, in an amount equal to the fair value of share-based payments (including stock option awards) on their date of grant, over the vesting period of the awards using graded vesting, which is an accelerated expense recognition method. Under the modified prospective method, compensation expense for Regeneron is recognized for (a) all share based payments granted on or after January 1, 2005 and (b) all awards granted to employees prior to January 1, 2005 that were unvested on that date. Prior to the adoption of the fair value method, we accounted for stock-based compensation to employees under the intrinsic value method of accounting set forth in Accounting Principles Board Opinion No. (APB) 25,Accounting for Stock Issued to Employees, and related interpretations. Therefore, compensation expense related to employee stock options was not reflected in operating expenses in any period prior to the first quarter of 2005 and prior period operating results were not restated.
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Effective January 1, 2006, we adopted the provisions of SFAS 123R,Share-Based Payment, which is a revision of SFAS 123. SFAS 123R focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions, and requires the recognition of compensation expense in an amount equal to the fair value of the share-based payment (including stock options and restricted stock) issued to employees. SFAS 123R requires companies to estimate the number of awards that are expected to be forfeited at the time of grant and to revise this estimate, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Effective January 1, 2005, and prior to our adoption of SFAS 123R, we recognized the effect of forfeitures in stock-based compensation cost in the period when they occurred, in accordance with SFAS 123. Upon adoption of SFAS 123R effective January 1, 2006, we were required to record a cumulative effect adjustment to reflect the effect of estimated forfeitures related to outstanding awards that were not expected to vest as of the SFAS 123R adoption date. This adjustment reduced our loss by $0.8 million and is included in our operating results for the year ended December 31, 2006 as a cumulative-effect adjustment of a change in accounting principle. Exclusive of the cumulative-effect adjustment, the effect of the change from applying the provisions of SFAS 123 to applying the provisions of SFAS 123R on our loss from operations, net loss, and net loss per share for the year ended December 31, 2006 was not significant, and there was no impact to our cash flows for the year ended December 31, 2006.
Non-cash stock-based employee compensation expense related to stock option awards (Stock Option Expense) recognized in operating expenses totaled $28.0 million, $18.4 million, and $19.9 million for the years ended December 31, 2007, 2006, and 2005, respectively. In addition, for the year ended December 31, 2005, $0.1 million of Stock Option Expense was capitalized into inventory. As of December 31, 2007, there was $60.6 million of stock-based compensation cost related to outstanding nonvested stock options, net of estimated forfeitures, which had not yet been recognized in operating expenses. We expect to recognize this compensation cost over a weighted-average period of 1.8 years. In addition, there are 723,092 options which are unvested as of December 31, 2007 and would become vested upon our products achieving certain sales targets and the optionee satisfying certain service conditions. Potential compensation cost, measured on the grant date, related to these performance options totals $2.7 million and will begin to be recognized only if, and when, these options’ performance condition is considered to be probable of attainment.
Assumptions
We use the Black-Scholes model to estimate the fair value of each option granted under the Regeneron Pharmaceuticals, Inc. 2000 Long-Term Incentive Plan. Using this model, fair value is calculated based on assumptions with respect to (i) expected volatility of our Common Stock price, (ii) the periods of time over which employees and members of our board of directors are expected to hold their options prior to exercise (expected lives), (iii) expected dividend yield on our Common Stock, and (iv) risk-free interest rates, which are based on quoted U.S. Treasury rates for securities with maturities approximating the options’ expected lives. Expected volatility has been estimated based on actual movements in our stock price over the most recent historical periods equivalent to the options’ expected lives. Expected lives are principally based on our limited historical exercise experience with option grants with similar exercise prices. The expected dividend yield is zero as we have never paid dividends and do not currently anticipate paying any in the foreseeable future. The following table summarizes the weighted average values of the assumptions we used in computing the fair value of option grants during 2007, 2006, and 2005:
| | | | | | | | | | | | | |
| | | 2007 | | | 2006 | | | 2005 | |
| |
| Expected volatility | | | 53% | | | | 67% | | | | 71% | |
| Expected lives from grant date | | | 5.6 years | | | | 6.5 years | | | | 5.9 years | |
| Expected dividend yield | | | 0% | | | | 0% | | | | 0% | |
| Risk-free interest rate | | | 3.60% | | | | 4.51% | | | | 4.16% | |
Changes in any of these assumptions may materially affect the fair value of stock options granted and the amount of stock-based compensation recognized in any period.
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Results of Operations
Years Ended December 31, 2007 and 2006
Net Loss:
Regeneron reported a net loss of $105.6 million, or $1.59 per share (basic and diluted), for the year ended December 31, 2007, compared to a net loss of $102.3 million, or $1.77 per share (basic and diluted) for 2006.
Revenues:
Revenues for the years ended December 31, 2007 and 2006 consist of the following:
| | | | | | | | | |
| | | 2007 | | | 2006 | |
| | | (In millions) | |
| |
| Contract research & development revenue | | | | | | | | |
| Sanofi-aventis | | $ | 51.7 | | | $ | 47.8 | |
| Bayer HealthCare | | | 35.9 | | | | | |
| Other | | | 9.0 | | | | 3.3 | |
| | | | | | | | | |
| Total contract research & development revenue | | | 96.6 | | | | 51.1 | |
| Contract manufacturing revenue | | | | | | | 12.3 | |
| Technology licensing revenue | | | 28.4 | | | | | |
| | | | | | | | | |
| Total revenue | | $ | 125.0 | | | $ | 63.4 | |
| | | | | | | | | |
We recognize revenue from sanofi-aventis, in connection with our aflibercept and antibody collaborations, in accordance with Staff Accounting Bulletin No. 104,Revenue Recognition(SAB 104) and FASB Emerging Issue Task Force IssueNo. 00-21,Accounting for Revenue Arrangements with Multiple Deliverables(EITF 00-21) (see “Critical Accounting Policies and Significant Judgments and Estimates”). We earn contract research and development revenue from sanofi-aventis which, as detailed below, consists partly of reimbursement for research and development expenses and partly of the recognition of revenue related to non-refundable, up-front payments of $105.0 million related to the aflibercept collaboration and $85.0 million related to the antibody collaboration. Non-refundable, up-front payments are recorded as deferred revenue and recognized over the period over which we are obligated to perform services. We estimate our performance periods based on the specific terms of the collaboration agreements, and adjust the performance periods, if appropriate, based on the applicable facts and circumstances.
| | | | | | | | | |
| | | December 31, | |
Sanofi-aventis Contract Research & Development Revenue | | 2007 | | | 2006 | |
| | | (In millions) | |
| |
| Aflibercept: | | | | | | | | |
| Regeneron expense reimbursement | | $ | 38.3 | | | $ | 36.4 | |
| Recognition of deferred revenue related to up-front payments | | | 8.8 | | | | 11.4 | |
| | | | | | | | | |
| Total aflibercept | | | 47.1 | | | | 47.8 | |
| | | | | | | | | |
| Antibody: | | | | | | | | |
| Regeneron expense reimbursement | | | 3.7 | | | | | |
| Recognition of deferred revenue related to up-front payments | | | 0.9 | | | | | |
| | | | | | | | | |
| Total antibody | | | 4.6 | | | | | |
| | | | | | | | | |
| Total sanofi-aventis contract research & development revenue | | $ | 51.7 | | | $ | 47.8 | |
| | | | | | | | | |
Sanofi-aventis’ reimbursement of Regeneron’s aflibercept expenses increased in 2007 compared to 2006, primarily due to higher preclinical and clinical development costs. Recognition of deferred revenue related to sanofi-aventis’ up-front aflibercept payments decreased in 2007 from 2006 due to an extension of the estimated performance period over which this deferred revenue is being recognized. As of December 31, 2007, $61.2 million
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of the original $105.0 million of up-front payments related to aflibercept was deferred and will be recognized as revenue in future periods.
In 2007, sanofi-aventis’ reimbursement of Regeneron’s antibody expenses consisted of $3.0 million under the collaboration’s discovery agreement and $0.7 million of REGN88 development costs under the license agreement. Recognition of deferred revenue under the antibody collaboration related to sanofi-aventis’ $85.0 million up-front payment. As of December 31, 2007, $84.1 million of this up-front payment was deferred and will be recognized as revenue in future periods.
As described above, effective in the fourth quarter of 2007, the Company determined the appropriate accounting policy for payments from Bayer HealthCare. The $75.0 million up-front licensing payment and the $20.0 million milestone payment (which was received in August 2007 and not considered substantive) from Bayer HealthCare are being recognized as contract research and development revenue over the related estimated performance period in accordance with SAB 104 andEITF 00-21. In periods when we recognize VEGF Trap-Eye development expenses that we incur under the collaboration, we also recognize, as contract research and development revenue, the portion of those VEGF Trap-Eye development expenses that is reimbursable from Bayer HealthCare. In periods when Bayer HealthCare incurs agreed upon VEGF Trap-Eye development expenses that benefit the collaboration and Regeneron, we also recognize, as additional research and development expense, the portion of Bayer HealthCare’s VEGF Trap-Eye development expenses that we are obligated to reimburse. In the fourth quarter of 2007, when we commenced recognizing previously deferred payments from Bayer HealthCare and cost-sharing of our and Bayer HealthCare’s 2007 VEGF Trap-Eye development expenses, we recognized, as a cumulative catch-up, contract research and development revenue of $35.9 million, consisting of (i) $15.9 million related to the $75.0 million up-front licensing payment and the $20.0 million milestone payment, and (ii) $20.0 million related to the portion of our 2007 VEGF Trap-Eye development expenses that is reimbursable from Bayer HealthCare. As of December 31, 2007, $79.1 million of the up-front licensing and milestone payments was deferred and will be recognized as revenue in future periods.
Other contract research and development revenue includes $5.5 million and $0.5 million, respectively, recognized in connection with our five-year grant from the NIH, which we were awarded in September 2006 as part of the NIH’s Knockout Mouse Project.
Contract manufacturing revenue in 2006 related to our long-term agreement with Merck & Co., Inc., which expired in October 2006, to manufacture a vaccine intermediate at our Rensselaer, New York facility. Revenue and the related manufacturing expense were recognized as product was shipped, after acceptance by Merck. Included in contract manufacturing revenue in 2006 was $1.2 million of deferred revenue associated with capital improvement reimbursements paid by Merck prior to commencement of production. We do not expect to receive any further contract manufacturing revenue from Merck.
In connection with our license agreement with AstraZeneca, as described above, the $20.0 million non-refundable, up-front payment, which we received in February 2007, was deferred and is being recognized as revenue ratably over the twelve month period beginning in February 2007. In connection with our license agreement with Astellas, as described above, the $20.0 million non-refundable, up-front payment, which we received in April 2007, was deferred and is being recognized as revenue ratably over the twelve month period beginning in June 2007. For the year ended December 31, 2007, we recognized $28.4 million of technology licensing revenue related to these agreements.
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Expenses:
Total operating expenses increased to $239.5 million in 2007 from $171.1 million in 2006. Our average employee headcount in 2007 increased to 627 from 573 in 2006, primarily to support our expanded development programs for the VEGF Trap-Eye and ARCALYSTtm and our activities to move our first antibody candidate (REGN88) into clinical trials. Operating expenses in 2007 and 2006 include a total of $28.0 million and $18.4 million of Stock Option Expense, respectively, as detailed below:
| | | | | | | | | | | | | |
| | | For the Year Ended December 31, 2007 | |
| | | Expenses Before
| | | | | | | |
| | | Inclusion of Stock
| | | Stock Option
| | | Expenses as
| |
Expenses | | Option Expense | | | Expense | | | Reported | |
| | | (In millions) | |
| |
| Research and development | | $ | 185.5 | | | $ | 16.1 | | | $ | 201.6 | |
| General and administrative | | | 26.0 | | | | 11.9 | | | | 37.9 | |
| | | | | | | | | | | | | |
| Total operating expenses | | $ | 211.5 | | | $ | 28.0 | | | $ | 239.5 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | For the Year Ended December 31, 2006 | |
| | | Expenses Before
| | | | | | | |
| | | Inclusion of Stock
| | | Stock Option
| | | Expenses as
| |
Expenses | | Option Expense | | | Expense | | | Reported | |
| | | (In millions) | |
| |
| Research and development | | $ | 126.9 | | | $ | 10.2 | | | $ | 137.1 | |
| Contract manufacturing | | | 7.8 | | | | 0.3 | | | | 8.1 | |
| General and administrative | | | 18.0 | | | | 7.9 | | | | 25.9 | |
| | | | | | | | | | | | | |
| Total operating expenses | | $ | 152.7 | | | $ | 18.4 | | | $ | 171.1 | |
| | | | | | | | | | | | | |
The increase in total Stock Option Expense in 2007 was primarily due to the higher fair market value of our Common Stock on the date of our annual employee option grants made in December 2006 in comparison to the fair market value of our Common Stock on the dates of annual employee option grants made in recent prior years.
Research and Development Expenses:
Research and development expenses increased to $201.6 million for the year ended December 31, 2007 from $137.1 million for 2006. The following table summarizes the major categories of our research and development expenses for the years ended December 31, 2007 and 2006:
| | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | | | | | | | Increase
| |
Research and Development Expenses | | 2007 | | | 2006 | | | (Decrease) | |
| | | (In millions) | |
| |
| Payroll and benefits (1) | | $ | 60.6 | | | $ | 44.8 | | | $ | 15.8 | |
| Clinical trial expenses | | | 37.6 | | | | 14.9 | | | | 22.7 | |
| Clinical manufacturing costs (2) | | | 47.0 | | | | 39.2 | | | | 7.8 | |
| Research and preclinical development costs | | | 23.2 | | | | 17.5 | | | | 5.7 | |
| Occupancy and other operating costs | | | 22.6 | | | | 20.7 | | | | 1.9 | |
| Cost-sharing of Bayer HealthCare VEGF Trap-Eye development expenses (3) | | | 10.6 | | | | | | | | 10.6 | |
| | | | | | | | | | | | | |
| Total research and development | | $ | 201.6 | | | $ | 137.1 | | | $ | 64.5 | |
| | | | | | | | | | | | | |
| | |
| (1) | | Includes $13.1 million and $8.4 million of Stock Option Expense for the years ended December 31, 2007 and 2006, respectively. |
|
| (2) | | Represents the full cost of manufacturing drug for use in research, preclinical development, and clinical trials, including related payroll and benefits, Stock Option Expense, manufacturing materials and supplies, |
41
| | |
| | depreciation, and occupancy costs of our Rensselaer manufacturing facility. Includes $3.0 million and $1.8 million of Stock Option Expense for the years ended December 31, 2007 and 2006, respectively. |
|
| (3) | | Under our collaboration with Bayer HealthCare, in periods when Bayer HealthCare incurs VEGF Trap-Eye development expenses, we also recognize, as additional research and development expense, the portion of their VEGF Trap-Eye development expenses that we are obligated to reimburse. In the fourth quarter of 2007, when we commenced recognizing cost-sharing of our and Bayer HealthCare’s 2007 VEGF Trap-Eye development expenses, we recognized as additional research and development expense a cumulative catch-up of $10.6 million of VEGF Trap-Eye development expenses that we were obligated to reimburse to Bayer HealthCare. |
Payroll and benefits increased primarily due to the increase in employee headcount, as described above, annual compensation increases effective in 2007, and higher Stock Option Expense, as described above. Clinical trial expenses increased due primarily to higher costs related to our Phase 3 study of the VEGF Trap-Eye in wet AMD, which we initiated in the third quarter of 2007, and our ongoing Phase 1 and 2 studies of the VEGF Trap-Eye in wet AMD. Clinical manufacturing costs increased due primarily to higher costs related to manufacturing ARCALYSTtm and preclinical and clinical supplies of REGN88, which were partly offset by lower costs related to manufacturing aflibercept and the VEGF Trap-Eye. Research and preclinical development costs increased primarily due to higher costs related to our human monoclonal antibody programs, including REGN88, and utilization of our proprietary technology platforms. Occupancy and other operating costs primarily increased in connection with higher Company headcount and to support our expanded research and development activities.
We budget our research and development costs by expense category, rather than by project. We also prepare estimates of research and development cost for projects in clinical development, which include direct costs and allocations of certain costs such as indirect labor, Stock Option Expense, and manufacturing and other costs related to activities that benefit multiple projects, and, under our collaboration with Bayer HealthCare, the portion of Bayer HealthCare’s VEGF Trap-Eye development expenses that we are obligated to reimburse. Our estimates of research and development costs for clinical development programs are shown below:
| | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | | | | | | | Increase
| |
Project Costs | | 2007 | | | 2006 | | | (Decrease) | |
| | | (In millions) | |
| |
ARCALYSTtm | | $ | 38.1 | | | $ | 29.6 | | | $ | 8.5 | |
| Aflibercept | | | 33.7 | | | | 30.7 | | | | 3.0 | |
| VEGF Trap-Eye | | | 53.7 | | | | 21.9 | | | | 31.8 | |
| REGN88 | | | 13.6 | | | | | | | | 13.6 | |
| Other research programs & unallocated costs | | | 62.5 | | | | 54.9 | | | | 7.6 | |
| | | | | | | | | | | | | |
| Total research and development expenses | | $ | 201.6 | | | $ | 137.1 | | | $ | 64.5 | |
| | | | | | | | | | | | | |
Drug development and approval in the United States is a multi-step process regulated by the FDA. The process begins with discovery and preclinical evaluation, leading up to the submission of an IND to the FDA which, if successful, allows the opportunity for study in humans, or clinical study, of the potential new drug. Clinical development typically involves three phases of study: Phase 1, 2, and 3. The most significant costs in clinical development are in Phase 3 clinical trials, as they tend to be the longest and largest studies in the drug development process. Following successful completion of Phase 3 clinical trials for a biological product, a biologics license application (or BLA) must be submitted to, and accepted by, the FDA, and the FDA must approve the BLA prior to commercialization of the drug. It is not uncommon for the FDA to request additional data following its review of a BLA, which can significantly increase the drug development timeline and expenses. We may elect either on our own, or at the request of the FDA, to conduct further studies that are referred to as Phase 3B and 4 studies. Phase 3B studies are initiated and either completed or substantially completed while the BLA is under FDA review. These studies are conducted under an IND. Phase 4 studies, also referred to as post-marketing studies, are studies that are initiated and conducted after the FDA has approved a product for marketing. In addition, as discovery research, preclinical development, and clinical programs progress, opportunities to expand development of drug candidates into new disease indications can emerge. We may elect to add such new disease indications to our development efforts (with the approval of our collaborator for joint development programs), thereby extending the period in
42
which we will be developing a product. For example, we, and our collaborators, where applicable, continue to explore further development of ARCALYSTtm, aflibercept, and the VEGF Trap-Eye in different disease indications.
There are numerous uncertainties associated with drug development, including uncertainties related to safety and efficacy data from each phase of drug development, uncertainties related to the enrollment and performance of clinical trials, changes in regulatory requirements, changes in the competitive landscape affecting a product candidate, and other risks and uncertainties described in Item 1A, “Risk Factors” under “Risks Related to Development of Our Product Candidates,” “Regulatory and Litigation Risks,” and “Risks Related to Commercialization of Products.” The lengthy process of seeking FDA approvals, and subsequent compliance with applicable statutes and regulations, require the expenditure of substantial resources. Any failure by us to obtain, or delay in obtaining, regulatory approvals could materially adversely affect our business.
For these reasons and due to the variability in the costs necessary to develop a product and the uncertainties related to future indications to be studied, the estimated cost and scope of the projects, and our ultimate ability to obtain governmental approval for commercialization, accurate and meaningful estimates of the total cost to bring our product candidates to market are not available. Similarly, we are currently unable to reasonably estimate if our product candidates will generate product revenues and material net cash inflows. In the second quarter of 2007, we submitted a BLA for ARCALYSTtm for the treatment of CAPS, a group of rare genetic disorders. We cannot predict whether or when the commercialization of ARCALYSTtm in CAPS will result in a material net cash inflow to us.
Contract Manufacturing Expenses:
We had no contract manufacturing expenses in 2007 compared to $8.1 million in 2006, due to the expiration of our manufacturing agreement with Merck in October 2006.
General and Administrative Expenses:
General and administrative expenses increased to $37.9 million in 2007 from $25.9 million in the same period of 2006 primarily due to (i) higher Stock Option Expense, as described above, (ii) higher compensation expense principally due to annual increases effective in 2007 and higher administrative headcount to support our expanded research and development activities, (iii) recruitment and related costs associated with expanding our headcount in 2007, (iv) higher fees for consultants and other professional services on various corporate matters, and (v) market research and related expenses incurred in 2007 in connection with our ARCALYSTtm and VEGF Trap-Eye programs.
Other Income and Expense:
Investment income increased to $20.9 million in 2007 from $16.5 million in 2006, resulting primarily from higher balances of cash and marketable securities (due, in part, to the up-front payment received from Bayer HealthCare in October 2006, as described above, and the receipt of net proceeds from the November 2006 public offering of our Common Stock). This increase was partly offset by a $5.9 million charge in 2007 related to marketable securities which we considered to be other than temporarily impaired in value. In the second half of 2007, deterioration in the credit quality of marketable securities from two issuers has subjected us to the risk of being unable to recover their full principal value, which totals $14.0 million. Interest expense was $12.0 million in 2007 and 2006. Interest expense is attributable primarily to $200.0 million of convertible notes issued in October 2001, which mature in October 2008 and bear interest at 5.5% per annum.
Years Ended December 31, 2006 and 2005
Net Loss:
Regeneron reported a net loss of $102.3 million, or $1.77 per share (basic and diluted), for the year ended December 31, 2006, compared to a net loss of $95.4 million, or $1.71 per (basic and diluted) for 2005.
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Revenues:
Revenues for the years ended December 31, 2006 and 2005 consist of the following:
| | | | | | | | | |
| | | 2006 | | | 2005 | |
| | | (In millions) | |
| |
| Contract research & development revenue | | | | | | | | |
| Sanofi-aventis | | $ | 47.8 | | | $ | 43.4 | |
| Procter & Gamble | | | | | | | 6.0 | |
| Other | | | 3.3 | | | | 3.1 | |
| | | | | | | | | |
| Total contract research & development revenue | | | 51.1 | | | | 52.5 | |
| Contract manufacturing revenue | | | 12.3 | | | | 13.7 | |
| | | | | | | | | |
| Total revenue | | $ | 63.4 | | | $ | 66.2 | |
| | | | | | | | | |
We earn contract research and development revenue from sanofi-aventis which, as detailed below, consists partly of reimbursement for research and development expenses and partly of the recognition of revenue related to a total of $105.0 million of non-refundable, up-front payments received in 2003 and 2006. Non-refundable, up-front payments are recorded as deferred revenue and recognized over the period over which we are obligated to perform services. We estimate our performance period based on the specific terms of each agreement, and adjust the performance periods, if appropriate, based on the applicable facts and circumstances.
| | | | | | | | | |
| | | December 31, | |
Sanofi-aventis Contract Research & Development Revenue | | 2006 | | | 2005 | |
| | | (In millions) | |
| |
| Regeneron expense reimbursement | | $ | 36.4 | | | $ | 33.9 | |
| Recognition of deferred revenue related to up-front payments | | | 11.4 | | | | 9.5 | |
| | | | | | | | | |
| Total | | $ | 47.8 | | | $ | 43.4 | |
| | | | | | | | | |
Sanofi-aventis’ reimbursement of Regeneron aflibercept expenses increased in 2006 compared to 2005, primarily due to higher costs related to our manufacture of aflibercept clinical supplies during the first half of 2006. Recognition of deferred revenue related to sanofi-aventis’ up-front payments also increased in 2006 from the same period in 2005, due to our receipt in January 2006 of a $25.0 million non-refundable, up-front payment from sanofi-aventis related to the expansion of the companies’ aflibercept collaboration to include Japan. As of December 31, 2006, $70.0 million of the original $105.0 million of up-front payments was deferred and will be recognized as revenue in future periods.
Contract research and development revenue earned from Procter & Gamble decreased in 2006 compared to 2005, as the research activities being pursued under our December 2000 collaboration agreement with Procter & Gamble, as amended, were completed on June 30, 2005, as described above under “Collaborations — The Procter & Gamble Company.” Since the second quarter of 2005, we have not received, and do not expect to receive, any further contract research and development revenue from Procter & Gamble.
In October 2006 we entered into our VEGF Trap-Eye collaboration with Bayer HealthCare. In the fourth quarter of 2007, we determined the appropriate accounting policy for payments from Bayer HealthCare and, in 2007, commenced recognizing previously deferred payments in our Statement of Operations through a cumulativecatch-up, as described above. Accordingly, there was no contract research and development revenue earned from Bayer HealthCare in 2006. As of December 31, 2006, the $75.0 million up-front payment received from Bayer HealthCare in October 2006 was deferred and will be recognized as revenue in future periods.
Other contract research and development revenue includes $0.5 million recognized in connection with our NIH Grant, as described above.
Contract manufacturing revenue relates to our long-term agreement with Merck, which expired in October 2006, to manufacture a vaccine intermediate at our Rensselaer facility. Contract manufacturing revenue decreased in 2006 compared to 2005 due to a decrease in product shipments to Merck in 2006. Revenue and the related
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manufacturing expense were recognized as product was shipped, after acceptance by Merck. Included in contract manufacturing revenue in 2006 and 2005 were $1.2 million and $1.4 million, respectively, of deferred revenue associated with capital improvement reimbursements paid by Merck prior to commencement of production. We do not expect to receive any further contract manufacturing revenue from Merck and there was no Merck deferred revenue as of the end of 2006.
Expenses:
Total operating expenses decreased to $171.1 million in 2006 from $190.6 million in 2005 due, in part, to our lower headcount, as described above. (Also see “Severance Costs” below.)
Operating expenses in 2006 and 2005 include a total of $18.4 million and $19.9 million of Stock Option Expense, respectively, as detailed below:
| | | | | | | | | | | | | |
| | | For the Year Ended December 31, 2006 | |
| | | Expenses Before
| | | | | | | |
| | | Inclusion of Stock
| | | Stock Option
| | | Expenses as
| |
Expenses | | Option Expense | | | Expense | | | Reported | |
| |
| Research and development | | $ | 126.9 | | | $ | 10.2 | | | $ | 137.1 | |
| Contract manufacturing | | | 7.8 | | | | 0.3 | | | | 8.1 | |
| General and administrative | | | 18.0 | | | | 7.9 | | | | 25.9 | |
| | | | | | | | | | | | | |
| Total operating expenses | | $ | 152.7 | | | $ | 18.4 | | | $ | 171.1 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | For the Year Ended December 31, 2005 | |
| | | Expenses Before
| | | | | | | |
| | | Inclusion of Stock
| | | Stock Option
| | | Expenses as
| |
Expenses | | Option Expense | | | Expense | | | Reported | |
| |
| Research and development | | $ | 143.7 | | | $ | 11.9 | | | $ | 155.6 | |
| Contract manufacturing | | | 9.2 | | | | 0.4 | | | | 9.6 | |
| General and administrative | | | 17.8 | | | | 7.6 | | | | 25.4 | |
| | | | | | | | | | | | | |
| Total operating expenses | | $ | 170.7 | | | $ | 19.9 | | | $ | 190.6 | |
| | | | | | | | | | | | | |
Research and Development Expenses:
Research and development expenses decreased to $137.1 million for the year ended December 31, 2006 from $155.6 million for 2005. The following table summarizes the major categories of our research and development expenses for the years ended December 31, 2006 and 2005:
| | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | | | | | | | Increase
| |
Research and Development Expenses | | 2006 | | | 2005 | | | (Decrease) | |
| |
| Payroll and benefits (1) | | $ | 44.8 | | | $ | 53.6 | | | $ | (8.8 | ) |
| Clinical trial expenses | | | 14.9 | | | | 18.2 | | | | (3.3 | ) |
| Clinical manufacturing costs (2) | | | 39.2 | | | | 41.6 | | | | (2.4 | ) |
| Research and preclinical development costs | | | 17.5 | | | | 19.2 | | | | (1.7 | ) |
| Occupancy and other operating costs | | | 20.7 | | | | 23.0 | | | | (2.3 | ) |
| | | | | | | | | | | | | |
| Total research and development | | $ | 137.1 | | | $ | 155.6 | | | $ | (18.5 | ) |
| | | | | | | | | | | | | |
| | |
| (1) | | Includes $8.4 million and $10.5 million of Stock Option Expense for the years ended December 31, 2006 and 2005, respectively. |
|
| (2) | | Represents the full cost of manufacturing drug for use in research, preclinical development, and clinical trials, including related payroll and benefits, Stock Option Expense, manufacturing materials and supplies, depreciation, and occupancy costs of our Rensselaer manufacturing facility. Includes $1.8 million and $1.4 million of Stock Option Expense for the years ended December 31, 2006 and 2005, respectively. |
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Payroll and benefits decreased principally due to our lower headcount in 2006. In addition, payroll and benefits in 2006 and 2005 included $0.4 million and $2.2 million, respectively, of severance costs associated with our workforce reduction plan that we initiated in October 2005. Clinical trial expenses decreased primarily due to lower ARCALYSTtm costs in 2006 as we discontinued clinical development of ARCALYSTtm in adult rheumatoid arthritis and osteoarthritis in the second half of 2005. This decrease was partly offset by higher 2006 VEGF Trap-Eye costs related to Phase 1 and Phase 2 clinical trials that we are conducting in wet AMD. Clinical manufacturing costs decreased because of lower costs in 2006 related to manufacturing ARCALYSTtm clinical supplies, which were partially offset by higher costs related to manufacturing aflibercept clinical supplies. Research and preclinical development costs decreased principally because of lower costs for general research supplies in 2006 as we narrowed the focus of our research and development efforts due, in part, to the expiration of our collaboration with Procter & Gamble in June 2005, as described above. Occupancy and other operating costs decreased primarily due to our lower 2006 headcount and lower costs for utilities associated with our leased research facilities in Tarrytown, New York.
We budget our research and development costs by expense category, rather than by project. We also prepare estimates of research and development cost for projects in clinical development, which include direct costs and allocations of certain costs such as indirect labor, non-cash stock-based employee compensation expense related to stock option awards, and manufacturing and other costs related to activities that benefit multiple projects. Our estimates of research and development costs for clinical development programs are shown below:
| | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | | | | | | | Increase
| |
Project Costs | | 2006 | | | 2005 | | | (Decrease) | |
| | | (In millions) | |
| |
ARCALYSTTM | | $ | 29.6 | | | $ | 57.2 | | | $ | (27.6 | ) |
| Aflibercept | | | 30.7 | | | | 27.8 | | | | 2.9 | |
| VEGF Trap-Eye | | | 21.9 | | | | 9.3 | | | | 12.6 | |
| Other research programs & unallocated costs | | | 54.9 | | | | 61.3 | | | | (6.4 | ) |
| | | | | | | | | | | | | |
| Total research and development expenses | | $ | 137.1 | | | $ | 155.6 | | | $ | (18.5 | ) |
| | | | | | | | | | | | | |
For the reasons described above under “Research and Development Expenses” for the years ended December 31, 2007 and 2006, and due to the variability in the costs necessary to develop a product and the uncertainties related to future indications to be studied, the estimated cost and scope of the projects, and our ultimate ability to obtain governmental approval for commercialization, accurate and meaningful estimates of the total cost to bring our product candidates to market are not available. Similarly, we are currently unable to reasonably estimate if our product candidates will generate product revenues and material net cash inflows.
Contract Manufacturing Expenses:
Contract manufacturing expenses decreased to $8.1 million in 2006, compared to $9.6 million in 2005, primarily because we shipped less product to Merck in 2006.
General and Administrative Expenses:
General and administrative expenses increased to $25.9 million in 2006 from $25.4 million in the same period of 2005 as higher legal expenses related to general corporate matters and higher patent-and trademark-related costs were partly offset by lower professional fees for internal audit and other administrative advisory services and lower administrative facility costs.
Other Income and Expense:
In June 2005, we and Procter & Gamble amended our collaboration agreement and agreed that the research activities of both companies under the collaboration agreement were completed. In connection with the amendment, Procter & Gamble made a one-time $5.6 million payment to us, which we recognized as other contract income in 2005. In January 2005, we and sanofi-aventis amended our collaboration agreement to exclude rights to
46
develop and commercialize aflibercept for intraocular delivery to the eye. In connection with the amendment, sanofi-aventis made a one-time $25.0 million payment to us, which we recognized as other contract income in 2005.
Investment income increased to $16.5 million in 2006 from $10.4 million in 2005, due primarily to higher balances of cash and marketable securities (due, in part, to the up-front payment received from Bayer HealthCare in October 2006, as described above, and the receipt of net proceeds from the November 2006 public offering of our Common Stock), as well as higher effective interest rates on investment securities in 2006. Interest expense was $12.0 million in 2006 and 2005. Interest expense is attributable primarily to $200.0 million of convertible notes issued in October 2001, which mature in 2008 and bear interest at 5.5% per annum.
Liquidity and Capital Resources
Since our inception in 1988, we have financed our operations primarily through offerings of our equity securities, a private placement of convertible debt, payments earned under our past and present research and development and contract manufacturing agreements, including our agreements with sanofi-aventis, Bayer HealthCare, and Merck, and investment income.
Years Ended December 31, 2007 and 2006
At December 31, 2007, we had $846.3 million in cash, cash equivalents, restricted cash and marketable securities compared with $522.9 million at December 31, 2006. In connection with our non-exclusive license agreements with AstraZeneca and Astellas, as described above, AstraZeneca and Astellas each made an up-front payment to us of $20.0 million in February and April 2007, respectively. In August 2007, we received a $20.0 million milestone payment from Bayer HealthCare following dosing of the first patient in our Phase 3 study of the VEGF Trap-Eye in wet AMD. In December 2007, we received an $85.0 million upfront payment in connection with our new collaboration with sanofi-aventis to discover, develop, and commercialize fully human monoclonal antibodies. Sanofi-aventis also purchased 12 million newly issued, unregistered shares of our Common Stock in December 2007 for gross proceeds to us of $312.0 million.
Cash Provided by Operations:
Net cash provided by operations was $27.4 million in 2007 and $23.1 million in 2006, and net cash used in operations was $30.3 million in 2005. Our net losses of $105.6 million in 2007, $102.3 million in 2006, and $95.4 million in 2005 included $28.1 million, $18.7 million, and $21.9 million, respectively, of non-cash stock-based employee compensation costs, consisting primarily of Stock Option Expense. Our net losses also included depreciation and amortization of $11.5 million, $14.6 million, and $15.5 million in 2007, 2006, and 2005, respectively, and a $5.9 million non-cash charge in 2007 related to marketable securities which we considered to be other than temporarily impaired in value.
In 2007, end-of-year accounts receivable increased by $10.8 million compared to 2006 due to higher receivable balances related to our collaborations with sanofi-aventis and Bayer HealthCare. Also, prepaid expenses and other assets increased $9.6 million at December 31, 2007 compared to end-of-year 2006 due primarily to higher prepaid clinical trial costs. At December 31, 2007, our deferred revenue balances increased by $89.8 million, compared to end-of-year 2006, due primarily to (i) the $85.0 million up-front payment received from sanofi-aventis, (ii) the $20.0 million milestone payment from Bayer HealthCare which was deemed to be non-substantive and fully deferred, and (iii) the two $20.0 million up-front payments received from each of AstraZeneca and Astellas, all as described above, partly offset by 2007 revenue recognition, principally from these deferred payments and prior year deferred payments from sanofi-aventis and Bayer HealthCare, in our Statement of Operations. Accounts payable, accrued expenses, and other liabilities increased $18.2 million at December 31, 2007 compared to end-of-year 2006 primarily due to a $4.9 million cost-sharing payment due to Bayer Healthcare in connection with the companies’ VEGF Trap-Eye collaboration and higher accruals in 2007 for payroll costs and clinical-related expenses.
In 2006, end-of-year accounts receivable balances decreased by $29.0 million compared to 2005, due to the January 2006 receipt of a $25.0 million up-front payment from sanofi-aventis, which was receivable at December 31, 2005, in connection with an amendment to our aflibercept collaboration to include Japan, and lower amounts due from sanofi aventis for reimbursement of aflibercept development expenses. Also, our deferred revenue balances at December 31, 2006 increased by $60.8 million compared to end-of-year 2005, due primarily to the October 2006 $75.0 million up-front payment from Bayer, as described above, partly offset by 2006 revenue
47
recognition from deferred sanofi-aventis up-front payments. In 2005, our deferred revenue balances increased by $14.5 million compared to 2004, due primarily to the January 2006 $25.0 million up-front payment from sanofi-aventis, which was receivable at December 31, 2005, partly offset by 2005 revenue recognition from deferred sanofi-aventis up-front payments.
The majority of our cash expenditures in 2007, 2006, and 2005 were to fund research and development, primarily related to our clinical programs and, in 2007, our preclinical human monoclonal antibody programs. In 2007, 2006, and 2005, we made two semi-annual interest payments totaling $11.0 million per year on our convertible senior subordinated notes.
Cash Provided by Investing Activities:
Net cash used in investing activities was $85.7 million in 2007 and $155.1 million in 2006, and net cash provided by investing activities was $115.5 million in 2005. In 2007 and 2006, purchases of marketable securities exceeded sales or maturities by $67.3 million and $150.7 million, respectively, whereas in 2005, sales or maturities of marketable securities exceeded purchases by $120.5 million. In addition, capital expenditures in 2007 included the purchase of land and a building in Rensselaer, NY for $9.0 million.
Cash Provided by Financing Activities:
Cash provided by financing activities was $319.4 million in 2007, $185.4 million in 2006, and $4.1 million in 2005. In 2007, sanofi-aventis purchased 12 million newly issued, unregistered shares of our Common Stock for gross proceeds to us of $312.0 million. In 2006, we completed a public offering of 7.6 million shares of our Common Stock and received proceeds, after expenses, of $174.6 million. In addition, proceeds from issuances of Common Stock in connection with exercises of employee stock options were $7.6 million in 2007, $10.4 million in 2006, and $4.1 million in 2005.
Collaborations with the sanofi-aventis Group:
Aflibercept
Under our aflibercept collaboration agreement with sanofi-aventis, as described under “Collaborations” above, agreed upon worldwide aflibercept development expenses incurred by both companies during the term of the agreement, including costs associated with the manufacture of clinical drug supply, will be funded by sanofi-aventis. If the collaboration becomes profitable, we will be obligated to reimburse sanofi-aventis for 50% of these development expenses, including 50% of the $25.0 million payment received in connection with the January 2005 amendment to our collaboration agreement, in accordance with a formula based on the amount of development expenses and our share of the collaboration profits and Japan royalties, or at a faster rate at our option. In addition, if the first commercial sale of an aflibercept product for intraocular delivery to the eye predates the first commercial sale of an aflibercept product under the collaboration by two years, we will begin reimbursing sanofi-aventis for up to $7.5 million of aflibercept development expenses in accordance with a formula until the first commercial aflibercept sale under the collaboration occurs. Since inception of the collaboration agreement through December 31, 2007, we and sanofi-aventis have incurred $306.8 million in agreed upon development expenses related to aflibercept. Currently, multiple clinical studies to evaluate aflibercept as both a single agent and in combination with other therapies in various cancer indications are ongoing, and we and sanofi-aventis plan to initiate additional aflibercept clinical studies in 2008.
Sanofi-aventis funded $38.3 million, $36.4 million, and $33.9 million, respectively, of our aflibercept development costs in 2007, 2006, and 2005, of which $10.5 million, $6.8 million, and $10.5 million, respectively, were included in accounts receivable as of December 31, 2007, 2006, and 2005. In addition, we received up-front payments of $80.0 million in September 2003 and $25.0 million in January 2006 from sanofi-aventis in connection with our collaboration. Both up-front payments were recorded to deferred revenue and are being recognized as contract research and development revenue over the period during which we expect to perform services. In 2007, 2006, and 2005, we recognized $8.8 million, $11.4 million, and $9.5 million of revenue, respectively, related to these up-front payments.
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Sanofi-aventis has the right to terminate the agreement without cause with at least twelve months advance notice. Upon termination of the agreement for any reason, any remaining obligation to reimburse sanofi-aventis for 50% of aflibercept development expenses will terminate and we will retain all rights to aflibercept.
Antibodies
As part of the discovery agreement under our collaboration with sanofi-aventis to discover, develop, and commercialize fully human monoclonal antibodies, as described under “Collaborations” above, sanofi-aventis will fund up to $475.0 million of our research through December 31, 2012, subject to specified funding limits of $75.0 million for the period from the collaboration’s inception through December 31, 2008, and $100.0 million annually in each of the next four years. The discovery agreement will expire on December 31, 2012; however, sanofi-aventis has an option to extend the agreement for up to an additional three years for further antibody development and preclinical activities.
As part of the license agreement under the collaboration, agreed upon worldwide development expenses incurred by both companies during the term of the agreement will be funded by sanofi-aventis, except that following receipt of the first positive Phase 3 trial results for a co-developed drug candidate, subsequent Phase 3 trial-related costs (called Shared Phase 3 Trial Costs) for that drug candidate will be shared 80% by sanofi-aventis and 20% by us. If the collaboration becomes profitable, we will be obligated to reimburse sanofi-aventis for 50% of development expenses that were fully funded by sanofi-aventis (or half of $0.7 million as of December 31, 2007) and 30% of Shared Phase 3 Trial Costs, in accordance with a defined formula based on the amounts of these expenses and our share of the collaboration profits from commercialization of collaboration products. The first therapeutic antibody to enter clinical development under the collaboration is REGN88, which has started clinical trials in rheumatoid arthritis. The second is expected to be a Dll4 antibody, which is currently slated to enter clinical development in mid-2008.
In 2007, sanofi-aventis funded $3.0 million of our expenses under the collaboration’s discovery agreement and $0.7 million of our REGN88 development costs under the license agreement. These amounts were included in accounts receivable as of December 31, 2007. In addition, the $85.0 million up-front payment received from sanofi-aventis in December 2007 was recorded to deferred revenue and is being recognized as contract research and development revenue over the period during which we expect to perform services. In 2007, we recognized $0.9 million related to this up-front payment.
With respect to each antibody product which enters development under the license agreement, sanofi-aventis or we may, by giving twelve months notice, opt-out of further developmentand/or commercialization of the product, in which event the other party retains exclusive rights to continue the developmentand/or commercialization of the product. We may also opt-out of the further development of an antibody product if we give notice to sanofi-aventis within thirty days of the date that sanofi-aventis enters joint development of such antibody product under the license agreement. Each of the discovery agreement and the license agreement contains other termination provisions, including for material breach by the other party and, in the case of the discovery agreement, a termination right for sanofi-aventis under certain circumstances, including if certain minimal criteria for the discovery program are not achieved. Prior to December 31, 2012, sanofi-aventis has the right to terminate the discovery agreement without cause with at least three months advance written notice; however, except under defined circumstances, sanofi-aventis would be obligated to immediately pay to us the full amount of unpaid research funding during the remaining term of the research agreement through December 31, 2012. Upon termination of the collaboration in its entirety, our obligation to reimburse sanofi-aventis for development costs out of any future profits from collaboration products will terminate.
Collaboration with Bayer HealthCare:
Under our collaboration agreement with Bayer HealthCare, as described under “Collaborations” above, agreed upon VEGF Trap-Eye development expenses incurred by both companies in 2007 under a global development plan, were shared as follows: The first $50.0 million was shared equally and we were solely responsible for up to the next $40.0 million. In 2007, cost-sharing between Bayer HealthCare and us of VEGF Trap-Eye development expenses resulted in (i) reimbursement of $14.3 million of our VEGF Trap-Eye development expenses by Bayer HealthCare,
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of which $2.8 million was included in accounts receivable at December 31, 2007, and (ii) payment of $4.9 million of Bayer HealthCare VEGF Trap-Eye development expenses by us, which was included in accrued expenses at December 31, 2007. Neither party was reimbursed for any development expenses that it incurred prior to 2007.
In 2008, agreed upon VEGF Trap-Eye development expenses incurred by both companies under a global development plan will be shared as follows: Up to the first $70.0 million will be shared equally, we are solely responsible for up to the next $30.0 million, and over $100.0 million will be shared equally. In 2009 and thereafter, all development expenses will be shared equally.
If the VEGF Trap-Eye is granted marketing authorization in a major market country outside the United States and the collaboration becomes profitable, we will be obligated to reimburse Bayer HealthCare out of our share of the collaboration profits for 50% of the agreed upon development expenses that Bayer HealthCare has incurred (or half of $25.4 million as of December 31, 2007) in accordance with a formula based on the amount of development expenses that Bayer HealthCare has incurred and our share of the collaboration profits, or at a faster rate at our option. In 2007, we and Bayer HealthCare initiated a Phase 3 study of the VEGF Trap-Eye in wet AMD. A second Phase 3 study of the VEGF Trap-Eye in wet AMD is planned for 2008.
We received a $75.0 million up-front payment in October 2006 and a $20.0 non-substantive milestone payment in August 2007 from Bayer HealthCare in connection with our collaboration. Both payments were recorded to deferred revenue and are being recognized as contract research and development revenue over the period during which we expect to perform services. In 2007, we recognized $15.9 million of revenue related to these deferred payments. We did not recognize revenue in connection with our collaboration with Bayer HealthCare in 2006.
Bayer HealthCare has the right to terminate the agreement without cause with at least six months or twelve months advance notice depending on defined circumstances at the time of termination. In the event of termination of the agreement for any reason, we retain all rights to the VEGF Trap-Eye.
National Institutes of Health Grant:
Under our five-year grant from the NIH, as described under “Other Agreements” above, we are entitled to receive a minimum of $17.9 million over a five-year period, subject to compliance with the grant’s terms and annual funding approvals, and another $1.0 million to optimize our existing C57BL/6 ES cell line and its proprietary growth medium. In 2007 and 2006, we recognized $5.5 million and $0.5 million, respectively, of revenue related to the NIH Grant, of which $1.0 million and $0.5 million, respectively, was receivable at the end of 2007 and 2006. In 2008, we expect to receive funding of approximately $5 million for reimbursement of Regeneron expenses related to the NIH Grant.
License Agreement with AstraZeneca and Astellas:
Under these non-exclusive license agreements, AstraZeneca and Astellas each made a $20.0 million non-refundable, up-front payment to us in February and April 2007, respectively. AstraZeneca and Astellas are each required to make up to five additional annual payments of $20.0 million, subject to each licensee’s ability to terminate its license agreement with us after making the first three additional payments or earlier if the technology does not meet minimum performance criteria.
Severance Costs:
In September 2005, we announced plans to reduce our workforce by approximately 165 employees in connection with narrowing the focus of our research and development efforts, substantial improvements in manufacturing productivity, the September 2005 expiration of our collaboration with Procter & Gamble, and the completion of contract manufacturing for Merck in late 2006. The majority of the headcount reduction occurred in the fourth quarter of 2005. The remaining headcount reductions occurred in 2006 as we completed activities related to contract manufacturing for Merck.
Costs associated with the workforce reduction were comprised principally of severance payments and related payroll taxes, employee benefits, and outplacement services. Termination costs related to 2005 workforce reductions were expensed in the fourth quarter of 2005, and included $0.2 million of non-cash expenses. Estimated
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termination costs associated with the workforce reduction in 2006 were measured in October 2005 and expensed ratably over the expected service period of the affected employees in accordance with SFAS 146,Accounting for Costs Associated with Exit or Disposal Activities. Total costs associated with the 2005 and 2006 workforce reductions were $2.6 million, of which $2.2 million was charged to expense in the fourth quarter of 2005 and $0.4 million was charged to expense in 2006.
Convertible Debt:
In 2001, we issued $200.0 million aggregate principal amount of convertible senior subordinated notes in a private placement and received proceeds, after deducting the initial purchasers’ discount and out-of pocket expenses, of $192.7 million. The notes bear interest at 5.5% per annum, payable semi-annually, and mature in 2008. The notes are convertible into shares of our Common Stock at a conversion price of approximately $30.25 per share, subject to adjustment in certain circumstances. If the price per share of our Common Stock is above $30.25 at maturity, we would expect the notes would be converted into shares of Common Stock. Otherwise, we will be required to repay the $200.0 million aggregate principal amount of the notes or refinance the notes prior to maturity; however, we can provide no assurance that we will be able to successfully arrange such refinancing.
New Operating Lease — Tarrytown, New York Facilities:
We currently lease approximately 232,000 square feet of laboratory and office facilities in Tarrytown, New York under operating lease agreements. In December 2006, we entered into a new operating lease agreement for approximately 221,000 square feet of laboratory and office space at our current Tarrytown location. The new lease includes approximately 27,000 square feet that we currently occupy (our retained facilities) and approximately 194,000 square feet to be located in new facilities that are under construction and expected to be completed inmid-2009. In 2007, we amended the December 2006 operating lease agreement to increase the amount of new space we will lease from approximately 194,000 square feet to approximately 230,000 square feet, for an amended total under the new lease of approximately 257,000 square feet. The term of the lease is now expected to commence in mid-2008 and will expire approximately 16 years later. Under the new lease we also have various options and rights on additional space at the Tarrytown site, and will continue to lease our present facilities until the new facilities are ready for occupancy. In addition, the lease contains three renewal options to extend the term of the lease by five years each and early termination options for our retained facilities only. The lease provides for monthly payments over the term of the lease related to our retained facilities, the costs of construction and tenant improvements for our new facilities, and additional charges for utilities, taxes, and operating expenses.
In connection with the new lease agreement, in December 2006, we issued a letter of credit in the amount of $1.6 million to our landlord, which is collateralized by a $1.6 million bank certificate of deposit.
Capital Expenditures:
Our additions to property, plant, and equipment totaled $19.6 million in 2007, $3.3 million in 2006, and $4.7 million in 2005. In 2008, we expect to incur approximately $55 to $65 million in capital expenditures primarily in connection with expanding our manufacturing capacity at our Rensselaer, New York facilities and tenant improvements and related costs in connection with our new Tarrytown operating lease, as described above. We expect that approximately $30 million of projected 2008 Tarrytown tenant improvement costs will be reimbursed by our landlord in connection with our new operating lease.
Funding Requirements:
Our total expenses for research and development from inception through December 31, 2007 have been approximately $1,352 million. We have entered into various agreements related to our activities to develop and commercialize product candidates and utilize our technology platforms, including collaboration agreements, such as those with sanofi-aventis and Bayer HealthCare, and agreements to use ourVelocigene technology platform. We incurred expenses associated with these agreements, which include an allocable portion of general and administrative costs, of $108.2 million, $43.4 million, and $42.2 million in 2007, 2006, and 2005, respectively.
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We expect to continue to incur substantial funding requirements primarily for research and development activities (including preclinical and clinical testing). Before taking into account reimbursements from collaborators, we currently anticipate that approximately55-65% of our expenditures for 2008 will be directed toward the preclinical and clinical development of product candidates, including ARCALYSTtm, aflibercept, VEGF Trap-Eye, and monoclonal antibodies (including REGN88 and the Dll4 antibody); approximately15-20% of our expenditures for 2008 will be applied to our basic research and early preclinical activities and the remainder of our expenditures for 2008 will be used for the continued development of our novel technology platforms, capital expenditures, and general corporate purposes.
In connection with our funding requirements, the following table summarizes our contractual obligations as of December 31, 2007. These obligations and commitments assume non-termination of agreements and represent expected payments based on current operating forecasts, which are subject to change:
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | Payments Due by Period | |
| | | | | | Less than
| | | 1 to 3
| | | 3 to 5
| | | Greater than
| |
| | | Total | | | one year | | | years | | | years | | | 5 years | |
| | | (In millions) | |
| |
Convertible senior subordinated notes
payable (1) | | $ | 211.0 | | | $ | 211.0 | | | | | | | | | | | | | |
| Operating leases (2) | | | 253.0 | | | | 5.1 | | | $ | 24.6 | | | $ | 29.7 | | | $ | 193.6 | |
| Purchase obligations (3) | | | 125.9 | | | | 60.4 | | | | 65.5 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Total contractual obligations | | $ | 589.9 | | | $ | 276.5 | | | $ | 90.1 | | | $ | 29.7 | | | $ | 193.6 | |
| | | | | | | | | | | | | | | | | | | | | |
| | |
| (1) | | Includes amounts representing interest. |
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| (2) | | Includes projected obligations based, in part, upon budgeted construction and tenant improvement costs related to our new operating lease for facilities under construction in Tarrytown, New York, as described above. Excludes future contingent rental costs for utilities, real estate taxes, and operating expenses. In 2007, these costs were $8.8 million. |
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| (3) | | Purchase obligations primarily relate to (i) research and development commitments, including those related to clinical trials, (ii) capital expenditures for equipment acquisitions, and (iii) license payments. Our obligation to pay certain of these amounts may increase or be reduced based on certain future events. Open purchase orders for the acquisition of goods and services in the ordinary course of business are excluded from the table above. |
Under our collaboration with Bayer HealthCare, over the next several years we and Bayer HealthCare will share agreed upon VEGF Trap-Eye development expenses incurred by both companies, under a global development plan, as described above. In addition, under our collaboration agreements with sanofi-aventis and Bayer HealthCare, if the applicable collaboration becomes profitable, we have contingent contractual obligations to reimburse sanofi- aventis and Bayer HealthCare for a defined percentage (generally 50%) ofagreed-upon development expenses incurred by sanofi-aventis and Bayer HealthCare, respectively. Profitability under each collaboration will be measured by calculating net sales lessagreed-upon expenses. These reimbursements would be deducted from our share of the collaboration profits (and, for our aflibercept collaboration with sanofi-aventis, royalties on product sales in Japan) otherwise payable to us unless we agree to reimburse these expenses at a faster rate at our option. Given the uncertainties related to drug development (including the development of aflibercept and co-developed antibody candidates in collaboration with sanofi-aventis and the VEGF Trap-Eye in collaboration with Bayer HealthCare) such as the variability in the length of time necessary to develop a product candidate and the ultimate ability to obtain governmental approval for commercialization, we are currently unable to reliably estimate if our collaborations with sanofi-aventis and Bayer HealthCare will become profitable.
The amount we need to fund operations will depend on various factors, including the status of competitive products, the success of our research and development programs, the potential future need to expand our professional and support staff and facilities, the status of patents and other intellectual property rights, the delay or failure of a clinical trial of any of our potential drug candidates, and the continuation, extent, and success of our collaborations with sanofi-aventis and Bayer HealthCare. Clinical trial costs are dependent, among other things, on the size and duration of trials, fees charged for services provided by clinical trial investigators and other third
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parties, the costs for manufacturing the product candidate for use in the trials, and for supplies, laboratory tests, and other expenses. The amount of funding that will be required for our clinical programs depends upon the results of our research and preclinical programs and early-stage clinical trials, regulatory requirements, the duration and results of clinical trials underway and of additional clinical trials that we decide to initiate, and the various factors that affect the cost of each trial as described above. In the future, if we are able to successfully develop, market, and sell certain of our product candidates, we may be required to pay royalties or otherwise share the profits generated on such sales in connection with our collaboration and licensing agreements.
We expect that expenses related to the filing, prosecution, defense, and enforcement of patent and other intellectual property claims will continue to be substantial as a result of patent filings and prosecutions in the United States and foreign countries.
We believe that our existing capital resources, including funding we are entitled to receive under our collaboration agreements, will enable us to meet operating needs through at least 2012. However, this is a forward-looking statement based on our current operating plan, and there may be a change in projected revenues or expenses that would lead to our capital being consumed significantly before such time. If there is insufficient capital to fund all of our planned operations and activities, we believe we would prioritize available capital to fund preclinical and clinical development of our product candidates. Other than the $1.6 million letter of credit issued to our landlord in connection with our new operating lease for facilities in Tarrytown, New York, as described above, we have no off-balance sheet arrangements. In addition, we do not guarantee the obligations of any other entity. As of December 31, 2007, we had no established banking arrangements through which we could obtain short-term financing or a line of credit. In the event we need additional financing for the operation of our business, we will consider collaborative arrangements and additional public or private financing, including additional equity financing. Factors influencing the availability of additional financing include our progress in product development, investor perception of our prospects, and the general condition of the financial markets. We may not be able to secure the necessary funding through new collaborative arrangements or additional public or private offerings. If we cannot raise adequate funds to satisfy our capital requirements, we may have to delay, scale-back, or eliminate certain of our research and development activities or future operations. This could materially harm our business.
Critical Accounting Policies and Significant Judgments and Estimates
Revenue Recognition:
We recognize contract research and development revenue and research progress payments in accordance with Staff Accounting Bulletin No. 104,Revenue Recognition(SAB 104) and Emerging Issues Task Force00-21,Accounting for Revenue Arrangements with Multiple Deliverables(EITF 00-21). We earn contract research and development revenue and research progress payments in connection with collaboration and other agreements to develop and commercialize product candidates and utilize our technology platforms. The terms of these agreements typically include non-refundable up-front licensing payments, research progress (milestone) payments, and payments for development activities. Non-refundable up-front license payments, where continuing involvement is required of us, are deferred and recognized over the related performance period. We estimate our performance period based on the specific terms of each agreement, and adjust the performance periods, if appropriate, based on the applicable facts and circumstances. Payments which are based on achieving a specific substantive performance milestone, involving a degree of risk, are recognized as revenue when the milestone is achieved and the related payment is due and non-refundable, provided there is no future service obligation associated with that milestone. Substantive performance milestones typically consist of significant achievements in the development life-cycle of the related product candidate, such as completion of clinical trials, filing for approval with regulatory agencies, and approvals by regulatory agencies. In determining whether a payment is deemed to be a substantive performance milestone, we take into consideration (i) the nature, timing, and value of significant achievements in the development life-cycle of the related development product candidate, (ii) the relative level of effort required to achieve the milestone, and (iii) the relative level of risk in achieving the milestone, taking into account the high degree of uncertainty in successfully advancing product candidates in a drug development program and in ultimately attaining an approved drug product. Payments for achieving milestones which are not considered substantive are accounted for as license payments and recognized over the related performance period.
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We enter into collaboration agreements that include varying arrangements regarding which parties perform and bear the costs of research and development activities. We may share the costs of research and development activities with our collaborator, such as in our VEGF Trap-Eye collaboration with Bayer HealthCare, or we may be reimbursed for all or a significant portion of the costs of our research and development activities, such as in our aflibercept and antibody collaborations with sanofi-aventis. We record our internal and third-party development costs associated with these collaborations as research and development expenses. When we are entitled to reimbursement of all or a portion of the research and development expenses that we incur under a collaboration, we record those reimbursable amounts as contract research and development revenue proportionately as we recognize our expenses. If the collaboration is a cost-sharing arrangement in which both we and our collaborator perform development work and share costs, in periods when our collaborator incurs development expenses that benefit the collaboration and Regeneron, we also recognize, as additional research and development expense, the portion of the collaborator’s development expenses that we are obligated to reimburse. In addition, we record revenue in connection with a government research grant using a proportional performance model as we incur expenses related to the grant, subject to the grant’s terms and annual funding approvals.
In connection with non-refundable licensing payments, our performance period estimates are principally based on projections of the scope, progress, and results of our research and development activities. Due to the variability in the scope of activities and length of time necessary to develop a drug product, changes to development plans as programs progress, and uncertainty in the ultimate requirements to obtain governmental approval for commercialization, revisions to performance period estimates are possible, and could result in material changes to the amount of revenue recognized each year in the future. In addition, performance periods may be extended if development programs encounter delays or we and our collaborators decide to expand our clinical plans for a drug candidate into additional disease indications. Also, if a collaborator terminates an agreement in accordance with the terms of the agreement, we would recognize any unamortized remainder of an up-front or previously deferred payment at the time of the termination. For the year ended December 31, 2006, changes in estimates of our performance periods, including an extension of our estimated performance period for our aflibercept collaboration with sanofi-aventis, did not have a material impact on contract research and development revenue that we recognized. For the year ended December 31, 2007, we recognized $2.6 million less in contract research and development revenue, compared to amounts recognized in 2006, in connection with $105.0 million of non-refundable up-front payments previously received from sanofi-aventis pursuant to the companies’ aflibercept collaboration, due to an extension of our estimated performance period.
Clinical Trial Expenses:
Clinical trial costs are a significant component of research and development expenses and include costs associated with third-party contractors. We outsource a substantial portion of our clinical trial activities, utilizing external entities such as contract research organizations, independent clinical investigators, and other third-party service providers to assist us with the execution of our clinical studies. For each clinical trial that we conduct, certain clinical trial costs are expensed immediately, while others are expensed over time based on the expected total number of patients in the trial, the rate at which patients enter the trial, and the period over which clinical investigators or contract research organizations are expected to provide services.
Clinical activities which relate principally to clinical sites and other administrative functions to manage our clinical trials are performed primarily by contract research organizations (CROs). CROs typically perform most of thestart-up activities for our trials, including document preparation, site identification, screening and preparation, pre-study visits, training, and program management. On a budgeted basis, thesestart-up costs are typically 10% to 15% of the total contract value. On an actual basis, this percentage range can be significantly wider, as many of our contracts with CROs are either expanded or reduced in scope compared to the original budget, whilestart-up costs for the particular trial may not change materially. Thesestart-up costs usually occur within a few months after the contract has been executed and are event driven in nature. The remaining activities and related costs, such as patient monitoring and administration, generally occur ratably throughout the life of the individual contract or study. In the event of early termination of a clinical trial, we accrue and recognize expenses in an amount based on our estimate of the remaining non-cancelable obligations associated with the winding down of the clinical trialand/or penalties.
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For clinical study sites, where payments are made periodically on a per-patient basis to the institutions performing the clinical study, we accrue on an estimatedcost-per-patient basis an expense based on subject enrollment and activity in each quarter. The amount of clinical study expense recognized in a quarter may vary from period to period based on the duration and progress of the study, the activities to be performed by the sites each quarter, the required level of patient enrollment, the rate at which patients actually enroll in and drop-out of the clinical study, and the number of sites involved in the study. Clinical trials that bear the greatest risk of change in estimates are typically those that have a significant number of sites, require a large number of patients, have complex patient screening requirements, and span multiple years. During the course of a trial, we adjust our rate of clinical expense recognition if actual results differ from our estimates. Our estimates and assumptions for clinical expense recognition could differ significantly from our actual results, which could cause material increases or decreases in research and development expenses in future periods when the actual results become known. No material adjustments to our past clinical trial accrual estimates were made during the years ended December 31, 2007 or 2006.
Depreciation of Property, Plant, and Equipment:
Property, plant, and equipment are stated at cost. Depreciation is provided on a straight-line basis over the estimated useful lives of the assets. Expenditures for maintenance and repairs which do not materially extend the useful lives of the assets are charged to expense as incurred. The cost and accumulated depreciation or amortization of assets retired or sold are removed from the respective accounts, and any gain or loss is recognized in operations. The estimated useful lives of property, plant, and equipment are as follows:
| | |
| Building and improvements | | 7-30 years |
| Laboratory and computer equipment | | 3-5 years |
| Furniture and fixtures | | 5 years |
Leasehold improvements are amortized over the shorter of the lease term or the estimated useful lives of the assets. Costs of construction of certain long-lived assets include capitalized interest which is amortized over the estimated useful life of the related asset.
In some situations, the life of the asset may be extended or shortened if circumstances arise that would lead us to believe that the estimated life of the asset has changed. The life of leasehold improvements may change based on the extension of lease contracts with our landlords. Changes in the estimated lives of assets will result in an increase or decrease in the amount of depreciation recognized in future periods.
Stock-based Employee Compensation:
Effective January 1, 2005, we adopted the fair value based method of accounting for stock-based employee compensation under the provisions of SFAS 123,Accounting for Stock-Based Compensation, using the modified prospective method as described in SFAS 148,Accounting for Stock-Based Compensation — Transition and Disclosure. As a result, in 2005, we recognized compensation expense, in an amount equal to the fair value of share-based payments (including stock option awards) on their date of grant, over the vesting period of the awards using graded vesting, which is an accelerated expense recognition method. Under the modified prospective method, compensation expense for Regeneron is recognized for (a) all share based payments granted on or after January 1, 2005 and (b) all awards granted to employees prior to January 1, 2005 that were unvested on that date. Prior to the adoption of the fair value method, we accounted for stock-based compensation to employees under the intrinsic value method of accounting set forth in APB 25,Accounting for Stock Issued to Employees, and related interpretations. Therefore, compensation expense related to employee stock options was not reflected in operating expenses in any period prior to the first quarter of 2005 and prior period operating results have not been restated.
Effective January 1, 2006, we adopted the provisions of SFAS 123R,Share-Based Payment, which is a revision of SFAS 123. SFAS 123R focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions, and requires the recognition of compensation expense in an amount equal to the fair value of the share-based payment (including stock options and restricted stock) issued to employees. SFAS 123R requires companies to estimate the number of awards that are expected to be forfeited at the
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time of grant and to revise this estimate, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Effective January 1, 2005, and prior to our adoption of SFAS 123R, we recognized the effect of forfeitures in stock-based compensation cost in the period when they occurred, in accordance with SFAS 123. Upon adoption of SFAS 123R effective January 1, 2006, we were required to record a cumulative effect adjustment to reflect the effect of estimated forfeitures related to outstanding awards that were not expected to vest as of the SFAS 123R adoption date. This adjustment reduced our loss by $0.8 million and is included in our operating results for the year ended December 31, 2006 as a cumulative-effect adjustment of a change in accounting principle.
We use the Black-Scholes model to estimate the fair value of each option granted under the Regeneron Pharmaceuticals, Inc. 2000 Long-Term Incentive Plan. Using this model, fair value is calculated based on assumptions with respect to (i) expected volatility of our Common Stock price, (ii) the periods of time over which employees and members of our board of directors are expected to hold their options prior to exercise (expected lives), (iii) expected dividend yield on our Common Stock, and (iv) risk-free interest rates, which are based on quoted U.S. Treasury rates for securities with maturities approximating the options’ expected lives. Expected volatility has been estimated based on actual movements in our stock price over the most recent historical periods equivalent to the options’ expected lives. Expected lives are principally based on our limited historical exercise experience with option grants with similar exercise prices. The expected dividend yield is zero as we have never paid dividends and do not currently anticipate paying any in the foreseeable future.
Future Impact of Recently Issued Accounting Standards
In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS 157,Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, however on December 14, 2007, the FASB issued a proposed staff position (FSPFAS 157-b) which would delay the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities to fiscal years beginning after November 15, 2008. We are required to adopt SFAS 157 as it relates to our financial assets and financial liabilities effective for the fiscal year beginning January 1, 2008, and as it relates to our nonfinancial assets and nonfinancial liabilities for the fiscal year beginning January 1, 2009. Our management does not anticipate that the adoption of SFAS 157 will have a material impact on our financial statements.
In February 2007, the FASB issued SFAS 159,The Fair Value Option for Financial Assets and Financial Liabilities. SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. We are required to adopt SFAS 159 effective for the fiscal year beginning January 1, 2008. Our management does not anticipate that the adoption of SFAS 159 will have a material impact on our financial statements.
In June 2007, the Emerging Issues Task Force issued StatementNo. 07-3,Accounting for Non-refundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities(EITF 07-3).EITF 07-3 addresses how entities involved in research and development activities should account for the non-refundable portion of an advance payment made for future research and development activities and requires that such payments be deferred and capitalized, and recognized as an expense when the goods are delivered or the related services are performed.EITF 07-3 is effective for fiscal years beginning after December 15, 2007, including interim periods within those fiscal years. We are required to adoptEITF 07-3 effective for the fiscal year beginning January 1, 2008. Our management does not anticipate that the adoption ofEITF 07-3 will have a material impact on our financial statements.
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| Item 7A. | Quantitative and Qualitative Disclosure About Market Risk |
Interest Rate Risk:
Our earnings and cash flows are subject to fluctuations due to changes in interest rates primarily from our investment of available cash balances in investment grade corporate, asset-backed, and U.S. government securities.
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We do not believe we are materially exposed to changes in interest rates. Under our current policies we do not use interest rate derivative instruments to manage exposure to interest rate changes. We estimated that a one percent change in interest rates would result in an approximately $1.4a $1.9 million changeand $1.7 million decrease in the fair market value of our investment portfolio at both December 31, 20042007 and 2003.2006, respectively. The increase in the potential impact of an interest rate change at December 31, 2007, compared to December 31, 2006, is due primarily to slight increases in our investment portfolio’s duration to maturity at the end of 2007 versus the end of 2006.
Credit Quality Risk:
We have an investment policy that includes guidelines on acceptable investment securities, minimum credit quality, maturity parameters, and concentration and diversification. Nonetheless, deterioration of the credit quality of an investment security subsequent to purchase may subject us to the risk of not being able to recover the full principal value of the security. In 2007, we recognized a $5.9 million charge related to marketable securities which we considered to be other than temporarily impaired in value.
| |
| Item 8. | Financial Statements and Supplementary Data |
The financial statements required by this Item are included on pages F-1 through F-35F-38 of this report. The supplementary financial information required by this Item is included at page F-35pages F-37 and F-38 of this report.
| |
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
Not applicable.
| |
| Item 9A. | Controls and Procedures |
| |
| Evaluation of Disclosure Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
The Company’s management, with the participation of our chief executive officer and chief financial officer, conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as such term is defined inRules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)), as of the end of the period covered by this Annual Report onForm 10-K. Based on this
42
evaluation, our chief executive officer and chief financial officer each concluded that, as of the end of such period, our disclosure controls and procedures were effective in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported on a timely basis, and is accumulated and communicated to the Company’s management, including the Company’s chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
| |
| Management’s Report on Internal Control over Financial Reporting |
Management Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and15d-15(f) under the Exchange Act. Our management conducted an evaluation of the effectiveness of our internal control over financial reporting using the framework inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation our management has concluded that our internal control over financial reporting was effective as of December 31, 2004. PricewaterhouseCoopers LLP, our independent registered public accounting firm, has issued a report on management’s assessment and the2007. The effectiveness of our internal control over financial reporting as of December 31, 2004,2007 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which report is included herein at page F-2.appears herein.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
| |
| Changes in Internal Control over Financial Reporting |
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting (as such term is defined inRules 13a-15(f) and15d-15(f) under the Exchange Act) during the quarter ended December 31, 20042007 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
57
Our management, including our chief executive officer and chief financial officer, does not expect that our disclosure controls and procedures or internal controls over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the system are met and cannot detect all deviations. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud or deviations, if any, within the company have been detected. Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
| |
| Item 9B. | Other Information |
None
PART III
| |
| Item 10. | Directors and Executive Officers of the Registrantand Corporate Governance |
The information required by this item (other than the information set forth in the next paragraph in this Item 10) will be included under the captions “Election of Directors,” “Board Committees and Meetings,” “Executive Officers of the Company,” and “Section 16(a) Beneficial Ownership Reporting Compliance,” in our definitive proxy statement with respect to our 20052008 Annual Meeting of Shareholders to be filed with the SEC, and is incorporated herein by reference.
We have adopted a code of business conduct and ethics that applies to our officers, directors and employees. The full text of our code of business conduct and ethics can be found on the Company’s website(http://www.regn.com) under the Investor Relations heading.
| |
| Item 11. | Executive Compensation |
The information called for by this item will be included under the captions “Compensation Committee Report,” “Compensation Committee Interlocks and Insider Participation,” “Executive Compensation” and “Compensation of Directors” in our definitive proxy statement with respect to our 20052008 Annual Meeting of Shareholders to be filed with the SEC, and is incorporated herein by reference.
43
| |
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
The information called for by this item will be included under the captions “Equity Compensation Plan Information”, “Security Ownership of Management,”Management” and “Stock Ownership of Certain Beneficial Owners”, and “Executive Compensation — Equity Compensation Plan Information”, in our definitive proxy statement with respect to our 20052008 Annual Meeting of Shareholders to be filed with the SEC, and is incorporated herein by reference.
| |
| Item 13. | Certain Relationships and Related Transactions, and Director Independence |
The information called forrequired by this item will be included under the caption “Certain Relationshipscaptions “Elections of Directors” and “Review of Transactions with Related Transactions”Persons” in our definitive proxy statement with respect to our 20052008 Annual Meeting of Shareholders to be filed with the SEC, and is incorporated herein by reference.
| |
| Item 14. | Principal Accountant Fees and Services |
The information called for by this item will be included under the caption “Information about Fees Paid to Independent Registered Public Accounting Firm” in our definitive proxy statement with respect to our 20052008 Annual Meeting of Shareholders to be filed with the SEC, and is incorporated herein by reference.
PART IV
| |
| Item 15. | Exhibits and Financial Statement Schedules |
(a) 1. Financial Statements
58
The financials statements filed as part of this report are listed on the Index to Financial Statements onpage F-1.
2. Financial Statement Schedules
All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted.
3. Exhibits
| | | | | | | | | |
| Exhibit | | | |
| Number | | | Description |
| | | | |
| | 3 | .1 | | (a) | | — | | Restated Certificate of Incorporation of Regeneron Pharmaceuticals, Inc. as of June 21, 1991. |
| | 3 | .1.1 | | (b) | | — | | Certificate of Amendment of the Restated Certificate of Incorporation of Regeneron Pharmaceuticals, Inc., as of October 18, 1996. |
| | 3 | .1.2 | | (c) | | — | | Certificate of Amendment of the Certificate of Incorporation of Regeneron Pharmaceuticals, Inc., as of December 17, 2001. |
| | 3 | .2 | | | | — | | By-Laws of the Company, currently in effect (amended through November 12, 2004). |
| | 10 | .1 | | (d) | | — | | 1990 Amended and Restated Long-Term Incentive Plan. |
| | 10 | .2 | | (e) | | — | | 2000 Long-Term Incentive Plan. |
| | 10 | .3.1 | | (f) | | — | | Amendment No. 1 to 2000 Long-Term Incentive Plan, effective as of June 14, 2002. |
| | 10 | .3.2 | | (f) | | — | | Amendment No. 2 to 2000 Long-Term Incentive Plan, effective as of December 20, 2002. |
| | 10 | .3.3 | | (g) | | — | | Amendment No. 3 to 2000 Long-term Incentive Plan, effective as of June 14, 2004. |
| | 10 | .3.4 | | (h) | | — | | Amendment No. 4 to 2000 Long-term Incentive Plan, effective as of November 15, 2004. |
| | 10 | .3.5 | | (i) | | — | | Form of option agreement and related notice of grant for use in connection with the grant of options to the Registrant’s non-employee directors and named executive officers. |
| | 10 | .3.6 | | (i) | | — | | Form of option agreement and related notice of grant for use in connection with the grant of options to the Registrant’s executive officers other than the named executive officers. |
| | | | | | | | | |
Exhibit
| | |
Number | | Description |
| |
| | 3 | .1 | | | | — | | Restated Certificate of Incorporation, filed February 11, 2008 with the New York Secretary of State. |
| | 3 | .2 | | (a) | | — | | By-Laws of the Company, currently in effect (amended through November 9, 2007). |
| | 10 | .1 | | (b) | | — | | 1990 Amended and Restated Long-Term Incentive Plan. |
| | 10 | .2 | | (c) | | — | | 2000 Long-Term Incentive Plan. |
| | 10 | .3.1 | | (d) | | — | | Amendment No. 1 to 2000 Long-Term Incentive Plan, effective as of June 14, 2002. |
| | 10 | .3.2 | | (d) | | — | | Amendment No. 2 to 2000 Long-Term Incentive Plan, effective as of December 20, 2002. |
| | 10 | .3.3 | | (e) | | — | | Amendment No. 3 to 2000 Long-term Incentive Plan, effective as of June 14, 2004. |
| | 10 | .3.4 | | (f) | | — | | Amendment No. 4 to 2000 Long-term Incentive Plan, effective as of November 15, 2004. |
| | 10 | .3.5 | | (g) | | — | | Form of option agreement and related notice of grant for use in connection with the grant of options to the Registrant’s non-employee directors and named executive officers. |
| | 10 | .3.6 | | (g) | | — | | Form of option agreement and related notice of grant for use in connection with the grant of options to the Registrant’s executive officers other than the named executive officers. |
| | 10 | .3.7 | | (h) | | — | | Form of restricted stock award agreement and related notice of grant for use in connection with the grant of restricted stock awards to the Registrant’s executive officers. |
| | 10 | .4 | | (d) | | — | | Employment Agreement, dated as of December 20, 2002, between the Company and Leonard S. Schleifer, M.D., Ph.D. |
| | 10 | .5* | | (i) | | — | | Employment Agreement, dated as of December 31, 1998, between the Company and P. Roy Vagelos, M.D. |
| | 10 | .6 | | (j) | | — | | Regeneron Pharmaceuticals, Inc. Change in Control Severance Plan, effective as of February 1, 2006. |
| | 10 | .7 | | (k) | | — | | Indenture, dated as of October 17, 2001, between Regeneron Pharmaceuticals, Inc. and American Stock Transfer & Trust Company, as trustee. |
| | 10 | .8 | | (k) | | — | | Registration Rights Agreement, dated as of October 17, 2001, among Regeneron Pharmaceuticals, Inc., Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, and Robertson Stephens, Inc. |
| | 10 | .9* | | (l) | | — | | IL-1 License Agreement, dated June 26, 2002, by and among the Company, Immunex Corporation, and Amgen Inc. |
| | 10 | .10* | | (m) | | — | | Collaboration, License and Option Agreement, dated as of March 28, 2003, by and between Novartis Pharma AG, Novartis Pharmaceuticals Corporation, and the Company. |
| | 10 | .11* | | (n) | | — | | Collaboration Agreement, dated as of September 5, 2003, by and between Aventis Pharmaceuticals Inc. and Regeneron Pharmaceuticals, Inc. |
| | 10 | .11.1* | | (i) | | — | | Amendment No. 1 to Collaboration Agreement, by and between Aventis Pharmaceuticals Inc. and Regeneron Pharmaceuticals, Inc., effective as of December 31, 2004. |
| | 10 | .11.2 | | (o) | | — | | Amendment No. 2 to Collaboration Agreement, by and between Aventis Pharmaceuticals Inc. and Regeneron Pharmaceuticals, Inc., effective as of January 7, 2005. |
| | 10 | .11.3* | | (p) | | — | | Amendment No. 3 to Collaboration Agreement, by and between Aventis Pharmaceuticals Inc. and Regeneron Pharmaceuticals, Inc., effective as of December 21, 2005. |
| | 10 | .11.4* | | (p) | | — | | Amendment No. 4 to Collaboration Agreement, by and between sanofi-aventis U.S., LLC (successor in interest to Aventis Pharmaceuticals, Inc.) and Regeneron Pharmaceuticals, Inc., effective as of January 31, 2006. |
59
44
| | | | | | | | | |
| Exhibit | | | |
| Number | | | Description |
| | | | |
| | 10 | .3.7 | | (i) | | — | | Form of restricted stock award agreement and related notice of grant for use in connection with the grant of restricted stock awards to the Registrant’s executive officers. |
| | 10 | .4 | | (j)* | | — | | Manufacturing Agreement dated as of September 18, 1995, between the Company and Merck & Co., Inc. |
| | 10 | .4.1* | | | | — | | Amendment No. 1 to the Manufacturing Agreement between the Company and Merck & Co., Inc., effective as of September 18, 1995. |
| | 10 | .4.2* | | | | — | | Amendment No. 2 to the Manufacturing Agreement between the Company and Merck & Co. Inc,, effective as of October 24, 1996. |
| | 10 | .4.3* | | | | — | | Amendment No. 3 to the Manufacturing Agreement between the Company and Merck & Co., Inc., effective as of December 9, 1999. |
| | 10 | .4.4* | | | | — | | Amendment No. 4 to the Manufacturing Agreement between the Company and Merck & Co., Inc., effective as of July 18, 2002. |
| | 10 | .4.5* | | | | — | | Amendment No. 5 to the Manufacturing Agreement between the Company and Merck & Co., Inc., effective as of January 1, 2005. |
| | 10 | .5 | | (k) | | — | | Rights Agreement, dated as of September 20, 1996, between Regeneron Pharmaceuticals, Inc. and Chase Mellon Shareholder Services LLC, as Rights Agent, including the form of Rights Certificate as Exhibit B thereto. |
| | 10 | .6 | | (f) | | — | | Employment Agreement, dated as of December 20, 2002, between the Company and Leonard S. Schleifer, M.D., Ph.D. |
| | 10 | .7* | | | | — | | Employment Agreement, dated as of December 31, 1998, between the Company and P. Roy Vagelos, M.D. |
| | 10 | .8 | | (l) | | — | | Indenture, dated as of October 17, 2001, between Regeneron Pharmaceuticals, Inc. and American Stock Transfer & Trust Company, as trustee. |
| | 10 | .9 | | (l) | | — | | Registration Rights Agreement, dated as of October 17, 2001, among Regeneron Pharmaceuticals, Inc., Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, and Robertson Stephens, Inc. |
| | 10 | .10 | | (m)* | | — | | Focused Collaboration Agreement, dated as of December 31, 2000, by and between the Company and The Procter & Gamble Company. |
| | 10 | .11 | | (m)* | | — | | IL-1 License Agreement, dated June 26, 2002, by and among the Company, Immunex Corporation, and Amgen Inc. |
| | 10 | .12 | | (n)* | | — | | Collaboration, License and Option Agreement, dated as of March 28, 2003, by and between Novartis Pharma AG, Novartis Pharmaceuticals Corporation, and the Company. |
| | 10 | .13 | | (n)* | | — | | Stock Purchase Agreement, dates as of March 28, 2003, by and between Novartis Pharma AG and the Company. |
| | 10 | .14 | | (n) | | — | | Registration Rights Agreement, dates as of March 28, 2003, by and between Novartis Pharma AG and the Company. |
| | 10 | .15 | | (o)* | | — | | Collaboration Agreement, dates as of September 5, 2003, by and between Aventis Pharmaceuticals Inc. and Regeneron Pharmaceuticals, Inc. |
| | 10 | .15.1* | | | | — | | Amendment No. 1 to Collaboration Agreement, by and between Aventis Pharmaceuticals, Inc. and Regeneron Pharmaceuticals, Inc., effective as of December 31, 2004. |
| | 10 | .15.2 | | (p) | | | | Amendment No. 2 to Collaboration Agreement, by and between Aventis Pharmaceuticals, Inc. and Regeneron Pharmaceuticals, Inc., effective as of January 7, 2005. |
| | 10 | .16 | | (o) | | — | | Stock Purchase Agreement, dates as of September 5, 2003, by and between Aventis Pharmaceuticals Inc. and Regeneron Pharmaceuticals, Inc. |
| | 10 | .17 | | (o)* | | — | | Non-Exclusive Patent License Agreement, effective as of August 18, 2003, by and between Merck & Co., Inc. and Regeneron Pharmaceuticals, Inc. |
| | 12 | .1 | | | | — | | Statement re: computation of ratio of earnings to combined fixed charges of Regeneron Pharmaceuticals, Inc. |
45
| | | | | | | | | |
| Exhibit | | | |
| Number | | | Description |
| | | | |
| | 18 | .1 | | (o) | | — | | Independent Accountant’s Preferability Letter Regarding a Change in Accounting Principle. |
| | 23 | .1 | | | | — | | Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm. |
| | 31 | .1 | | | | — | | Certification of CEO pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934. |
| | 31 | .2 | | | | — | | Certification of CFO pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934. |
| | 32 | | | | | — | | Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350. |
| | | | | | | | | |
Exhibit
| | |
Number | | Description |
| |
| | 10 | .12 | | (n) | | — | | Stock Purchase Agreement, dates as of September 5, 2003, by and between Aventis Pharmaceuticals Inc. and Regeneron Pharmaceuticals, Inc. |
| | 10 | .13* | | (q) | | — | | License and Collaboration Agreement, dated as of October 18, 2006, by and between Bayer HealthCare LLC and Regeneron Pharmaceuticals, Inc. |
| | 10 | .14* | | (r) | | — | | Non Exclusive License and Material Transfer Agreement, dated as of February 5, 2007 by and between AstraZeneca UK Limited and Regeneron Pharmaceuticals, Inc. |
| | 10 | .15 | | (s) | | — | | Lease, dated as of December 21, 2006, by and betweenBMR-Landmark at Eastview LLC and Regeneron Pharmaceuticals, Inc. |
| | 10 | .16* | | (t) | | — | | Non Exclusive License and Material Transfer Agreement, dated as of March 30, 2007, by and between Astellas Pharma Inc. and Regeneron Pharmaceuticals, Inc. |
| | 10 | .17* | | (u) | | — | | First Amendment to Lease, by and betweenBMR-Landmark at Eastview LLC and Regeneron Pharmaceuticals, Inc., effective as of October 24, 2007. |
| | 10 | .18* | | | | — | | Discovery and Preclinical Development Agreement, dated as of November 28, 2007, by and between Aventis Pharmaceuticals Inc. and Regeneron Pharmaceuticals, Inc. |
| | 10 | .19* | | | | — | | License and Collaboration Agreement, dated as of November 28, 2007, by and among Aventis Pharmaceuticals Inc., sanofi-aventis Amerique Du Nord and Regeneron Pharmaceuticals, Inc. |
| | 10 | .20 | | | | — | | Stock Purchase Agreement, dated as of November 28, 2007, by and among sanofi-aventis Amerique Du Nord, sanofi-aventis US LLC and Regeneron Pharmaceuticals, Inc. |
| | 10 | .21 | | | | — | | Investor Agreement, dated as of December 20, 2007, by and among sanofi-aventis, sanofi-aventis US LLC, Aventis Pharmaceuticals Inc., sanofi-aventis Amerique du Nord, and Regeneron Pharmaceuticals, Inc. |
| | 12 | .1 | | | | — | | Statement re: computation of ratio of earnings to combined fixed charges of Regeneron Pharmaceuticals, Inc. |
| | 23 | .1 | | | | — | | Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm. |
| | 31 | .1 | | | | — | | Certification of CEO pursuant toRule 13a-14(a) under the Securities and Exchange Act of 1934. |
| | 31 | .2 | | | | — | | Certification of CFO pursuant toRule 13a-14(a) under the Securities and Exchange Act of 1934. |
| | 32 | | | | | — | | Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350. |
Description:
| | |
| (a) | | Incorporated by reference from theForm 10-Q8-K for Regeneron Pharmaceuticals, Inc. for the quarter ended June 30, 1991,, filed AugustNovember 13, 1991.2007. |
| |
| (b) | | Incorporated by reference from the Company’s registration statement onForm 10-Q for Regeneron Pharmaceuticals, Inc. for the quarter ended September 30, 1996, filed November 5, 1996.S-1 (file number33-39043). |
| |
| (c) | | Incorporated by reference from theForm 10-K for Regeneron Pharmaceuticals, Inc., for the fiscal year ended December 31, 2001, filed March 22, 2002. |
| |
| (d) | | Incorporated by reference from the Company’s registration statement on Form S-1 (file number 33-39043). |
|
(e) | | Incorporated by reference from the Form 10-K for Regeneron Pharmaceuticals, Inc. for the quarter ended December 31, 2001, filed March 22, 2002. |
|
(f) | | Incorporated by reference from the Form 10-K for Regeneron Pharmaceuticals, Inc., for the fiscal year ended December 31, 2002, filed March 31, 2003. |
| |
(g)(e) | | Incorporated by reference from theForm 10-Q for Regeneron Pharmaceuticals, Inc. for the quarter ended June 30, 2004, filed August 5, 2004. |
| |
| (f) | | Incorporated by reference from theForm 8-K for Regeneron Pharmaceuticals, Inc., filed November 17, 2004. |
|
| (g) | | Incorporated by reference from theForm 8-K for Regeneron Pharmaceuticals, Inc., filed December 16, 2005. |
|
| (h) | | Incorporated by reference from theForm 8-K for Regeneron Pharmaceuticals, Inc., filed November 17,December 13, 2004. |
| |
| (i) | | Incorporated by reference from theForm 8-K10-K for Regeneron Pharmaceuticals, Inc. for the fiscal year ended December 31, 2004, filed December 13, 2004.March 11, 2005. |
| |
| (j) | | Incorporated by reference from theForm 10-Q8-K for Regeneron Pharmaceuticals, Inc. for the quarter ended September 30, 1995,, filed November 14, 1995.January 25, 2006. |
| |
| (k) | | Incorporated by reference from the Company’s registration statement onForm 8-A for Regeneron Pharmaceuticals, Inc. filed October 15, 1996.S-3 (file number333-74464). |
60
| | |
| (l) | | Incorporated by reference from the Company’s registration statement on Form S-3 (file number 333-74464). |
|
(m) | | Incorporated by reference from the Form 10-Q for Regeneron Pharmaceuticals, Inc. for the quarter ended June 30, 2002, filed August 13, 2002. |
| |
(n)(m) | | Incorporated by reference from theForm 10-Q for Regeneron Pharmaceuticals, Inc. for the quarter ended March 31, 2003, filed May 15, 2003. |
| |
(o)(n) | | Incorporated by reference from theForm 10-Q for Regeneron Pharmaceuticals, Inc. for the quarter ended September 30, 2003, filed November 11, 2003. |
46
|
| (o) | | Incorporated by reference from theForm 8-K for Regeneron Pharmaceuticals, Inc., filed January 11, 2005. |
|
| (p) | | Incorporated by reference from theForm 8-K10-K for Regeneron Pharmaceuticals, Inc., for the fiscal year ended December 31, 2005, filed January 11, 2005.February 28, 2006. |
|
| (q) | | Incorporated by reference from theForm 8-K for Regeneron Pharmaceuticals, Inc., filed October 18, 2006. |
|
| (r) | | Incorporated by reference from theForm 10-K for Regeneron Pharmaceuticals, Inc for the year ended December 31, 2006, filed March 12, 2007. |
|
| (s) | | Incorporated by reference from theForm 8-K for Regeneron Pharmaceuticals, Inc., filed December 22, 2006. |
|
| (t) | | Incorporated by reference from theForm 10-Q for Regeneron Pharmaceuticals, Inc for the quarter ended March 31, 2007, filed May 4, 2007. |
|
| (u) | | Incorporated by reference from theForm 10-Q for Regeneron Pharmaceuticals, Inc for the quarter ended September 31, 2007, filed November 7, 2007. |
| | |
| * | | Portions of this document have been omitted and filed separately with the Commission pursuant to requests for confidential treatment pursuant to Rule 24b-2. |
61
47
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| |
| Regeneron Pharmaceuticals, Inc. |
Regeneron Pharmaceuticals, Inc.
| | |
| | By: | /s/Leonard S. Schleifer |
| |
| |
| Leonard S. Schleifer, M.D., Ph.D. |
| President and Chief Executive Officer |
Leonard S. Schleifer, M.D., Ph.D.
President and Chief Executive Officer
| |
| Dated: | New York, New York
March 11, 2005 |
February 27, 2008
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Leonard S. Schleifer, President and Chief Executive Officer, and Murray A. Goldberg, Senior Vice President, Finance & Administration, Chief Financial Officer, Treasurer, and Assistant Secretary, and each of them, his true and lawful attorney-in-fact and agent, with the full power of substitution and resubstitution, for him and in his name, place, and stead, in any and all capacities therewith, to sign any and all amendments to this report onForm 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto each said attorney-in-fact and agent full power and authority to do and perform each and every act in person, hereby ratifying and confirming all that each said attorney-in-fact and agent, or either of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
| | | | | |
Signature | | Title |
|
| | | |
|
/s/Leonard S. ShleiferSchleifer
Leonard S. Schleifer, M.D., Ph.D. | | President, Chief Executive Officer, and Director
(Principal (Principal Executive Officer) |
| | | |
/s/Murray A. Goldberg
Murray A. Goldberg | | Senior Vice President, Finance & Administration, Chief Financial Officer, Treasurer, and Assistant Secretary (Principal Financial Officer) |
| | | |
/s/Douglas S. McCorkle
Douglas S. McCorkle | | Vice President, Controller and Assistant Treasurer
(Principal (Principal Accounting Officer) |
| | | |
/s/George D. Yancopoulos
George D. Yancopoulos, M.D., Ph.D | | Executive Vice President, Chief Scientific Officer,
President, Regeneron Research Laboratories,
and Director |
| | | |
/s/P. Roy Vagelos
P. Roy Vagelos, M.D. | | Chairman of the Board |
| | | |
/s/Charles A. Baker
Charles A. Baker | | Director |
|
/s/Michael S. Brown
|
62
Michael S. Brown, M.D. | Director | 48
| | | | | |
Signature | | Title |
|
| | | |
|
/s/Alfred G. GilmanMichael S. Brown Alfred G. Gilman,Michael S. Brown, M.D. , Ph.D. | | Director |
| | | |
/s/Joseph L. GoldsteinAlfred G. Gilman Joseph L. Goldstein,Alfred G. Gilman, M.D. , Ph.D. | | Director |
| | | |
/s/Arthur F. RyanJoseph L. Goldstein Arthur F. RyanJoseph L. Goldstein, M.D. | | Director |
| | | |
/s/Eric M. ShooterArthur F. Ryan Eric M. Shooter, Ph.D. Arthur F. Ryan | | Director |
| | | |
/s/George L. Sing George L. Sing | | Director |
63
49
REGENERON PHARMACEUTICALS, INC.
INDEX TO FINANCIAL STATEMENTS
| | | |
| | | Page
|
| | | Numbers |
| | | |
| | |
| | | F-2 to F-3 |
| | | F-4F-3 |
| | | F-5F-4 |
| | | F-6F-5 to F-7F-6 |
| | | F-8F-7 |
| | | F-9F-8 to F-35F-38 |
F-1
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Regeneron Pharmaceuticals, Inc.:
We have completed an integrated audit of Regeneron Pharmaceutical Inc.’s 2004 financial statements and of its internal control over financial reporting as of December 31, 2004 and audits of its 2003 and 2002 financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.
Financial statements
In our opinion, the financialaccompanying balance sheets and the related statements listed in the accompanying indexof operations, stockholders’ equity and cash flows present fairly, in all material respects, the financial position of Regeneron Pharmaceuticals, Inc. at December 31, 20042007 and 2003,2006, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 20042007 in conformity with accounting principles generally accepted in the United States of America. TheseAlso in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria established inInternal Control — IntegratedFramework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, are the responsibilityfor maintaining effective internal control over financial reporting and for its assessment of the Company’s management.effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express an opinionopinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the auditaudits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An auditmisstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements includesincluded examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinion.
Internal control over financial reportingopinions.
Also,
As discussed in our opinion, management’s assessment, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A, thatnote 2 to the financial statements, effective January 1, 2006, the Company maintained effective internal control over financial reporting aschanged its method of December 31, 2004 based on criteria established inInternal Control — Integrated Frameworkissued by the Committeeaccounting for share-based payment, to conform with FASB Statement of Sponsoring Organizations of the Treadway Commission (COSO)Financial Accounting Standards No. 123 (revised 2004), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004 based on criteria established inInternal Control — Integrated Frameworkissued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.“Share-based Payment.”
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the
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company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
| |
| PricewaterhouseCoopers LLP |
PricewaterhouseCoopers LLP
New York, New York
March 7, 2005February 27, 2008
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F-3
REGENERON PHARMACEUTICALS, INC.
BALANCE SHEETS
December 31, 20042007 and 20032006
| | | | | | | | | | | |
| | | 2004 | | | 2003 | |
| | | | | | | |
| | | (In thousands, | |
| | | except share data) | |
ASSETS | | | | | | | | |
| Current assets | | | | | | | | |
| | Cash and cash equivalents | | $ | 101,234 | | | $ | 118,285 | |
| | Marketable securities | | | 194,748 | | | | 164,576 | |
| | Restricted marketable securities | | | | | | | 10,913 | |
| | Accounts receivable | | | 43,102 | | | | 15,529 | |
| | Prepaid expenses and other current assets | | | 1,642 | | | | 1,898 | |
| | Inventory | | | 3,229 | | | | 9,006 | |
| | | | | | | |
| | | Total current assets | | | 343,955 | | | | 320,207 | |
| Marketable securities | | | 52,930 | | | | 72,792 | |
| Property, plant, and equipment, at cost, net of accumulated depreciation and amortization | | | 71,239 | | | | 80,723 | |
| Other assets | | | 4,984 | | | | 5,833 | |
| | | | | | | |
| | | Total assets | | $ | 473,108 | | | $ | 479,555 | |
| | | | | | | |
| |
LIABILITIES and STOCKHOLDERS’ EQUITY | | | | | | | | |
| Current liabilities | | | | | | | | |
| | Accounts payable and accrued expenses | | $ | 18,872 | | | $ | 18,933 | |
| | Deferred revenue, current portion | | | 15,267 | | | | 40,173 | |
| | Loan payable to Novartis Pharma AG | | | | | | | 13,817 | |
| | | | | | | |
| | | Total current liabilities | | | 34,139 | | | | 72,923 | |
| Deferred revenue | | | 56,426 | | | | 68,830 | |
| Notes payable | | | 200,000 | | | | 200,000 | |
| Other long-term liabilities | | | | | | | 159 | |
| | | | | | | |
| | | Total liabilities | | | 290,565 | | | | 341,912 | |
| | | | | | | |
| Commitments and contingencies | | | | | | | | |
| 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; 2,358,373 shares issued and outstanding in 2004 2,365,873 shares issued and outstanding in 2003 | | | 2 | | | | 2 | |
| | Common Stock, $.001 par value; 160,000,000 shares authorized; 53,502,004 shares issued and outstanding in 2004 53,165,635 shares issued and outstanding in 2003 | | | 54 | | | | 53 | |
| | Additional paid-in capital | | | 675,389 | | | | 673,118 | |
| | Unearned compensation | | | (2,299 | ) | | | (4,101 | ) |
| | Accumulated deficit | | | (489,834 | ) | | | (531,533 | ) |
| | Accumulated other comprehensive (loss) income | | | (769 | ) | | | 104 | |
| | | | | | | |
| | | Total stockholders’ equity | | | 182,543 | | | | 137,643 | |
| | | | | | | |
| | | Total liabilities and stockholders’ equity | | $ | 473,108 | | | $ | 479,555 | |
| | | | | | | |
| | | | | | | | | |
| | | 2007 | | | 2006 | |
| | | (In thousands, except share data) | |
| |
ASSETS |
| Current assets | | | | | | | | |
| Cash and cash equivalents | | $ | 498,925 | | | $ | 237,876 | |
| Marketable securities | | | 267,532 | | | | 221,400 | |
| Accounts receivable from the sanofi-aventis Group | | | 14,244 | | | | 6,900 | |
| Accounts receivable — other | | | 4,076 | | | | 593 | |
| Prepaid expenses and other current assets | | | 13,052 | | | | 3,215 | |
| | | | | | | | | |
| Total current assets | | | 797,829 | | | | 469,984 | |
| Restricted cash | | | 1,600 | | | | 1,600 | |
| Marketable securities | | | 78,222 | | | | 61,983 | |
| Property, plant, and equipment, at cost, net of accumulated depreciation and amortization | | | 58,304 | | | | 49,353 | |
| Other assets | | | 303 | | | | 2,170 | |
| | | | | | | | | |
| Total assets | | $ | 936,258 | | | $ | 585,090 | |
| | | | | | | | | |
| |
LIABILITIES and STOCKHOLDERS’ EQUITY |
| Current liabilities | | | | | | | | |
| Accounts payable and accrued expenses | | $ | 39,232 | | | $ | 21,471 | |
| Deferred revenue from sanofi-aventis, current portion | | | 18,855 | | | | 8,937 | |
| Deferred revenue — other, current portion | | | 25,577 | | | | 14,606 | |
| Notes payable | | | 200,000 | | | | | |
| | | | | | | | | |
| Total current liabilities | | | 283,664 | | | | 45,014 | |
| Deferred revenue from sanofi-aventis | | | 126,431 | | | | 61,013 | |
| Deferred revenue — other | | | 65,896 | | | | 62,439 | |
| Notes payable | | | | | | | 200,000 | |
| | | | | | | | | |
| Total liabilities | | | 475,991 | | | | 368,466 | |
| | | | | | | | | |
| Commitments and contingencies | | | | | | | | |
| 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 — 2,260,266 in 2007 and 2,270,353 in 2006 | | | 2 | | | | 2 | |
| Common Stock, $.001 par value; 160,000,000 shares authorized; | | | | | | | | |
| shares issued and outstanding — 76,592,218 in 2007 and 63,130,962 in 2006 | | | 77 | | | | 63 | |
| Additional paid-in capital | | | 1,253,235 | | | | 904,407 | |
| Accumulated deficit | | | (793,217 | ) | | | (687,617 | ) |
| Accumulated other comprehensive income (loss) | | | 170 | | | | (231 | ) |
| | | | | | | | | |
| Total stockholders’ equity | | | 460,267 | | | | 216,624 | |
| | | | | | | | | |
| Total liabilities and stockholders’ equity | | $ | 936,258 | | | $ | 585,090 | |
| | | | | | | | | |
The accompanying notes are an integral part of the financial statements.
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REGENERON PHARMACEUTICALS, INC.
STATEMENTS OF OPERATIONS
forFor the Years Ended December 31, 2004, 2003,2007, 2006, and 20022005
| | | | | | | | | | | | | | |
| | | 2004 | | | 2003 | | | 2002 | |
| | | | | | | | | | |
| | | (In thousands, except per share data) | |
| Revenues | | | | | | | | | | | | |
| | Contract research and development | | $ | 113,157 | | | $ | 47,366 | | | $ | 10,924 | |
| | Research progress payments | | | 42,770 | | | | | | | | | |
| | Contract manufacturing | | | 18,090 | | | | 10,131 | | | | 11,064 | |
| | | | | | | | | | |
| | | | 174,017 | | | | 57,497 | | | | 21,988 | |
| | | | | | | | | | |
| Expenses | | | | | | | | | | | | |
| | Research and development | | | 136,095 | | | | 136,024 | | | | 124,953 | |
| | Contract manufacturing | | | 15,214 | | | | 6,676 | | | | 6,483 | |
| | General and administrative | | | 17,062 | | | | 14,785 | | | | 12,532 | |
| | | | | | | | | | |
| | | | 168,371 | | | | 157,485 | | | | 143,968 | |
| | | | | | | | | | |
| Income (loss) from operations | | | 5,646 | | | | (99,988 | ) | | | (121,980 | ) |
| | | | | | | | | | |
| Other income (expense) | | | | | | | | | | | | |
| | Other contract income | | | 42,750 | | | | | | | | | |
| | Investment income | | | 5,478 | | | | 4,462 | | | | 9,462 | |
| | Interest expense | | | (12,175 | ) | | | (11,932 | ) | | | (11,859 | ) |
| | | | | | | | | | |
| | | | 36,053 | | | | (7,470 | ) | | | (2,397 | ) |
| | | | | | | | | | |
| Net income (loss) | | $ | 41,699 | | | $ | (107,458 | ) | | $ | (124,377 | ) |
| | | | | | | | | | |
| Net income (loss) per share: | | | | | | | | | | | | |
| | Basic | | $ | 0.75 | | | $ | (2.13 | ) | | $ | (2.83 | ) |
| | Diluted | | $ | 0.74 | | | $ | (2.13 | ) | | $ | (2.83 | ) |
The accompanying notes are an integral part of the financial statements.
| | | | | | | | | | | | | |
| | | 2007 | | | 2006 | | | 2005 | |
| | | (In thousands, except per share data) | |
| |
| Revenues | | | | | | | | | | | | |
| Contract research and development from sanofi-aventis | | $ | 51,687 | | | $ | 47,763 | | | $ | 43,445 | |
| Other contract research and development | | | 44,916 | | | | 3,373 | | | | 9,002 | |
| Contract manufacturing | | | | | | | 12,311 | | | | 13,746 | |
| Technology licensing | | | 28,421 | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | 125,024 | | | | 63,447 | | | | 66,193 | |
| | | | | | | | | | | | | |
| Expenses | | | | | | | | | | | | |
| Research and development | | | 201,613 | | | | 137,064 | | | | 155,581 | |
| Contract manufacturing | | | | | | | 8,146 | | | | 9,557 | |
| General and administrative | | | 37,865 | | | | 25,892 | | | | 25,476 | |
| | | | | | | | | | | | | |
| | | | 239,478 | | | | 171,102 | | | | 190,614 | |
| | | | | | | | | | | | | |
| Loss from operations | | | (114,454 | ) | | | (107,655 | ) | | | (124,421 | ) |
| | | | | | | | | | | | | |
| Other income (expense) | | | | | | | | | | | | |
| Other contract income (includes $25.0 million from sanofi-aventis) | | | | | | | | | | | 30,640 | |
| Investment income | | | 20,897 | | | | 16,548 | | | | 10,381 | |
| Interest expense | | | (12,043 | ) | | | (12,043 | ) | | | (12,046 | ) |
| | | | | | | | | | | | | |
| | | | 8,854 | | | | 4,505 | | | | 28,975 | |
| | | | | | | | | | | | | |
| Net loss before cumulative effect of a change in accounting principle | | | (105,600 | ) | | | (103,150 | ) | | | (95,446 | ) |
| Cumulative effect of adopting Statement of Financial Accounting Standards No. 123R (“SFAS 123R”) | | | | | | | 813 | | | | | |
| | | | | | | | | | | | | |
| Net loss | | $ | (105,600 | ) | | $ | (102,337 | ) | | $ | (95,446 | ) |
| | | | | | | | | | | | | |
| Net loss per share, basic and diluted: | | | | | | | | | | | | |
| Net loss before cumulative effect of a change in accounting principle | | $ | (1.59 | ) | | $ | (1.78 | ) | | $ | (1.71 | ) |
| Cumulative effect of adopting SFAS 123R | | | | | | | 0.01 | | | | | |
| | | | | | | | | | | | | |
| Net loss | | $ | (1.59 | ) | | $ | (1.77 | ) | | $ | (1.71 | ) |
| | | | | | | | | | | | | |
| Weighted average shares outstanding, basic and diluted | | | 66,334 | | | | 57,970 | | | | 55,950 | |
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F-5
REGENERON PHARMACEUTICALS, INC.
STATEMENTS OF STOCKHOLDERS’ EQUITY
For the Years Ended December 31, 2004, 2003,2007, 2006, and 20022005
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | Accumulated | | | | | |
| | | Class A Stock | | | Common Stock | | | Additional | | | | | | | Other | | | Total | | | |
| | | | | | | | | Paid-In | | | Unearned | | | Accumulated | | | Comprehensive | | | Stockholders’ | | | Comprehensive | |
| | | Shares | | | Amount | | | Shares | | | Amount | | | Capital | | | Compensation | | | Deficit | | | Income (Loss) | | | Equity | | | Loss | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | (In thousands) | |
Balance, December 31, 2001 | | | 2,563 | | | $ | 3 | | | | 41,264 | | | $ | 41 | | | $ | 567,624 | | | $ | (2,789 | ) | | $ | (299,698 | ) | | $ | 1,174 | | | $ | 266,355 | | | | | |
| Issuance of Common Stock in connection with exercise of stock options, net of shares tendered | | | | | | | | | | | 251 | | | | | | | | 2,149 | | | | | | | | | | | | | | | | 2,149 | | | | | |
| Issuance of Common Stock in connection with Company 401(k) Savings Plan contribution | | | | | | | | | | | 22 | | | | | | | | 764 | | | | | | | | | | | | | | | | 764 | | | | | |
| Conversion of Class A Stock to Common Stock | | | (72 | ) | | | (1 | ) | | | 72 | | | | 1 | | | | | | | | | | | | | | | | | | | | | | | | | |
| Issuance of restricted Common Stock under Long-Term Incentive Plan, net of forfeitures | | | | | | | | | | | 137 | | | | | | | | 2,644 | | | | (2,644 | ) | | | | | | | | | | | | | | | | |
| Amortization of unearned compensation | | | | | | | | | | | | | | | | | | | | | | | 1,790 | | | | | | | | | | | | 1,790 | | | | | |
| Issuance of stock options in consideration for consulting services | | | | | | | | | | | | | | | | | | | 3 | | | | | | | | | | | | | | | | 3 | | | | | |
| Net loss, 2002 | | | | | | | | | | | | | | | | | | | | | | | | | | | (124,377 | ) | | | | | | | (124,377 | ) | | $ | (124,377 | ) |
| Change in net unrealized gain (loss) on marketable securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (703 | ) | | | (703 | ) | | | (703 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2002 | | | 2,491 | | | | 2 | | | | 41,746 | | | | 42 | | | | 573,184 | | | | (3,643 | ) | | | (424,075 | ) | | | 471 | | | | 145,981 | | | $ | (125,080 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Issuance of Common Stock in connection with exercise of stock options, net of shares tendered | | | | | | | | | | | 601 | | | | | | | | 1,941 | | | | | | | | | | | | | | | | 1,941 | | | | | |
| Issuance of Common Stock to Novartis Pharma AG | | | | | | | | | | | 7,527 | | | | 8 | | | | 47,992 | | | | | | | | | | | | | | | | 48,000 | | | | | |
| Issuance of Common Stock to the sanofi-aventis Group | | | | | | | | | | | 2,800 | | | | 3 | | | | 44,997 | | | | | | | | | | | | | | | | 45,000 | | | | | |
| Issuance of Common Stock to Merck & Co. Inc. | | | | | | | | | | | 109 | | | | | | | | 1,500 | | | | | | | | | | | | | | | | 1,500 | | | | | |
| Issuance of Common Stock in connection with Company 401(k) Savings Plan contribution | | | | | | | | | | | 43 | | | | | | | | 747 | | | | | | | | | | | | | | | | 747 | | | | | |
| Conversion of Class A Stock to Common Stock | | | (125 | ) | | | | | | | 125 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Issuance of restricted Common Stock under Long-Term Incentive Plan, net of forfeitures | | | | | | | | | | | 215 | | | | | | | | 2,757 | | | | (2,757 | ) | | | | | | | | | | | | | | | | |
| Amortization of unearned compensation | | | | | | | | | | | | | | | | | | | | | | | 2,299 | | | | | | | | | | | | 2,299 | | | | | |
| Net loss, 2003 | | | | | | | | | | | | | | | | | | | | | | | | | | | (107,458 | ) | | | | | | | (107,458 | ) | | $ | (107,458 | ) |
| Change in net unrealized gain (loss) on marketable securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (367 | ) | | | (367 | ) | | | (367 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2003 | | | 2,366 | | | | 2 | | | | 53,166 | | | | 53 | | | | 673,118 | | | | (4,101 | ) | | | (531,533 | ) | | | 104 | | | | 137,643 | | | $ | (107,825 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | Accumulated
| | | | | | | |
| | | | | | | | | | | | | | | Additional
| | | | | | | | | Other
| | | Total
| | | | |
| | | Class A Stock | | | Common Stock | | | Paid-in
| | | Unearned
| | | Accumulated
| | | Comprehensive
| | | Stockholders’
| | | Comprehensive
| |
| | | Shares | | | Amount | | | Shares | | | Amount | | | Capital | | | Compensation | | | Deficit | | | Income (Loss) | | | Equity | | | Income (Loss) | |
| | | (In thousands) | |
| |
Balance, December 31, 2004 | | | 2,358 | | | $ | 2 | | | | 53,502 | | | $ | 54 | | | $ | 675,389 | | | $ | (2,299 | ) | | $ | (489,834 | ) | | $ | (769 | ) | | $ | 182,543 | | | | | |
| Issuance of Common Stock in connection with exercise of stock options, net of shares tendered | | | | | | | | | | | 494 | | | | | | | | 4,081 | | | | | | | | | | | | | | | | 4,081 | | | | | |
| Issuance of Common Stock in connection with Company 401(k) Savings Plan contribution | | | | | | | | | | | 90 | | | | | | | | 632 | | | | | | | | | | | | | | | | 632 | | | | | |
| Conversion of Class A Stock to Common Stock | | | (11 | ) | | | | | | | 11 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Forfeitures of restricted Common Stock under Long-Term Incentive Plan | | | | | | | | | | | (5 | ) | | | | | | | (54 | ) | | | 54 | | | | | | | | | | | | | | | | | |
| Stock-based compensation expense | | | | | | | | | | | | | | | | | | | 19,963 | | | | 1,930 | | | | | | | | | | | | 21,893 | | | | | |
| Net loss, 2005 | | | | | | | | | | | | | | | | | | | | | | | | | | | (95,446 | ) | | | | | | | (95,446 | ) | | $ | (95,446 | ) |
| Change in net unrealized gain (loss) on marketable securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 299 | | | | 299 | | | | 299 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2005 | | | 2,347 | | | | 2 | | | | 54,092 | | | | 54 | | | | 700,011 | | | | (315 | ) | | | (585,280 | ) | | | (470 | ) | | | 114,002 | | | $ | (95,147 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Issuance of Common Stock in a public offering at $23.03 per share | | | | | | | | | | | 7,600 | | | | 8 | | | | 175,020 | | | | | | | | | | | | | | | | 175,028 | | | | | |
| Cost associated with issuance of equity securities | | | | | | | | | | | | | | | | | | | (412 | ) | | | | | | | | | | | | | | | (412 | ) | | | | |
| Issuance of Common Stock in connection with exercise of stock options, net of shares tendered | | | | | | | | | | | 1,243 | | | | 1 | | | | 10,391 | | | | | | | | | | | | | | | | 10,392 | | | | | |
| Issuance of Common Stock in connection with Company 401(k) Savings Plan contribution | | | | | | | | | | | 121 | | | | | | | | 1,884 | | | | | | | | | | | | | | | | 1,884 | | | | | |
| Conversion of Class A Stock to Common Stock | | | (77 | ) | | | | | | | 77 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Forfeitures of restricted Common Stock under Long-Term Incentive Plan | | | | | | | | | | | (2 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Stock-based compensation expense | | | | | | | | | | | | | | | | | | | 18,641 | | | | | | | | | | | | | | | | 18,641 | | | | | |
| Adjustment to reduce unearned compensation upon adoption of SFAS 123R | | | | | | | | | | | | | | | | | | | (315 | ) | | | 315 | | | | | | | | | | | | | | | | | |
| Cumulative effect of adopting SFAS 123R | | | | | | | | | | | | | | | | | | | (813 | ) | | | | | | | | | | | | | | | (813 | ) | | | | |
| Net loss, 2006 | | | | | | | | | | | | | | | | | | | | | | | | | | | (102,337 | ) | | | | | | | (102,337 | ) | | $ | (102,337 | ) |
| Change in net unrealized gain (loss) on marketable securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 239 | | | | 239 | | | | 239 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2006 | | | 2,270 | | | | 2 | | | | 63,131 | | | | 63 | | | | 904,407 | | | | — | | | | (687,617 | ) | | | (231 | ) | | | 216,624 | | | $ | (102,098 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Continued) |
F-5
F-6
REGENERON PHARMACEUTICALS, INC.
STATEMENTS OF STOCKHOLDERS’ EQUITY — (Continued)
For the Years Ended December 31, 2004, 2003,2007, 2006, and 20022005
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | Accumulated | | | | | |
| | | Class A Stock | | | Common Stock | | | Additional | | | | | | | Other | | | Total | | | |
| | | | | | | | | Paid-in | | | Unearned | | | Accumulated | | | Comprehensive | | | Stockholders’ | | | Comprehensive | |
| | | Shares | | | Amount | | | Shares | | | Amount | | | Capital | | | Compensation | | | Deficit | | | Income (Loss) | | | Equity | | | Loss | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | (In thousands, except per share data) | |
| Issuance of Common Stock in connection with exercise of stock options, net of shares tendered | | | | | | | | | | | 286 | | | | 1 | | | | 1,501 | | | | | | | | | | | | | | | | 1,502 | | | | | |
| Repurchase of Common Stock from Merck & Co., Inc. | | | | | | | | | | | (109 | ) | | | | | | | (888 | ) | | | | | | | | | | | | | | | (888 | ) | | | | |
| Issuance of Common Stock in connection with Company 401(k) Savings Plan contribution | | | | | | | | | | | 64 | | | | | | | | 917 | | | | | | | | | | | | | | | | 917 | | | | | |
| Conversion of Class A Stock to Common Stock | | | (8 | ) | | | | | | | 8 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Issuance of restricted Common Stock under Long-Term Incentive Plan, net of forfeitures | | | | | | | | | | | 87 | | | | | | | | 741 | | | | (741 | ) | | | | | | | | | | | | | | | | |
| Amortization of unearned compensation | | | | | | | | | | | | | | | | | | | | | | | 2,543 | | | | | | | | | | | | 2,543 | | | | | |
| Net income, 2004 | | | | | | | | | | | | | | | | | | | | | | | | | | | 41,699 | | | | | | | | 41,699 | | | $ | 41,699 | |
| Change in net unrealized gain (loss) on marketable securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (873 | ) | | | (873 | ) | | | (873 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2004 | | | 2,358 | | | $ | 2 | | | | 53,502 | | | $ | 54 | | | $ | 675,389 | | | $ | (2,299 | ) | | $ | (489,834 | ) | | $ | (769 | ) | | $ | 182,543 | | | $ | 40,826 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | Accumulated
| | | | | | | |
| | | | | | | | | | | | | | | Additional
| | | | | | | | | Other
| | | Total
| | | | |
| | | Class A Stock | | | Common Stock | | | Paid-in
| | | Unearned
| | | Accumulated
| | | Comprehensive
| | | Stockholders’
| | | Comprehensive
| |
| | | Shares | | | Amount | | | Shares | | | Amount | | | Capital | | | Compensation | | | Deficit | | | Income (Loss) | | | Equity | | | Income (Loss) | |
| | | (In thousands) | |
| |
| Issuance of Common Stock in connection with exercise of stock options, net of shares tendered | | | | | | | | | | | 886 | | | | 1 | | | | 7,618 | | | | | | | | | | | | | | | | 7,619 | | | | | |
| Issuance of Common Stock to sanofi-aventis | | | | | | | | | | | 12,000 | | | | 12 | | | | 311,988 | | | | | | | | | | | | | | | | 312,000 | | | | | |
Cost associated with issuance of equity securities tosanofi-aventis | | | | | | | | | | | | | | | | | | | (219 | ) | | | | | | | | | | | | | | | (219 | ) | | | | |
| Issuance of Common Stock in connection with Company 401(k) Savings Plan contribution | | | | | | | | | | | 65 | | | | | | | | 1,367 | | | | | | | | | | | | | | | | 1,367 | | | | | |
| Issuance of restricted Common Stock under Long- Term Incentive Plan | | | | | | | | | | | 500 | | | | 1 | | | | (1 | ) | | | | | | | | | | | | | | | | | | | | |
| Conversion of Class A Stock to Common Stock | | | (10 | ) | | | | | | | 10 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Stock-based compensation expense | | | | | | | | | | | | | | | | | | | 28,075 | | | | | | | | | | | | | �� | | | 28,075 | | | | | |
| Net loss, 2007 | | | | | | | | | | | | | | | | | | | | | | | | | | | (105,600 | ) | | | | | | | (105,600 | ) | | $ | (105,600 | ) |
| Change in net unrealized gain (loss) on marketable securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 401 | | | | 401 | | | | 401 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2007 | | | 2,260 | | | $ | 2 | | | | 76,592 | | | $ | 77 | | | $ | 1,253,235 | | | | — | | | $ | (793,217 | ) | | $ | 170 | | | $ | 460,267 | | | $ | (105,199 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of the financial statements.
F-6
F-7
REGENERON PHARMACEUTICALS, INC.
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2004, 2003,2007, 2006, and 20022005
| | | | | | | | | | | | | | | | | |
| | | 2004 | | | 2003 | | | 2002 | |
| | | | | | | | | | |
| | | (In thousands) | |
| Cash flows from operating activities | | | | | | | | | | | | |
| | Net income (loss) | | $ | 41,699 | | | $ | (107,458 | ) | | $ | (124,377 | ) |
| | | | | | | | | | |
| | Adjustments to reconcile net income (loss) to net cash used in operating activities | | | | | | | | | | | | |
| | | Depreciation and amortization | | | 15,362 | | | | 12,937 | | | | 8,454 | |
| | | Non-cash compensation expense | | | 2,543 | | | | 2,562 | | | | 1,793 | |
| | | Non-cash expense related to a license agreement | | | | | | | 1,500 | | | | | |
| | | Forgiveness of loan payable to Novartis Pharma AG, inclusive of accrued interest | | | (17,770 | ) | | | | | | | | |
| | | Changes in assets and liabilities | | | | | | | | | | | | |
| | | | Increase in accounts receivable | | | (27,573 | ) | | | (11,512 | ) | | | (1,042 | ) |
| | | | (Increase) decrease in prepaid expenses and other assets | | | (1,799 | ) | | | 589 | | | | 184 | |
| | | | Decrease (increase) in inventory | | | 6,914 | | | | (1,049 | ) | | | (1,732 | ) |
| | | | (Decrease) increase in deferred revenue | | | (37,310 | ) | | | 93,869 | | | | 1,498 | |
| | | | Increase in accounts payable, accrued expenses, and other liabilities | | | 1,025 | | | | 2,429 | | | | 4,699 | |
| | | | | | | | | | |
| | | | | Total adjustments | | | (58,608 | ) | | | 101,325 | | | | 13,854 | |
| | | | | | | | | | |
| | | | | Net cash used in operating activities | | | (16,909 | ) | | | (6,133 | ) | | | (110,523 | ) |
| | | | | | | | | | |
| Cash flows from investing activities | | | | | | | | | | | | |
| | Purchases of marketable securities | | | (265,243 | ) | | | (276,447 | ) | | | (234,463 | ) |
| | Purchases of restricted marketable securities | | | (11,075 | ) | | | (11,055 | ) | | | (5,514 | ) |
| | Sales or maturities of marketable securities | | | 255,783 | | | | 231,261 | | | | 199,317 | |
| | Maturities of restricted marketable securities | | | 22,126 | | | | 22,054 | | | | 16,514 | |
| | Capital expenditures | | | (6,174 | ) | | | (29,656 | ) | | | (34,370 | ) |
| | | | | | | | | | |
| | | | | Net cash used in investing activities | | | (4,583 | ) | | | (63,843 | ) | | | (58,516 | ) |
| | | | | | | | | | |
| Cash flows from financing activities | | | | | | | | | | | | |
| | Net proceeds from issuances of Common Stock | | | 1,502 | | | | 94,678 | | | | 2,149 | |
| | Repurchase of Common Stock | | | (888 | ) | | | | | | | | |
| | Borrowings under loan payable | | | 3,827 | | | | 13,656 | | | | | |
| | Capital lease payments | | | | | | | (150 | ) | | | (426 | ) |
| | | | | | | | | | |
| | | | | Net cash provided by financing activities | | | 4,441 | | | | 108,184 | | | | 1,723 | |
| | | | | | | | | | |
| | | | | Net (decrease) increase in cash and cash equivalents | | | (17,051 | ) | | | 38,208 | | | | (167,316 | ) |
| Cash and cash equivalents at beginning of period | | | 118,285 | | | | 80,077 | | | | 247,393 | |
| | | | | | | | | | |
| | | | | Cash and cash equivalents at end of period | | $ | 101,234 | | | $ | 118,285 | | | $ | 80,077 | |
| | | | | | | | | | |
| Supplemental disclosure of cash flow information | | | | | | | | | | | | |
| | Cash paid for interest | | $ | 11,007 | | | $ | 11,003 | | | $ | 11,038 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| | | 2007 | | | 2006 | | | 2005 | |
| | | (In thousands) | |
| |
| Cash flows from operating activities | | | | | | | | | | | | |
| Net loss | | $ | (105,600 | ) | | $ | (102,337 | ) | | $ | (95,446 | ) |
| | | | | | | | | | | | | |
| Adjustments to reconcile net loss to net cash provided | | | | | | | | | | | | |
| by (used in) operating activities | | | | | | | | | | | | |
| Depreciation and amortization | | | 11,487 | | | | 14,592 | | | | 15,504 | |
| Non-cash compensation expense | | | 28,075 | | | | 18,675 | | | | 21,859 | |
| Impairment charge on marketable securities | | | 5,943 | | | | | | | | | |
| Cumulative effect of a change in accounting principle | | | | | | | (813 | ) | | | | |
| Changes in assets and liabilities | | | | | | | | | | | | |
| (Increase) decrease in accounts receivable | | | (10,827 | ) | | | 29,028 | | | | 6,581 | |
| (Increase) decrease in prepaid expenses and other assets | | | (9,649 | ) | | | 155 | | | | 74 | |
| Decrease in inventory | | | | | | | 3,594 | | | | 1,250 | |
| Increase in deferred revenue | | | 89,764 | | | | 60,833 | | | | 14,469 | |
| Increase (decrease) in accounts payable, accrued expenses, | | | | | | | | | | | | |
| and other liabilities | | | 18,179 | | | | (652 | ) | | | 5,413 | |
| | | | | | | | | | | | | |
| Total adjustments | | | 132,972 | | | | 125,412 | | | | 65,150 | |
| | | | | | | | | | | | | |
| Net cash provided by (used in) operating activities | | | 27,372 | | | | 23,075 | | | | (30,296 | ) |
| | | | | | | | | | | | | |
| Cash flows from investing activities | | | | | | | | | | | | |
| Purchases of marketable securities | | | (594,446 | ) | | | (456,893 | ) | | | (102,990 | ) |
| Sales or maturities of marketable securities | | | 527,169 | | | | 306,199 | | | | 223,448 | |
| Capital expenditures | | | (18,446 | ) | | | (2,811 | ) | | | (4,964 | ) |
| Increase in restricted cash | | | | | | | (1,600 | ) | | | | |
| | | | | | | | | | | | | |
| Net cash (used in) provided by investing activities | | | (85,723 | ) | | | (155,105 | ) | | | 115,494 | |
| | | | | | | | | | | | | |
| Cash flows from financing activities | | | | | | | | | | | | |
| Net proceeds from the issuance of Common Stock | | | 319,400 | | | | 185,008 | | | | 4,081 | |
| Other | | | | | | | 390 | | | | | |
| | | | | | | | | | | | | |
| Net cash provided by financing activities | | | 319,400 | | | | 185,398 | | | | 4,081 | |
| | | | | | | | | | | | | |
| Net increase in cash and cash equivalents | | | 261,049 | | | | 53,368 | | | | 89,279 | |
| Cash and cash equivalents at beginning of period | | | 237,876 | | | | 184,508 | | | | 95,229 | |
| | | | | | | | | | | | | |
| Cash and cash equivalents at end of period | | $ | 498,925 | | | $ | 237,876 | | | $ | 184,508 | |
| | | | | | | | | | | | | |
| Supplemental disclosure of cash flow information | | | | | | | | | | | | |
| Cash paid for interest | | $ | 11,000 | | | $ | 11,000 | | | $ | 11,002 | |
The accompanying notes are an integral part of the financial statements.
F-7
F-8
REGENERON PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
For the years ended December 31, 2004, 2003,2007, 2006, and 2002
2005
(Unless otherwise noted, dollars in thousands, except per share data)
1. Organization and Business
| |
| 1. | Organization and Business |
Regeneron Pharmaceuticals, Inc. (the “Company” or “Regeneron”) was incorporated in January 1988 in the State of New York. The Company is engaged in research and development programs to discover and commercialize therapeutics to treat human disorders and conditions. The Company’s facilities are located in New York. The Company’s business is subject to certain risks including, but not limited to, uncertainties relating to conducting pharmaceutical research, obtaining regulatory approvals, commercializing products, and obtaining and enforcing patents.
2. Summary of Significant Accounting Policies
| |
| 2. | Property, Plant, and EquipmentSummary of Significant Accounting Policies |
Cash and Cash Equivalents
For purposes of the statement of cash flows and the balance sheet, the Company considers all highly liquid debt instruments with a maturity of three months or less when purchased to be cash equivalents. The carrying amount reported in the balance sheet for cash and cash equivalents approximates its fair value.
Property, Plant, and Equipment
Property, plant, and equipment are stated at cost. Depreciation is provided on a straight-line basis over the estimated useful lives of the assets. Expenditures for maintenance and repairs which do not materially extend the useful lives of the assets are charged to expense as incurred. The cost and accumulated depreciation or amortization of assets retired or sold are removed from the respective accounts, and any gain or loss is recognized in operations. The estimated useful lives of property, plant, and equipment are as follows:
| | | | |
| Building and improvements | | 6-30 | 7-30 years |
Leasehold improvements | | Life of lease |
| Laboratory and computer equipment | | | 3-5 years | |
| Furniture and fixtures | | | 5 years | |
Leasehold improvements are amortized over the shorter of the lease term or the estimated useful lives of the assets. Costs of construction of certain long-lived assets include capitalized interest which is amortized over the estimated useful life of the related asset. The Company capitalized interest costs
Accounting for the Impairment of $0.3 million and $0.2 million in 2003 and 2002, respectively. The Company did not capitalize any interest costs in 2004.Long-Lived Assets
The Company periodically assesses the recoverability of long-lived assets, such as property, plant, and equipment, and evaluates such assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Asset impairment is determined to exist if estimated future undiscounted cash flows are less than the carrying amount in accordance with Statement of Financial Accounting Standards No. (“SFAS”) 144,Accounting for the Impairment or Disposal of Long-Lived Assets. As of December 31, 2004, there were no impairments of long-lived assets.
| |
| Cash and Cash Equivalents |
For purposes of the statement of cash flows and the balance sheet, the Company considers all highly liquid debt instruments with a maturity of three months or less when purchased to be cash equivalents. The carrying amount reported in the balance sheet for cash and cash equivalents approximates its fair value.
Inventories are stated at the lower of cost or market. Cost is determined based on standards that approximate the first-in, first-out method. Inventories are shown net of applicable reserves.
| |
| Revenue Recognition and Change in Accounting Principle |
| |
a. | Contract Research and Development and Research Progress Payments |
The Company recognizes revenue from contract research and development and research progress payments in accordance with Staff Accounting Bulletin No. 104,Revenue Recognition(“SAB 104”) and
F-9
REGENERON PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
FASB Emerging Issue Task Force Issue No. 00-21,Accounting for Revenue Arrangements with Multiple Deliverables(“EITF 00-21”). SAB 104 superseded Staff Accounting Bulletin No. 101,Revenue Recognition in Financial Statement(“SAB 101”), in December 2003. During the third quarter of 2003, the Company elected to change the method it uses to recognize revenue under SAB 101 related to non-refundable collaborator payments, including up-front licensing payments, payments for development activities, and research progress (milestone) payments, to the Substantive Milestone Method, adopted retroactively to January 1, 2003. There was no cumulative effect of this change in accounting principle on prior periods. Under this method, the Company recognizes revenue from non-refundable up-front license payments, not tied to achieving a specific performance milestone, ratably over the period over which the Company expects to perform services. Payments for development activities are recognized as revenue as earned, ratably over the period of effort. Substantive at-risk milestone payments, which are based on achieving a specific performance milestone, are recognized as revenue when the milestone is achieved and the related payment is due, provided there is no future service obligation associated with that milestone. The change in accounting method was made because the Company believes that it better reflects the substance of the Company’s collaborative agreements and is more consistent with current practices in the biotechnology industry.
Previously, the Company had recognized revenue from non-refundable collaborator payments based on the percentage of costs incurred to date, estimated costs to complete, and total expected contract revenue. However, the revenue recognized was limited to the amount of non-refundable payments received. This accounting method was adopted on January 1, 2000 upon the release of SAB 101. The cumulative effect of adopting SAB 101 at January 1, 2000 amounted to $1.6 million of additional loss, with a corresponding increase to deferred revenue that has been recognized in subsequent periods, of which $0.1 million, $0.4 million, and $0.4 million, respectively, was included in contract research and development revenue in 2004, 2003, and 2002. The $1.6 million represented a portion of a 1989 payment received from Sumitomo Chemical Co. Ltd. in consideration for a fifteen year limited right of first negotiation to license up to three of the Company’s product candidates in Japan (see Note 11d). The effect of income taxes on the cumulative effect adjustment was immaterial.
The Company has entered into a contract manufacturing agreement under which it manufactures product and performs services for a third party. Contract manufacturing revenue is recognized as product is shipped and as services are performed (see Note 12).
Interest income, which is included in investment income, is recognized as earned.
| |
| Accounting for the Impairment of Long-Lived Assets |
Long-lived assets, such as fixed assets, are reviewed for impairment when events or circumstances indicate that their carrying value may not be recoverable. Estimated undiscounted expected future cash flows are used to determine if an asset is impaired in which case the asset’s carrying value would be reduced to fair value. For all periods presented, no impairment losses were recorded.
Patents
As a result of the Company’s research and development efforts, itthe Company has obtained, applied for, or is applying for, a number of patents to protect proprietary technology and inventions. All costs associated with patents are expensed as incurred.
F-8
F-10
REGENERON PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
| |
| Research and Development Expenses |
Revenue Recognition
a. Contract Research and Development and Research Progress Payments
The Company recognizes contract research and development revenue and research progress payments in accordance with Staff Accounting Bulletin No. 104,Revenue Recognition(“SAB 104”) and Emerging Issues Task Force00-21,Accounting for Revenue Arrangements with Multiple Deliverables(“EITF 00-21”). The Company earns contract research and development revenue and research progress payments in connection with collaboration and other agreements to develop and commercialize product candidates and utilize the Company’s technology platforms. The terms of these agreements typically include non-refundable up-front licensing payments, research progress (milestone) payments, and payments for development activities. Non-refundable up-front license payments, where continuing involvement is required of the Company, are deferred and recognized over the related performance period. The Company estimates its performance period based on the specific terms of each agreement, and adjusts the performance periods, if appropriate, based on the applicable facts and circumstances. Payments which are based on achieving a specific performance milestone, involving a degree of risk, are recognized as revenue when the milestone is achieved and the related payment is due and non-refundable, provided there is no future service obligation associated with that milestone. Substantive performance milestones typically consist of significant achievements in the development life-cycle of the related product candidate, such as completion of clinical trials and approvals by regulatory agencies. In determining whether a payment is deemed to be a substantive performance milestone, the Company takes into consideration (i) the nature, timing, and value of significant achievements in the development life-cycle of the related development product candidate, (ii) the relative level of effort required to achieve the milestone, and (iii) the relative level of risk in achieving the milestone, taking into account the high degree of uncertainty in successfully advancing product candidates in a drug development program and in ultimately attaining an approved drug product. Payments for achieving milestones which are not considered substantive are accounted for as license payments and recognized over the related performance period.
The Company enters into collaboration agreements that include varying arrangements regarding which parties perform and bear the costs of research and development activities. The Company may share the costs of research and development activities with a collaborator, such as in the Company’s VEGF Trap-Eye collaboration with Bayer HealthCare LLC, or the Company may be reimbursed for all or a significant portion of the costs of the Company’s research and development activities, such as in the Company’s aflibercept and antibody collaborations with sanofi-aventis. The Company records its internal and third-party development costs associated with these collaborations as research and development expenses. When the Company is entitled to reimbursement of all or a portion of the research and development expenses that it incurs under a collaboration, the Company records those reimbursable amounts as contract research and development revenue proportionately as the Company recognizes its expenses. If the collaboration is a cost-sharing arrangement in which both the Company and its collaborator perform development work and share costs, in periods when the Company’s collaborator incurs development expenses that benefit the collaboration and Regeneron, the Company also recognizes, as additional research and development expense, the portion of the collaborator’s development expenses that the Company is obligated to reimburse. In addition, the Company records revenue in connection with a government research grant using a proportional performance model as it incurs expenses related to the grant, subject to the grant’s terms and annual funding approvals.
In connection with non-refundable licensing payments, the Company’s performance period estimates are principally based on projections of the scope, progress, and results of its research and development activities. Due to the variability in the scope of activities and length of time necessary to develop a drug product, changes to development plans as programs progress, and uncertainty in the ultimate requirements to obtain governmental approval for commercialization, revisions to performance period estimates are possible, and could result in material changes to the amount of revenue recognized each year in the future. In addition, performance periods may be extended if the Company and its collaborators decide to expand the clinical plans for a drug candidate into
F-9
REGENERON PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
additional disease indications. Also, if a collaborator terminates an agreement in accordance with the terms of the agreement, the Company would recognize any unamortized remainder of an up-front or previously deferred payment at the time of the termination.
b. Contract Manufacturing
The Company manufactured product and performed services for a third party under a contract manufacturing agreement which expired in October 2006. Contract manufacturing revenue was recognized as product was shipped and as services were performed (see Note 13).
c. Technology Licensing
The Company enters into non-exclusive license agreements with third parties that allow the third party to utilize the Company’sVelocImmune® technology in its internal research programs. The terms of these agreements include annual, non-refundable, up-front payments and entitle the Company to receive royalties on any future sales of products discovered by the third party using the Company’sVelocImmunetechnology (see Note 12). Annual, non-refundable, up-front payments under these agreements, where continuing involvement is required of the Company, are deferred and recognized ratably over their respective annual license periods.
Investment Income
Interest income, which is included in investment income, is recognized as earned.
Research and Development Expenses
Research and development expenses include costs directly attributable to the conduct of research and development programs, including the cost of salaries, payroll taxes, employee benefits, materials, supplies, depreciation on and maintenance of research equipment, costs related to research collaboration and licensing agreements (see Note 10e)10), the cost of services provided by outside contractors, including services related to the Company’s clinical trials, clinical trial expenses, the full cost of manufacturing drug for use in research, preclinical development, and clinical trials, amounts that the Company is obligated to reimburse to collaborators for research and development expenses that they incur (see Note 11), expenses related to the development of manufacturing processes prior to commencing commercial production of a product under contract manufacturing arrangements, and the allocable portions of facility costs, such as rent, utilities, insurance, repairs and maintenance, depreciation, and general support services. All costs associated with research and development are expensed as incurred.
Clinical trial costs are a significant component of research and development expenses and include costs associated with third-party contractors. The Company outsources a substantial portion of its clinical trial activities, utilizing external entities such as contract research organizations, independent clinical investigators, and other third-party service providers to assist the Company with the execution of its clinical studies. For each clinical trial that the Company conducts, certain clinical trial costs which are included in research and development expenses, are expensed immediately, while others are expensed over time based on the expected total number of patients in the trial, the rate at which patients enter the trial, and the period over which clinical investigators or contract research organizations are expected to provide services.
Clinical activities which relate principally to clinical sites and other administrative functions to manage the Company’s clinical trials are performed primarily by contract research organizations (“CROs”). CROs typically perform most of thestart-up activities for the Company’s trials, including document preparation, site identification, screening and preparation, pre-study visits, training, and program management. On a budgeted basis, thesestart-up costs are typically 10% to 15% of the total contract value. On an actual basis, this percentage range can be significantly wider, as many of the Company’s contracts are either expanded or reduced in scope compared to the original budget, whilestart-up costs for the particular trial may not change materially. Thesestart-up costs usually occur within a few months after the contract has been executed and are event driven in nature. The remaining
F-10
REGENERON PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
activities and related costs, such as patient monitoring and administration, generally occur ratably throughout the life of the individual contract or study. In the event of early termination of a clinical trial, the Company accrues and recognizes expenses in an amount based on its estimate of the remaining non-cancelable obligations associated with the winding down of the clinical trialand/or penalties.
For clinical study sites, where payments are made periodically on a per-patient basis to the institutions performing the clinical study, the Company accrues on an estimatedcost-per-patient basis an expense based on subject enrollment and activity in each quarter. The amount of clinical study expense recognized in a quarter may vary from period to period based on the duration and progress of the study, the activities to be performed by the sites each quarter, the required level of patient enrollment, the rate at which patients actually enroll in and drop-out of the clinical study, and the number of sites involved in the study. Clinical trials that bear the greatest risk of change in estimates are typically those that have a significant number of sites, require a large number of patients, have complex patient screening requirements, and span multiple years. During the course of a clinical trial, the Company adjusts its rate of clinical expense recognition if actual results differ from the Company’s estimates. The Company’s estimates and assumptions for clinical expense recognition could differ significantly from its actual results, which could cause material increases or decreases in research and development expenses in future periods when the actual results become known.
Per Share Data
Net income (loss) per share, basic and diluted, is computed on the basis of the net income (loss) for the period divided by the weighted average number of shares of Common Stock and Class A Stock outstanding during the period. The basicBasic net income (loss) per share excludes restricted stock awards until vested. The dilutedDiluted net income per share for the year ended December 31, 2004 is based upon the weighted average number of shares of Common Stock and Class A Stock outstanding, and theof common stock equivalents outstanding when dilutive. Common stock equivalents include: (i) outstanding stock options and restricted stock awards under the Company’s Long-Term Incentive Plans, which are included under the treasury stock method when dilutive, and (ii) Common Stock to be issued under the assumed conversion of the Company’s outstanding convertible senior subordinated notes, which are included under the if-converted method when dilutive. The computation of diluted net loss per share for the years ended December 31, 20032007, 2006, and 20022005 does not include common stock equivalents, since such inclusion would be antidilutive. Disclosures required by Statement of Financial Accounting Standards No.SFAS 128,Earnings per Share, have been included in Note 17.19.
Income Taxes
The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined on the basis of the difference between the tax basis of assets and liabilities and their respective financial reporting amounts (“temporary differences”) at enacted tax rates in effect for the years in which the differences are expected to reverse. A valuation allowance is established for deferred tax assets for which realization is uncertain. See Note 15.17.
| |
| Comprehensive Income (Loss) |
Comprehensive Income (Loss)
Comprehensive
The Company presents comprehensive income (loss) represents the change in net assets of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. accordance with SFAS 130,Reporting Comprehensive Income.Comprehensive income (loss) of the Company includes net income (loss) adjusted for the change in net unrealized gain or loss on marketable securities. The net effect of income taxes on comprehensive income (loss) is immaterial. Comprehensive income for the year ended December 31, 2004 and comprehensive losses for the years ended December 31, 20032007, 2006, and 20022005 have been included in the Statements of Stockholders’ Equity.
F-11
F-11
REGENERON PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
| |
| Concentrations of Credit Risk |
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to concentrations of credit risk consist of cash, cash equivalents, marketable securities, restricted marketable securities, and receivables from the sanofi-aventis Group, The Procter & Gamble Company, and Merck & Co., Inc.Bayer HealthCare. The Company generally invests its excess cash in obligations of the U.S. government and its agencies, bank deposits, investment grade debt securities issued by corporations, governments, and financial institutions, bank deposits, asset-backed securities, commercial paper, and money market funds that invest in these instruments. The Company has establishedan investment policy that includes guidelines that relate toon acceptable investment securities, minimum credit quality, diversification,maturity parameters, and maturity,concentration and that limit exposurediversification. Nonetheless, deterioration of the credit quality of an investment security subsequent to any one issuepurchase may subject the Company to the risk of securities.not being able to recover the full principal value of the security. The Company recognizes a charge to earnings in a period when the Company considers a marketable security to be other than temporarily impaired in value.
Risks and Uncertainties
Regeneron has had no sales of its products and there is no assurance that the Company’s research and development efforts will be successful, that the Company will ever have commercially approved products, or that the Company will achieve significant sales of any such products. The Company has generally incurred net losses and negative cash flows from operations since its inception, and revenuesinception. Revenues to date have principally been limited to (i) payments from the Company’s collaborators and other entities for the Company’s development activities with respect to product candidates and to utilize the Company’s technology platforms, (ii) payments for research from our collaborators and forpast contract manufacturing from two pharmaceutical companiesactivities, and (iii) investment income. The Company operates in an environment of rapid change in technology and is dependent upon the services of its employees, consultants, collaborators, and certain third-party suppliers, including single-source unaffiliated third-party suppliers of certain raw materials and equipment. Regeneron, as licensee, licenses certain technologies that are important to the Company’s business which impose various obligations on the Company. If Regeneron fails to comply with these requirements, licensors may have the right to terminate the Company’s licenses.
Contract research and development revenue in 20042007 was primarily earned from the sanofi-aventis Group, Novartis Pharma AG, and The Procter & Gamble CompanyBayer HealthCare under collaboration agreements (see Notes 11a, 11b and 11e)Note 11 for the terms of these agreements). Under the collaboration agreementThe Company recognizes revenue from its collaborations with sanofi-aventis agreed upon VEGF Trap development expenses incurredand Bayer HealthCare in accordance with SAB 104 andEITF 00-21, as described above. These collaboration agreements contain early termination provisions, as defined, by Regeneron during the termsanofi-aventis or Bayer HealthCare, as applicable.
Use of the agreement will be funded by sanofi-aventis. In addition, the Company earned a $25.0 million payment in 2004 upon achievement of an early-stage clinical milestone and may receive up to $360.0 million in additional milestone payments upon receipt of specified VEGF Trap marketing approvals. Sanofi-aventis has the right to terminate the agreement without cause with at least twelve months advance notice. Under the collaboration agreement with Novartis, agreed upon IL-1 Trap development expenses were shared equally by the Company and Novartis in 2003. In February 2004, Novartis provided notice of its intention not to proceed with the joint development of the IL-1 Trap and the Company subsequently recognized contract research and development revenue equal to the remaining balance of a 2003 up-front payment from Novartis that had been deferred. Under the long-term collaboration with Procter & Gamble, Procter & Gamble is obligated to provide payments to fund Regeneron research of $2.5 million per quarter, before adjustments for inflation, through December 2005, with no further research obligations by either party thereafter. Contract manufacturing revenue in 2004 was earned from Merck & Co., Inc. under a long-term manufacturing agreement that extends, as amended, through October 2006 (see Note 12), but may be terminated at any time by Merck upon Merck’s payment of a termination fee and may be extended by Merck, upon twelve-months’ prior notice, for an additional year through October 2007.Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Significant estimates include (i) useful lives of property, plant, and equipment, (ii) the periods over which certain revenues and expenses will be recognized, including contract research and development revenue recognized from non-refundable up-front licensing payments contract manufacturing revenue recognized from reimbursed, deferred capital costs,
F-12
REGENERON PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
and expense recognition of certain clinical trial costs which are included in research and development expenses, and(iii) the extent to which deferred tax assets and liabilities are offset by a valuation allowance.
| |
| Stock-based Employee Compensation |
The accompanying financial positionallowance, and results(iv) the fair value of operationsstock options on their date of grant using the Black-Scholes option-pricing model, based on assumptions with respect to (a) expected volatility of our Common Stock price, (b) the periods of time over which employees and members of the Company have been prepared in accordanceCompany’s board of directors are expected to hold their options prior to exercise (expected lives), (c) expected dividend yield on the Company’s Common Stock, and (d) risk-free interest rates, which are based on quoted U.S. Treasury rates for securities with APB Opinion No. 25,Accounting for Stock Issued to Employees(“APB No. 25”). Under APB No. 25, generally, no compensation expense is recognized inmaturities approximating the accompanying financial statementsoptions’ expected lives. In addition, in connection with the awardingrecognition of stock option grants to employees provided that, as of the grant date, all terms associated with the award are fixed and the quoted market price of the Company’s stock, as of the grant date, is equal to or less than the amount an employee must pay to acquire the stock as defined.
The Company has stock-based incentive plans, which are more fully described in Note 13a. The following table illustrates the effect on the Company’s net income (loss) and net income (loss) per share had compensation costs for the incentive plans been determinedexpense in accordance with the fair value based methodprovisions of accounting for stock-based compensationSFAS 123R,Share-
F-12
REGENERON PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
Based Payment, as prescribed by Statementdescribed below, the Company is required to estimate, at the time of Financial Accounting Standards No. 123,Accounting for Stock-Based Compensation(“SFAS No. 123”). Sincegrant, the number of stock option grants awarded during 2004, 2003, and 2002 vest over several years and additional awards that are expected to be issued in the future, the pro forma results shown below are not likely to be representative of the effects on future years of the application of the fair value based method.
| | | | | | | | | | | | | | |
| | | 2004 | | | 2003 | | | 2002 | |
| | | | | | | | | | |
| Net income (loss), as reported | | $ | 41,699 | | | $ | (107,458 | ) | | $ | (124,377 | ) |
| Add: Stock-based employee compensation expense included in reported net income (loss) | | | 2,543 | | | | 2,562 | | | | 1,790 | |
| Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards | | | (36,093 | ) | | | (45,048 | ) | | | (45,676 | ) |
| | | | | | | | | | |
| Pro forma net income (loss), basic | | $ | 8,149 | | | $ | (149,944 | ) | | $ | (168,263 | ) |
| | | | | | | | | | |
| Basic net income (loss) per share amounts: | | | | | | | | | | | | |
| | As reported | | $ | 0.75 | | | $ | (2.13 | ) | | $ | (2.83 | ) |
| | | | | | | | | | |
| | Pro forma | | $ | 0.15 | | | $ | (2.97 | ) | | $ | (3.83 | ) |
| | | | | | | | | | |
| Diluted net income (loss) per share amounts: | | | | | | | | | | | | |
| | As reported | | $ | 0.74 | | | $ | (2.13 | ) | | $ | (2.83 | ) |
| | | | | | | | | | |
| | Pro forma | | $ | 0.15 | | | $ | (2.97 | ) | | $ | (3.83 | ) |
| | | | | | | | | | |
In 2003, the Company’s Chief Executive Officer was granted permission by the Board of Directors to initiate a one-time net cashless exercise of stock options. Upon completion of the net cashless exercise, the Company recognized $0.3 million of compensation expense, which equaled the excess of the fair market value of the shares over the option exercise price on the date that the Board of Directors granted its consent for the transaction.forfeited.
Stock-based Employee Compensation
Effective January 1, 2005, the Company intends to adoptadopted the fair value based method of accounting for stock-based employee compensation under the provisions of SFAS No. 123,Accounting for Stock-Based Compensation, using the modified prospective method as modified by Statement of Financial Accounting Standards No.described in SFAS 148,Accounting for Stock BasedStock-Based Compensation — Transition and Disclosure (“SFAS No. 148”), using. As a result, in 2005, the modified prospective method. SFAS Nos. 123/148 require thatCompany recognized compensation expense, in an amount equal to the fair market value of the share-based paymentpayments (including stock option awards) be recognizedon their date of grant, over the vesting period of the awards.awards using graded vesting, which is an accelerated expense recognition method. Under the modified prospective method, compensation cost will beexpense for the Company is recognized beginning January 1, 2005 for (a) all share based payments
F-13
REGENERON PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
granted on or after January 1, 2005 including(including replacement options granted under the Company’s stock option exchange program which concluded on January 5, 2005 (see Note 13a)14)) and (b) all awards granted to employees prior to January 1, 2005 that remainwere unvested on that date. The Company will recognize this compensation cost in each of the categories of expense in the Company’s Statement of Operations.
Other disclosures required by SFAS No. 123 have been included in Note 13a.
Supplemental disclosure of noncash investing and financing activities:
In 2004, 2003, and 2002,Effective January 1, 2006, the Company awarded 105,052, 219,367, and 139,611 shares, respectively,adopted the provisions of Restricted Stock under the Regeneron Pharmaceuticals, Inc. Long-Term Incentive Plan (see Note 13a). The Company records unearned compensation in Stockholders’ Equity related to these awards based on the fair market value of shares of the Company’s Common Stock on the grant date of the Restricted Stock award, which is expensed, on a pro rata basis, over the period that the restrictions on these shares lapse. In 2004, 2003, and 2002, the Company recognized $2.5 million, $2.3 million, and $1.8 million, respectively, of compensation expense related to Restricted Stock awards.
Included in accounts payable and accrued expenses at December 31, 2004, 2003, and 2002 were $0.6 million, $0.8 million, and $13.5 million of capital expenditures, respectively.
Included in accounts payable and accrued expenses at December 31, 2003, 2002, and 2001 were $0.9 million, $0.7 million, and $0.8 million, respectively, of accrued 401(k) Savings Plan contribution expense. During the first quarter of 2004, 2003, and 2002, the Company contributed 64,333, 42,543, and 21,953 shares, respectively, of Common Stock to the 401(k) Savings Plan in satisfaction of these obligations.
Included in marketable securities at December 31, 2004, 2003, and 2002 were $2.6 million, $0.9 million, and $2.0 million of accrued interest income, respectively.
| |
| Future Impact of Recently Issued Accounting Standards |
In April 2004, the Emerging Issues Task Force issued Statement No. 03-6,Participating Securities and the Two — Class Method under FASB Statement No. 128, Earnings per Share(“EITF 03-6”). EITF 03-6 addresses a number of questions regarding the computation of earnings per share (“EPS”) by companies that have issued securities other than common stock that contractually entitle the holder to participate in dividends and earnings of the company when, and if, it declares dividends on its common stock. EITF 03-6 defines participation rights based solely on whether the holder would be entitled to receive any dividends if the entity declared them during the period and requires the use of the two-class method for computing basic EPS when participating convertible securities exist. In addition, EITF 03-6 expands the use of the two-class method to encompass other forms of participating securities and is effective for fiscal periods beginning after March 31, 2004. Since the Company has no participating securities, the Company’s adoption of EITF 03-6 did not have an impact on the Company’s financial statements.
In November 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 151,Inventory Costs, an amendment of ARB 43, Chapter 4 (“SFAS No. 151”). SFAS No. 151 clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material by requiring that those items be recognized as current-period charges in all circumstances. SFAS No. 151 is effective for fiscal years beginning after June 15, 2005. Management believes that the future adoption of SFAS No. 151 will not have a material impact on the Company’s financial statements.
In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123R,Share-Based Payment (“SFAS No. 123R”). SFAS No. 123R, which is a revision of SFAS No. 123,Accounting for
F-14
REGENERON PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
Stock-Based Compensation, and supersedes APB Opinion No. 25,Accounting for Stock Issued to Employees,and its related implementation guidance.123. SFAS No. 123R establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. SFAS No. 123R focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions, and requires the recognition of compensation expense in an amount equal to the fair value of the share-based payment (including stock options and restricted stock) issued to employees. SFAS No. 123R requires companies to estimate, at the time of grant, the number of awards that are expected to be forfeited and to revise this estimate, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Effective January 1, 2005 and prior to the Company’s adoption of SFAS 123R, the Company recognized the effect of forfeitures in stock-based compensation cost in the period when they occurred, in accordance with SFAS 123. Upon adoption of SFAS 123R effective January 1, 2006, the Company was required to record a cumulative effect adjustment to reflect the effect of estimated forfeitures related to outstanding awards that were not expected to vest as of the SFAS 123R adoption date. This adjustment reduced the Company’s loss by $0.8 million and is included in the Company’s operating results in 2006 as a cumulative-effect adjustment of a change in accounting principle.
For the years ended December 31, 2007, 2006, and 2005, $28.0 million, $18.4 million, and $19.9 million, respectively, of non-cash stock-based employee compensation expense related to stock option awards (“Stock Option Expense”) was recognized in operating expenses. In addition, for the year ended December 31, 2005, $0.1 million of Stock Option Expense was capitalized in inventory.
Other disclosures required by SFAS 123 and SFAS 123R have been included in Note 14.
Statement of Cash Flows
Supplemental disclosure of noncash investing and financing activities:
In 2007, 2006, and 2005, the Company recognized $0.1 million, $0.3 million, and $1.9 million, respectively, of compensation expense related to Restricted Stock awards, the fair value of which is expensed, on a pro rata basis, over the period that the restrictions on the shares lapse (see Note 14).
Included in accounts payable and accrued expenses at December 31, 2007, 2006, and 2005 were $1.7 million, $0.8 million, and $0.2 million of capital expenditures, respectively.
Included in accounts payable and accrued expenses at December 31, 2006, 2005, and 2004 were $1.4 million, $1.9 million, and $0.6 million, respectively, of accrued 401(k) Savings Plan contribution expense. During the first quarter of 2007, 2006, and 2005, the Company contributed 64,532, 120,960, and 90,385 shares, respectively, of Common Stock to the 401(k) Savings Plan in satisfaction of these obligations.
F-13
REGENERON PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
Included in marketable securities at December 31, 2007, 2006, and 2005 were $2.2 million, $1.5 million, and $1.2 million of accrued interest income, respectively.
Future Impact of Recently Issued Accounting Standards
In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS 157,Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (“GAAP”), and expands disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal periodsyears beginning after JuneNovember 15, 2005. The Company currently intends to adopt SFAS No. 123R effective July 1, 2005 using2007, however on December 14, 2007, the modified prospective method. Under the modified prospective method, compensation cost is recognized beginning with the effective date based on (a) the requirements of SFAS No. 123R for all share-based payments granted after the effective date and (b) the requirements of SFAS No. 123 for all awards granted to employees prior toFASB issued a proposed staff position (“FSPFAS 157-b”) which would delay the effective date of SFAS No. 123R that remain unvested on157 for nonfinancial assets and nonfinancial liabilities to fiscal years beginning after November 15, 2008. The Company is required to adopt SFAS 157 as it relates to the Company’s financial assets and financial liabilities effective date. Althoughfor the impact of adopting SFAS No. 123R hasfiscal year beginning January 1, 2008, and as it relates to the Company’s nonfinancial assets and nonfinancial liabilities for the fiscal year beginning January 1, 2009. Management does not yet been quantified, management believesanticipate that the future adoption of this standardSFAS 157 will have a material impact on the Company’s financial statements.
In December 2004,February 2007, the FASB issued Statement ofSFAS 159,The Fair Value Option for Financial Accounting Standards No. 153,Exchanges of Nonmonetary Assets an amendment of APB Opinion No. 29 (“SFAS No. 153”)and Financial Liabilities. SFAS No. 153 eliminates an exception for nonmonetary exchanges of similar productive assets under APB Opinion No. 29,159 permits entities to choose to measure many financial instruments and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. SFAS No. 153certain other items at fair value. The objective is to be applied prospectivelyimprove financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS 159 is effective for nonmonetary asset exchanges occurring infinancial statements issued for fiscal periodsyears beginning after JuneNovember 15, 2005.2007. The Company is required to adopt SFAS 159 effective for the fiscal year beginning January 1, 2008. Management believesdoes not anticipate that the future adoption of SFAS No. 153159 will not have a material impact on the Company’s financial statements.
In June 2007, the Emerging Issues Task Force issued StatementNo. 07-3,Accounting for Non-refundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities(“EITF 07-3”).EITF 07-3 addresses how entities involved in research and development activities should account for the non-refundable portion of an advance payment made for future research and development activities and requires that such payments be deferred and capitalized, and recognized as an expense when the goods are delivered or the related services are performed.EITF 07-3 is effective for fiscal years beginning after December 15, 2007, including interim periods within those fiscal years. The Company is required to adoptEITF 07-3 effective for the fiscal year beginning January 1, 2008. Management does not anticipate that the adoption ofEITF 07-3 will have a material impact on the Company’s financial statements.
| |
| 3. | Marketable SecuritiesSeverance Costs |
In September 2005, the Company announced plans to reduce its workforce by approximately 165 employees in connection with narrowing the focus of the Company’s research and development efforts, substantial improvements in manufacturing productivity, the June 2005 expiration of the Company’s collaboration with The Procter & Gamble Company, and the completion of contract manufacturing for Merck & Co., Inc. in late 2006. The majority of the headcount reduction occurred in the fourth quarter of 2005. The remaining headcount reductions occurred during 2006 as the Company completed activities related to contract manufacturing for Merck.
Costs associated with the workforce reduction were comprised principally of severance payments and related payroll taxes, employee benefits, and outplacement services. Termination costs related to 2005 workforce reductions were expensed in the fourth quarter of 2005, and included non-cash expenses due to the accelerated vesting of certain stock options and restricted stock held by affected employees. Estimated termination costs associated with the planned workforce reduction in 2006 were measured in October 2005 and were expensed ratably over the expected service period of the affected employees in accordance with SFAS 146,Accounting for
F-14
REGENERON PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
Costs Associated with Exit or Disposal Activities.The total costs associated with the 2005 and 2006 workforce reductions were $2.6 million, including $0.2 million of non-cash expenses.
Severance costs associated with the workforce reduction plan that were charged to expense in 2005, 2006, and 2007 consist of the following:
| | | | | | | | | | | | | |
| | | | | | | | | Accrued liability
| |
| | | Costs charged to
| | | Costs paid or
| | | at December 31,
| |
| | | expense in 2005 | | | settled in 2005 | | | 2005 | |
| |
| Employee severance, payroll taxes, and benefits | | $ | 1,786 | | | $ | 879 | | | $ | 907 | |
| Other severance costs | | | 206 | | | | 30 | | | | 176 | |
| Non-cash expenses | | | 221 | | | | 221 | | | | | |
| | | | | | | | | | | | | |
| Total | | $ | 2,213 | | | $ | 1,130 | | | $ | 1,083 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | Accrued liability
| |
| | | Costs charged to
| | | Costs paid or
| | | at December 31,
| |
| | | expense 2006 | | | settled in 2006 | | | 2006 | |
| |
| Employee severance, payroll taxes, and benefits | | $ | 315 | | | $ | (1,159 | ) | | $ | 63 | |
| Other severance costs | | | 33 | | | | (209 | ) | | | | |
| | | | | | | | | | | | | |
| Total | | $ | 348 | | | $ | (1,368 | ) | | $ | 63 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | Accrued liability
| |
| | | Costs charged to
| | | Costs paid or
| | | at December 31,
| |
| | | expense in 2007 | | | settled in 2007 | | | 2007 | |
| |
| Employee severance, payroll taxes, and benefits | | $ | 43 | | | $ | (106 | ) | | $ | — | |
These severance costs are included in the Company’s Statement of Operations for the years ended December 31, 2007, 2006, and 2005 as follows:
| | | | | | | | | | | | | | | | | | | | | |
| | | 2007 | | | 2006 | | | 2005 | |
| | | R&D | | | R&D | | | G&A | | | R&D | | | G&A | |
| |
| Employee severance, payroll taxes, and benefits | | $ | 43 | | | $ | 317 | | | $ | (2 | ) | | $ | 1,734 | | | $ | 52 | |
| Other severance costs | | | | | | | 33 | | | | | | | | 206 | | | | | |
| Non-cash expenses | | | | | | | | | | | | | | | 215 | | | | 6 | |
| | | | | | | | | | | | | | | | | | | | | |
| Total | | $ | 43 | | | $ | 350 | | | $ | (2 | ) | | $ | 2,155 | | | $ | 58 | |
| | | | | | | | | | | | | | | | | | | | | |
For segment reporting purposes (see Note 20), all severance-related expenses are included in the Research & Development segment.
The Company considers its unrestricted marketable securities to be “available-for-sale,“available-for-sale,” as defined by Statement of Financial Accounting Standards No.SFAS 115,Accounting for Certain Investments in Debt and Equity Securities. Gross unrealized holding gains and losses are reported as a net amount in a separate component of stockholders’ equity entitled Accumulated Other Comprehensive Income (Loss). The net change in unrealized holding gains and losses is excluded from operations and included in stockholders’ equity as a separate component of comprehensive loss.
F-15
F-15
REGENERON PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
The following tables summarize the amortized cost basis of marketable securities, the aggregate fair value of marketable securities, and gross unrealized holding gains and losses at December 31, 20042007 and 2003:2006:
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Unrealized Holding | |
| | | Amortized | | | | | | |
| | | Cost Basis | | | Fair Value | | | Gains | | | (Losses) | | | Net | |
| | | | | | | | | | | | | | | | |
At December 31, 2004 | | | | | | | | | | | | | | | | | | | | |
| Maturities within one year | | | | | | | | | | | | | | | | | | | | |
| | Corporate debt securities | | $ | 58,077 | | | $ | 57,971 | | | $ | 8 | | | $ | (114 | ) | | $ | (106 | ) |
| | U.S. government securities | | | 137,105 | | | | 136,777 | | | | — | | | | (328 | ) | | | (328 | ) |
| | | | | | | | | | | | | | | | |
| | | | 195,182 | | | | 194,748 | | | | 8 | | | | (442 | ) | | | (434 | ) |
| | | | | | | | | | | | | | | | |
| Maturities between one and two years | | | | | | | | | | | | | | | | | | | | |
| | U.S. government securities | | | 53,265 | | | | 52,930 | | | | — | | | | (335 | ) | | | (335 | ) |
| | | | | | | | | | | | | | | | |
| | | $ | 248,447 | | | $ | 247,678 | | | $ | 8 | | | $ | (777 | ) | | $ | (769 | ) |
| | | | | | | | | | | | | | | | |
At December 31, 2003 | | | | | | | | | | | | | | | | | | | | |
| Maturities within one year | | | | | | | | | | | | | | | | | | | | |
| | Corporate debt securities | | $ | 40,586 | | | $ | 40,578 | | | $ | 6 | | | $ | (14 | ) | | $ | (8 | ) |
| | U.S. government securities | | | 123,893 | | | | 123,998 | | | | 107 | | | | (2 | ) | | | 105 | |
| | | | | | | | | | | | | | | | |
| | | | 164,479 | | | | 164,576 | | | | 113 | | | | (16 | ) | | | 97 | |
| | | | | | | | | | | | | | | | |
| Maturities between one and two years | | | | | | | | | | | | | | | | | | | | |
| | Corporate debt securities | | | 28,928 | | | | 28,931 | | | | 18 | | | | (15 | ) | | | 3 | |
| | U.S. government securities | | | 40,749 | | | | 40,803 | | | | 54 | | | | | | | | 54 | |
| | Asset-backed securities | | | 3,108 | | | | 3,058 | | | | — | | | | (50 | ) | | | (50 | ) |
| | | | | | | | | | | | | | | | |
| | | | 72,785 | | | | 72,792 | | | | 72 | | | | (65 | ) | | | 7 | |
| | | | | | | | | | | | | | | | |
| | | $ | 237,264 | | | $ | 237,368 | | | $ | 185 | | | $ | (81 | ) | | $ | 104 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | Amortized
| | | Fair
| | | Unrealized Holding | |
| | | Cost Basis | | | Value | | | Gains | | | (Losses) | | | Net | |
| |
At December 31, 2007 | | | | | | | | | | | | | | | | | | | | |
| Maturities within one year | | | | | | | | | | | | | | | | | | | | |
| Corporate and municipal bonds | | $ | 69,213 | | | $ | 69,263 | | | $ | 74 | | | $ | (24 | ) | | $ | 50 | |
| Asset-backed securities | | | 73,939 | | | | 73,706 | | | | 99 | | | | (332 | ) | | | (233 | ) |
| Commercial paper | | | 64,846 | | | | 64,870 | | | | 25 | | | | (1 | ) | | | 24 | |
| U.S. government obligations | | | 50,386 | | | | 50,475 | | | | 89 | | | | | | | | 89 | |
| Certificates of deposit | | | 9,220 | | | | 9,218 | | | | | | | | (2 | ) | | | (2 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| | | | 267,604 | | | | 267,532 | | | | 287 | | | | (359 | ) | | | (72 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Maturities between one and two years | | | | | | | | | | | | | | | | | | | | |
| Corporate and municipal bonds | | | 49,724 | | | | 49,947 | | | | 289 | | | | (66 | ) | | | 223 | |
| Asset-backed securities | | | 20,295 | | | | 20,323 | | | | 173 | | | | (145 | ) | | | 28 | |
| Commercial paper | | | 7,952 | | | | 7,952 | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | 77,971 | | | | 78,222 | | | | 462 | | | | (211 | ) | | | 251 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | $ | 345,575 | | | $ | 345,754 | | | $ | 749 | | | $ | (570 | ) | | $ | 179 | |
| | | | | | | | | | | | | | | | | | | | | |
At December 31, 2006 | | | | | | | | | | | | | | | | | | | | |
| Maturities within one year | | | | | | | | | | | | | | | | | | | | |
| Corporate and municipal bonds | | $ | 25,254 | | | $ | 25,221 | | | | | | | $ | (33 | ) | | $ | (33 | ) |
| Asset-backed securities | | | 94,159 | | | | 94,075 | | | $ | 6 | | | | (90 | ) | | | (84 | ) |
| Commercial paper | | | 69,547 | | | | 69,535 | | | | 9 | | | | (21 | ) | | | (12 | ) |
| U.S. government obligations | | | 22,267 | | | | 22,243 | | | | 1 | | | | (25 | ) | | | (24 | ) |
| Certificates of deposit | | | 10,327 | | | | 10,326 | | | | 2 | | | | (3 | ) | | | (1 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| | | | 221,554 | | | | 221,400 | | | | 18 | | | | (172 | ) | | | (154 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Maturities between one and two years | | | | | | | | | | | | | | | | | | | | |
| Corporate and municipal bonds | | | 6,047 | | | | 6,032 | | | | | | | | (15 | ) | | | (15 | ) |
| Asset-backed securities | | | 32,835 | | | | 32,762 | | | | 3 | | | | (76 | ) | | | (73 | ) |
| U.S. government obligations | | | 23,190 | | | | 23,189 | | | | 6 | | | | (7 | ) | | | (1 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| | | | 62,072 | | | | 61,983 | | | | 9 | | | | (98 | ) | | | (89 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| | | $ | 283,626 | | | $ | 283,383 | | | $ | 27 | | | $ | (270 | ) | | $ | (243 | ) |
| | | | | | | | | | | | | | | | | | | | | |
In addition, cash equivalents at December 31, 2007 and 2006 included an unrealized holding loss of $9 thousand and an unrealized holding gain of $12 thousand, respectively.
Realized gains and losses are included as a component of investment income. For the years ended December 31, 2004, 2003,2007, 2006, and 2002,2005, gross realized gains and losses wereon sales of marketable securities was not significant. In computing realized gains and losses, the Company computes the cost of its investments on a specific identification basis. Such cost includes the direct costs to acquire the securities, adjusted for the amortization of any discount or premium. TheIn 2007, deterioration in the credit quality of marketable securities from two issuers
F-16
REGENERON PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
has subjected the Company to the risk of not being able to recover the full principal value of these securities, which totals $14.0 million. Since market activity for these securities is very limited, their fair values at December 31, 2007 were developed based on information provided by the Company’s investment advisors, including but not limited to estimated value of the assets underlying each security and quoted bid prices, as applicable. As a result, the Company recognized a $5.9 million charge related to these marketable securities, which the Company considered to be other than temporarily impaired. Excluding these other than temporarily impaired securities, fair value of marketable securities has been estimated based on quotedinputs that are observable for each security, either directly or indirectly, through corroboration with observable market prices.data.
The following table shows the unrealized losses and fair value of the Company’s marketable securities with unrealized losses that are not deemed to be other-than-temporarilyonly temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2004. These2007 and 2006. The securities listed at December 31, 2007 mature at various dates through May 2006.December 2009.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Less than 12 Months | | | 12 Months or Greater | | | Total | |
| | | | | | | | | | |
| | | | | Unrealized | | | | | Unrealized | | | | | Unrealized | |
| Description of Security | | Fair Value | | | Loss | | | Fair Value | | | Loss | | | Fair Value | | | Loss | |
| | | | | | | | | | | | | | | | | | | |
| Corporate debt securities | | $ | 29,267 | | | $ | 93 | | | $ | 7,353 | | | $ | 21 | | | $ | 36,620 | | | $ | 114 | |
| U.S. government securities | | | 189,707 | | | | 663 | | | | 0 | | | | 0 | | | $ | 189,707 | | | | 663 | |
| | | | | | | | | | | | | | | | | | | |
| | | $ | 218,974 | | | $ | 756 | | | $ | 7,353 | | | $ | 21 | | | $ | 226,327 | | | $ | 777 | |
| | | | | | | | | | | | | | | | | | | |
The
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Total | |
| | | Less than 12 Months | | | 12 Months or Greater | | | | | | Unrealized
| |
| | | Fair Value | | | Unrealized Loss | | | Fair Value | | | Unrealized Loss | | | Fair Value | | | Loss | |
| |
At December 31, 2007 | | | | | | | | | | | | | | | | | | | | | | | | |
| Corporate and municipal | | | | | | | | | | | | | | | | | | | | | | | | |
| bonds | | $ | 36,979 | | | $ | (89 | ) | | $ | 3,056 | | | $ | (1 | ) | | $ | 40,035 | | | $ | (90 | ) |
| Asset-backed securities | | | 18,674 | | | | (360 | ) | | | 12,390 | | | | (116 | ) | | | 31,064 | | | | (476 | ) |
| Commercial paper | | | 14,950 | | | | (2 | ) | | | | | | | | | | | 14,950 | | | | (2 | ) |
| Certificates of deposit | | | 9,218 | | | | (2 | ) | | | | | | | | | | | 9,218 | | | | (2 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | $ | 79,821 | | | $ | (453 | ) | | $ | 15,446 | | | $ | (117 | ) | | $ | 95,267 | | | $ | (570 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
At December 31, 2006 | | | | | | | | | | | | | | | | | | | | | | | | |
| Corporate and municipal | | | | | | | | | | | | | | | | | | | | | | | | |
| bonds | | $ | 12,113 | | | $ | (31 | ) | | $ | 12,191 | | | $ | (18 | ) | | $ | 24,304 | | | $ | (49 | ) |
| Asset-backed securities | | | 92,544 | | | | (161 | ) | | | 891 | | | | (5 | ) | | | 93,435 | | | | (166 | ) |
| Commercial paper | | | 12,949 | | | | (20 | ) | | | | | | | | | | | 12,949 | | | | (20 | ) |
| U.S. government obligations | | | 23,273 | | | | (25 | ) | | | 2,023 | | | | (7 | ) | | | 25,296 | | | | (32 | ) |
| Certificates of deposit | | | 3,034 | | | | (3 | ) | | | | | | | | | | | 3,034 | | | | (3 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | $ | 143,913 | | | $ | (240 | ) | | $ | 15,105 | | | $ | (30 | ) | | $ | 159,018 | | | $ | (270 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
At December 31, 2007, the unrealized losses onin the Company’s investmentsmarketable securities were primarily caused by general instability in corporate debt securities and U.S. governmentthe credit markets at the end of 2007. At December 31, 2006, the unrealized losses in the Company’s marketable securities were primarily caused by interest rate increases, which have generally resulted in a decrease in the
F-16
REGENERON PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
market value of the Company’s portfolio. Based upon the Company’s currently projected sources and uses of cash, the Company intends to hold these securities until a recovery of fair value, which may be maturity. Therefore, the Company does not consider these marketable securities to be other-than-temporarily impaired at December 31, 2004. Unrealized holding losses on2007 and 2006 to beotherthan temporarily impaired. However, further deterioration in the credit markets may subject the Company to the risk of not being able to recover the full principal value of certain of its marketable securities, at December 31, 2003 were losses for less than twelve months.
Accounts receivable as of December 31, 2004 and 2003 consist ofwhich could have a material impact on the following:Company’s financial statements.
| | | | | | | | | |
| | | 2004 | | | 2003 | |
| | | | | | | |
| Receivable from the sanofi-aventis Group (see Note 11a) | | $ | 39,362 | | | $ | 8,917 | |
| Receivable from Novartis Pharma AG (see Note 11b) | | | — | | | | 3,177 | |
| Receivable from The Procter & Gamble Company (see Note 11e) | | | 2,345 | | | | 2,670 | |
| Receivable from Merck & Co. Inc. (see Note 12) | | | 1,315 | | | | 765 | |
| Other | | | 80 | | | | — | |
| | | | | | | |
| | | $ | 43,102 | | | $ | 15,529 | |
| | | | | | | |
Inventory balances at December 31, 2004 and 2003 consist of raw materials, work-in process, and finished products associated with the production of an intermediate for a Merck & Co., Inc. pediatric vaccine under a long-term manufacturing agreement (see Note 12).
Inventories as of December 31, 2004 and 2003 consist of the following:
| | | | | | | | | |
| | | 2004 | | | 2003 | |
| | | | | | | |
| Raw materials | | $ | 310 | | | $ | 388 | |
| Work-in process | | | 692 | (1) | | | — | (2) |
| Finished products | | | 2,227 | | | | 8,618 | |
| | | | | | | |
| | | $ | 3,229 | | | $ | 9,006 | |
| | | | | | | |
| |
(1) | Net of reserves of $0.3 million. |
|
(2) | Net of reserves of $0.2 million. |
F-17
REGENERON PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
Accounts receivable as of December 31, 2007 and 2006 consist of the following:
| | | | | | | | | |
| | | 2007 | | | 2006 | |
| |
| Receivable from sanofi-aventis (see Note 11) | | $ | 14,244 | | | $ | 6,900 | |
| Receivable from Bayer HealthCare (see Note 11) | | | 2,797 | | | | | |
| Other | | | 1,279 | | | | 593 | |
| | | | | | | | | |
| | | $ | 18,320 | | | $ | 7,493 | |
| | | | | | | | | |
| |
| 6. | Property, Plant, and Equipment |
Property, plant, and equipment as of December 31, 20042007 and 20032006 consist of the following:
| | | | | | | | | |
| | | 2004 | | | 2003 | |
| | | | | | | |
| Land | | $ | 475 | | | $ | 475 | |
| Building and improvements | | | 56,750 | | | | 56,054 | |
| Leasehold improvements | | | 30,451 | | | | 29,108 | |
| Construction-in-progress | | | 172 | | | | 1,443 | |
| Laboratory and other equipment | | | 55,174 | | | | 51,536 | |
| Furniture, fixtures, and computer equipment | | | 5,498 | | | | 5,092 | |
| | | | | | | |
| | | | 148,520 | | | | 143,708 | |
| Less, accumulated depreciation and amortization | | | (77,281 | ) | | | (62,985 | ) |
| | | | | | | |
| | | $ | 71,239 | | | $ | 80,723 | |
| | | | | | | |
| | | | | | | | | |
| | | 2007 | | | 2006 | |
| |
| Land | | $ | 2,117 | | | $ | 475 | |
| Building and improvements | | | 66,208 | | | | 57,045 | |
| Leasehold improvements | | | 13,982 | | | | 14,662 | |
| Construction-in-progress | | | 4,677 | | | | 203 | |
| Laboratory and other equipment | | | 61,717 | | | | 59,164 | |
| Furniture, fixtures, software and computer equipment | | | 6,080 | | | | 5,413 | |
| | | | | | | | | |
| | | | 154,781 | | | | 136,962 | |
| Less, accumulated depreciation and amortization | | | (96,477 | ) | | | (87,609 | ) |
| | | | | | | | | |
| | | $ | 58,304 | | | $ | 49,353 | |
| | | | | | | | | |
In October 2007, the Company purchased land and a building in Rensselaer, New York for $9.0 million. The Company previously leased manufacturing, office, and warehouse space in a portion of the purchased building (see Note 10).
Depreciation and amortization expense on property, plant, and equipment amounted to $10.4 million, $14.3 million, $13.0 million, and $8.5$15.4 million for the years ended December 31, 2004, 2003,2007, 2006, and 2002,2005, respectively. Included in these amounts was $1.1$0.7 million and $0.9 million of depreciation and amortization expense related to contract manufacturing that was capitalized into inventory for each of the three years ended December 31, 2004, 2003,2006 and 2002.2005, respectively.
| |
| 7. | Accounts Payable and Accrued Expenses |
Accounts payable and accrued expenses as of December 31, 20042007 and 20032006 consist of the following:
| | | | | | | | | |
| | | 2004 | | | 2003 | |
| | | | | | | |
| Accounts payable | | $ | 4,407 | | | $ | 3,878 | |
| Accrued payroll and related costs | | | 7,972 | | | | 5,125 | |
| Accrued clinical trial expense | | | 2,083 | | | | 3,876 | |
| Accrued expenses, other | | | 2,118 | | | | 3,762 | |
| Interest payable on convertible notes | | | 2,292 | | | | 2,292 | |
| | | | | | | |
| | | $ | 18,872 | | | $ | 18,933 | |
| | | | | | | |
| | | | | | | | | |
| | | 2007 | | | 2006 | |
| |
| Accounts payable | | $ | 8,128 | | | $ | 4,349 | |
| Payable due to Bayer HealthCare (see Note 11) | | | 4,892 | | | | | |
| Accrued payroll and related costs | | | 14,514 | | | | 9,932 | |
| Accrued clinical trial expense | | | 5,609 | | | | 2,606 | |
| Accrued expenses, other | | | 3,797 | | | | 2,292 | |
| Interest payable on convertible notes | | | 2,292 | | | | 2,292 | |
| | | | | | | | | |
| | | $ | 39,232 | | | $ | 21,471 | |
| | | | | | | | | |
F-18
F-18
REGENERON PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
Deferred revenue as of December 31, 20042007 and 20032006 consists of the following:
| | | | | | | | | | |
| | | 2004 | | | 2003 | |
| | | | | | | |
| Current portion: | | | | | | | | |
| | Received from the sanofi-aventis Group | | $ | 9,405 | | | $ | 10,909 | |
| | Received from Novartis Pharma AG | | | — | | | | 22,100 | |
| | Received from Merck & Co., Inc. | | | 4,407 | | | | 6,262 | |
| | Other | | | 1,455 | | | | 902 | |
| | | | | | | |
| | | $ | 15,267 | | | $ | 40,173 | |
| | | | | | | |
| Long-term portion: | | | | | | | | |
| | Received from the sanofi-aventis Group | | $ | 56,426 | | | $ | 65,455 | |
| | Received from Merck & Co., Inc. | | | — | | | | 3,375 | |
| | | | | | | |
| | | $ | 56,426 | | | $ | 68,830 | |
| | | | | | | |
| | | | | | | | | |
| | | 2007 | | | 2006 | |
| |
| Current portion: | | | | | | | | |
| Received from sanofi-aventis (see Note 11) | | $ | 18,855 | | | $ | 8,937 | |
| Received from Bayer HealthCare (see Note 11) | | | 13,179 | | | | 12,561 | |
| Received for technology license agreements (see Note 12) | | | 11,579 | | | | | |
| Other | | | 819 | | | | 2,045 | |
| | | | | | | | | |
| | | $ | 44,432 | | | $ | 23,543 | |
| | | | | | | | | |
| Long-term portion: | | | | | | | | |
| Received from sanofi-aventis | | $ | 126,431 | | | $ | 61,013 | |
| Received from Bayer HealthCare | | | 65,896 | | | | 62,439 | |
| | | | | | | | | |
| | | $ | 192,327 | | | $ | 123,452 | |
| | | | | | | | | |
| |
| 9. | Stockholders’Stockholders Equity |
The Company’s AmendedRestated Certificate of Incorporation provides for the issuance of up to 40 million shares of Class A Stock, par value $0.001 per share, and 160 million shares of Common Stock, par value $0.001 per share. Shares of Class A Stock are convertible, at any time, at the option of the holder into shares of Common Stock on ashare-for-share basis. Holders of Class A Stock have rights and privileges identical to Common Stockholders except that Class A Stockholders are entitled to ten votes per share, while Common Stockholders are entitled to one vote per share. Class A Stock may only be transferred to specified Permitted Transferees, as defined. TheUnder the Company’s Restated Certificate of Incorporation, the Company’s Board of Directors (the “Board”) is authorized to issue up to 30 million shares of preferred stock, in series, with rights, privileges, and qualifications of each series determined by the Board.
During 1996, the Company adopted a Shareholder Rights Plan in which Rights were distributed as a dividend at the rate of one Right for each share of Common Stock and Class A Stock (collectively, “Stock”) held by shareholders of record as of the close of business on October 18, 1996. Each Right initially entitles the registered holder to buy a unit (“Unit”) consisting of one-one thousandth of a share of Series A Junior Participating Preferred Stock (“A Preferred Stock”) at a purchase price of $120 per Unit (the “Purchase Price”). Initially the Rights were attached to all Stock certificates representing shares then outstanding, and no separate Rights certificates were distributed. The Rights will separate from the Stock and a “distribution date” will occur upon the earlier of (i) ten days after a public announcement that a person or group of affiliated or associated persons, excluding certain defined persons, (an “Acquiring Person”) has acquired, or has obtained the right to acquire, beneficial ownership of 20% or more of the outstanding shares of Stock or (ii) ten business days following the commencement of a tender offer or exchange offer that would result in a person or group beneficially owning 20% or more of such outstanding shares of Stock. The Rights are not exercisable unless a distribution date occurs and will expire at the close of business on October 18, 2006 unless earlier redeemed by the Company, subject to certain defined restrictions, for $.01 per Right. In the event that an Acquiring Person becomes the beneficial owner of 20% or more of the then outstanding shares of Stock (unless such acquisition is made pursuant to a tender or exchange offer for all outstanding shares of the Company, at a price determined by a majority of the independent directors of the Company who are not representatives, nominees, affiliates, or associates of an Acquiring Person to be fair and otherwise in the best interest of the Company and its shareholders after receiving advice from one or more investment banking firms), each Right (other than Rights held by the Acquiring Person which shall be voided) will entitle the
F-19
REGENERON PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
holder to purchase, at the Right’s then current exercise price, common shares (or, in certain circumstances, cash, property or other securities of the Company) having a value twice the Right’s Exercise Price. The Right’s Exercise Price is the Purchase Price times the number of shares of Common Stock associated with each Right (initially, one). Upon the occurrence of any such events, the Rights held by an Acquiring Person become null and void. In certain circumstances, a Right entitles the holder to receive, upon exercise, shares of common stock of an acquiring company having a value equal to two times the Right’s Exercise Price.
As a result of the Shareholder Rights Plan, the Company’s Board designated 100,000 shares of preferred stock as A Preferred Stock. The A Preferred Stock has certain preferences, as defined.
In October 2001, the Company completed a private placement of $200.0 million aggregate principal amount of senior subordinated notes, which are convertible into shares of the Company’s Common Stock. See Note 10d.10.
In March 2003, Novartis Pharma AG purchased $48.0November 2006, the Company completed a public offering of 7.6 million of newly issued unregistered shares of the Company’s Common Stock. Regeneron issued 2,400,000 shares of Common Stock to Novartis in March 2003 and an additional 5,127,050 shares in May 2003 forat a total of 7,527,050 shares based upon the average closing price of the Common Stock for the 20 consecutive trading days ending May 12, 2003. See Note 11b.$23.03 per share and received proceeds, after expenses, of $174.6 million.
In August 2003, Regeneron issued to Merck & Co., Inc., 109,450 newly issued unregistered shares of the Company’s Common Stock as consideration for a non-exclusive license agreement granted by Merck to the Company. In August 2004, the Company repurchased these shares from Merck for a purchase price of $0.9 million based on the fair market value of the shares on August 19, 2004. The shares were subsequently retired. See Note 10e.
In September 2003, Aventissanofi-aventis purchased 2,799,552 newly issued, unregistered shares of the Company’s Common Stock for $45.0 million. See Note 11.
In December 2007, sanofi-aventis purchased 12 million based upon the average closing pricenewly issued, unregistered shares of the Company’s Common Stock for an aggregate cash price of $312.0 million. As a condition to the five consecutive trading days ending September 4, 2003. Seeclosing of this transaction, sanofi-aventis entered into an investor agreement with the Company. Under the investor agreement, sanofi-aventis has three demand rights to require the Company to use all reasonable efforts to conduct a registered underwritten public offering with respect to shares of the Company’s Common Stock beneficially owned by sanofi-aventis immediately after the closing of the transaction. Until the later of the fifth anniversaries of the expiration or earlier termination of the License and Collaboration Agreement under the Company’s antibody collaboration with sanofi-aventis (see Note 11a11) and the Company’s collaboration agreement with sanofi-aventis for the development and commercialization of aflibercept (see Note 11), sanofi-aventis will be bound by certain “standstill” provisions. These provisions include an agreement not to acquire more than a specified percentage of the outstanding shares of the Company’s Class A Stock and Common Stock. The percentage is currently 25% and will increase to 30% after December 20, 2011. Sanofi-aventis has also agreed not to dispose of any shares of the Company’s Common Stock
F-19
REGENERON PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
that were beneficially owned by sanofi-aventis immediately after the closing of the transaction until December 20, 2012, subject to certain limited exceptions. Following December 20, 2012, sanofi-aventis will be permitted to sell shares of the Company’s Common Stock (i) in a registered underwritten public offering imdertaken pursuant to the demand registration rights granted to sanofi-aventis and described above, subject to the underwriter’s broad distribution of securities sold, (ii) pursuant to Rule 144 under the Securities Act and transactions exempt from registration under the Securities Act, subject to a volume limitation of one million shares of the Company’s Common Stock every three months and a prohibition on selling to beneficial owners, or persons that would become beneficial owners as a result of such sale, of 5% or more of the outstanding shares of the Company’s Common Stock and (iii) into an issuer tender offer, or a tender offer by a third party that is recommended or not opposed by the Company’s Board of Directors. Sanofi-aventis has agreed to vote, and cause its affiliates to vote, all shares of the Company’s voting securities they are entitled to vote, at sanofi-aventis’ election, either as recommended by the Company’s Board of Directors or proportionally with the votes cast by the Company’s other shareholders, except with respect to certain change of control transactions, liquidation or dissolution, stock issuances equal to or exceeding 10% of the then outstanding shares or voting rights of the Company’s Class A Stock and Common Stock, and new equity compensation plans or amendments if not materially consistent with the Company’s historical equity compensation practices. The rights and restrictions under the investor agreement are subject to termination upon the occurrence of certain events.
| |
| 10. | Commitments and Contingencies |
The Company currently leases and subleases laboratory and office facilities in Tarrytown, New York under operating lease agreementsagreements. In December 2006, the Company entered into a new operating lease agreement to lease laboratory and office space that is now under construction and expected to be completed in mid-2009 at the Company’s current Tarrytown location, plus retain a portion of the Company’s existing space. In October 2007, the Company amended the December 2006 operating lease agreement to increase the amount of new space to be leased. The term of the lease is expected to commence in mid-2008 and will expire approximately 16 years later. Under the new lease the Company also has various options and rights on additional space at the Tarrytown site, and will continue to lease its present facilities until the new facilities are ready for occupancy. In addition, the lease contains three renewal options to extend the term of the lease by five years each and early termination options for the Company’s retained facilities only. The lease provides for monthly payments over the term of the lease related to the Company’s retained facilities, the costs of construction and tenant improvements for the Company’s new facilities, and additional charges for utilities, taxes, and operating expenses.
In connection with the new lease agreement, in December 2006, the Company issued a letter of credit in the amount of $1.6 million to its landlord, which expire throughis collateralized by a $1.6 million bank certificate of deposit. The certificate of deposit has been classified as restricted cash at December 31, 2007 and 2006 in the accompanying financial statements.
In November 2007, the Company entered into a new operating sublease for additional office space in Tarrytown, New York. The lease expires in September 2009 and containcontains two renewal options for lease extensions on certain facilities through December 2014. to extend the term of the sublease by three months each.
The Company also leasesformerly leased manufacturing, office, and warehouse facilities in Rensselaer, New York under an operating lease agreement which expires in July 2007 and contains renewal options to extend theagreement. The lease for two additional five-year terms and a purchase option. The leases provideprovided for base rent plus additional rental charges for utilities, taxes, and operating expenses, as defined. In June 2007, the Company exercised a purchase option under the lease and, in October 2007, purchased the land and building (see Note 6).
The Company leases certain laboratory and office equipment under operating leases which expire at various times through 2007.2011.
F-20
F-20
REGENERON PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
At
Based, in part, upon budgeted construction and tenant improvement costs related to our new operating lease for facilities to be constructed in Tarrytown, New York, as described above, at December 31, 2004,2007, the estimated future minimum noncancelable lease commitments under operating leases were as follows:
| | | | | | | | | | | | | |
| December 31, | | Facilities | | | Equipment | | | Total | |
| | | | | | | | | | |
| 2005 | | $ | 4,627 | | | $ | 228 | | | $ | 4,855 | |
| 2006 | | | 4,539 | | | | 130 | | | | 4,669 | |
| 2007 | | | 4,537 | | | | 22 | | | | 4,559 | |
| 2008 | | | 1,800 | | | | | | | | 1,800 | |
| 2009 | | | 1,800 | | | | | | | | 1,800 | |
| | | | | | | | | | |
| | | $ | 17,303 | | | $ | 380 | | | $ | 17,683 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
December 31, | | Facilities | | | Equipment | | | Total | |
| |
| 2008 | | $ | 4,686 | | | $ | 429 | | | $ | 5,115 | |
| 2009 | | | 9,573 | | | | 339 | | | | 9,912 | |
| 2010 | | | 14,453 | | | | 185 | | | | 14,638 | |
| 2011 | | | 14,713 | | | | 13 | | | | 14,726 | |
| 2012 | | | 14,979 | | | | | | | | 14,979 | |
| Thereafter | | | 193,643 | | | | | | | | 193,643 | |
| | | | | | | | | | | | | |
| | | $ | 252,047 | | | $ | 966 | | | $ | 253,013 | |
| | | | | | | | | | | | | |
Rent expense under operating leases was:
| | | | | | | | | | | | | |
| Year Ending December 31, | | Facilities | | | Equipment | | | Total | |
| | | | | | | | | | |
| 2004 | | $ | 5,351 | | | $ | 303 | | | $ | 5,654 | |
| 2003 | | | 5,394 | | | | 305 | | | | 5,699 | |
| 2002 | | | 4,556 | | | | 257 | | | | 4,813 | |
| | | | | | | | | | | | | |
Year Ending December 31, | | Facilities | | | Equipment | | | Total | |
| |
| 2007 | | $ | 4,632 | | | $ | 363 | | | $ | 4,995 | |
| 2006 | | | 4,492 | | | | 307 | | | | 4,799 | |
| 2005 | | | 4,606 | | | | 319 | | | | 4,925 | |
In addition to its rent expense for various facilities, the Company paid additional rental charges for utilities, real estate taxes, and operating expenses of $6.0$8.8 million, $6.0$8.7 million, and $3.6$9.5 million for the years ended December 31, 2004 2003,2007, 2006, and 2002,2005, respectively.
| |
| b. | b. Capital LeasesConvertible Debt |
In 2003 and prior years, the Company had leased equipment under noncancelable capital leases. Lease terms were generally four years after which, for certain leases, the Company purchased the equipment at amounts defined by the agreements. As of December 31, 2003, the Company had no remaining capital leases outstanding.
In March 2003, the Company entered into a collaboration agreement with Novartis Pharma AG. In accordance with that agreement, Regeneron funded its share of 2003 collaboration development expenses through a loan from Novartis, which bore interest at a rate per annum equal to the LIBOR rate plus 2.5%, compounded quarterly. In March 2004, Novartis forgave its outstanding loan to Regeneron totaling $17.8 million, including accrued interest, based on Regeneron’s achieving a pre-defined development milestone. See Note 11b.
In October 2001, the Company issued $200.0 million aggregate principal amount of convertible senior subordinated notes (“Notes”) in a private placement for proceeds to the Company of $192.7 million, after deducting the initial purchasers’ discount and out-of-pocket expenses (collectively, “Deferred Financing Costs”). The Notes bear interest at 5.5% per annum, payable semi-annually, and mature on October 17, 2008. Deferred Financing Costs, which are included in other assets, are amortized as interest expense over the period from the Notes’ issuance to stated maturity. The Notes are convertible, at the option of the holder at any time, into shares of the Company’s Common Stock at a conversion price of approximately $30.25 per share, subject to adjustment in certain circumstances. Regeneron may also redeem some or all of the Notes at any time if the closing price of the Company’s Common Stock has exceeded 140% of the conversion price then in effect for a
F-21
REGENERON PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
specified period of time. The fair market value of the Notes fluctuates over time. The estimated fair value of the Notes at December 31, 20042007 was approximately $190.0$206.1 million.
With respect to the Notes, the Company pledged as collateral $31.6 million of U.S. government securities (“Restricted Marketable Securities”) which matured at various dates through October 2004. At December 31, 2003, the balance of the Restricted Marketable Securities had an amortized cost basis of $10.9 million, due to scheduled interest payments made on the Notes in 2002 and 2003. Upon maturity, the proceeds of the remaining Restricted Marketable Securities paid the scheduled 2004 interest payments on the Notes when due. The Company considered its Restricted Marketable Securities to be “held-to-maturity,” as defined by Statement of Financial Accounting Standards No. 115,Accounting for Certain Investments in Debt and Equity Securities. These securities were reported at their amortized cost, which included the direct costs to acquire the securities, plus the amortization of any discount or premium, and accrued interest earned on the securities. The fair value of the Restricted Marketable Securities at December 31, 2003, which was estimated based on quoted market prices, was $11.0 million and the gross unrealized holding gain was $0.1 million. At December 31, 2004 there were no remaining Restricted Marketable Securities.
| |
| c. | e. Research Collaboration and Licensing Agreements |
As part of the Company’s research and development efforts, the Company enters into research collaboration and licensing agreements with related and unrelated companies, scientific collaborators, universities, and consultants. The Company also has a license and supply agreement with Nektar Therapeutics for a reagent used to formulate one of the Company’s product candidates. These agreements contain varying terms and provisions which include fees and milestones to be paid by the Company, services to be provided, and ownership rights to certain proprietary technology developed under the agreements. Some of the agreements contain provisions which require the Company to pay royalties, as defined, at rates that range from 0.25% to 10%16.5%, in the event the Company sells or licenses any proprietary products developed under the respective agreements.
Certain agreements under which the Company is required to pay fees permit the Company, upon 30 to90-day written notice, to terminate such agreements. With respect to payments associated with these agreements, the
F-21
REGENERON PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
Company incurred expenses of $1.4$1.0 million, $2.7$1.1 million, and $1.7$1.0 million for the years ended December 31, 2004, 2003,2007, 2006, and 2002,2005, respectively.
In August 2003, Merck & Co.,July 2002, Amgen Inc. and Immunex Corporation (now part of Amgen) granted the Company a non-exclusive license agreement to certain patents and patent applications which may be used in the development and commercialization of AXOKINE®ARCALYSTTM(rilonacept; also known as IL-1 Trap). As consideration,The license followed two other licensing arrangements under which Regeneron obtained a non-exclusive license to patents owned by ZymoGenetics, Inc. and Tularik Inc. for use in connection with the Company issued to Merck 109,450 newly issued unregistered shares of its Common Stock (the “Merck Shares”), valued at $1.5 million based on the fair market value of shares of the Company’s Common Stock on the agreement’s effective date. In August 2004, the Company repurchased from Merck and subsequently retired the Merck Shares for $0.9 million based on the fair market value of the shares on August 19, 2004. The Company also made a cash payment of $0.6 million to Merck as required under theARCALYSTTM program. These license agreement. The agreement also requiresagreements would require the Company to make an additional payment to Merck upon receipt of marketing approval for a product covered by the licensed patents. In addition, the Company would be required to pay royalties at staggered rates in the mid-single digits, based on the net sales of products covered byARCALYSTTM if and when it is approved for sale. In total, the licensedroyalty rate under these three agreements would be in the mid-single digits.
In December 2003, the Company entered into a non-exclusive license agreement with Cellectis Inc. that granted the Company certain rights in a family of patents relating to homologous recombination. Cellectis now claims that agreements the Company entered into relating to itsVelocImmune mice with AstraZeneca UK Limited, Astellas Pharma Inc., and sanofi-aventis are outside of the scope of the Company’s license from Cellectis. The Company disagrees with Cellectis’ position and is in discussions with Cellectis regarding this matter. If the Company is not able to resolve this dispute, Cellectis may commence a lawsuit against the Company and itsVelocImmune licensees alleging infringement of Cellectis’ patents. The Company is unable to estimate the losses or expenses, if any, that may result from the resolution of this matter; however, such losses or expenses could be material.
| |
| 11. | Research and Development Agreements |
The Company has entered into various agreements related to its activities to develop and commercialize product candidates and utilize its technology platforms. Amounts earned by the Company in connection with these agreements, which were recognized as contract research and development revenue research progress payments, or other contract income, as applicable, totaled $198.7$96.6 million, $47.4$51.1 million, and $10.9$83.1 million in
F-22
REGENERON PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
2004, 2003, 2007, 2006, and 2002,2005, respectively. Total Company incurred expenses associated with these agreements, which include reimbursable as applicable, and non-reimbursable amounts, and an allocable portion of general and administrative costs, and cost-sharing of a collaborator’s development expenses, where applicable (see Bayer HealthCare below), were $75.3$108.2 million, $56.0$43.4 million and $11.9$42.2 million in 2004, 2003,2007, 2006, and 2002,2005, respectively. Significant agreements of this kind are described below.
| |
| a. | a. The sanofi-aventis Group |
Aflibercept
In September 2003, the Company entered into a collaboration agreement (the “s-a“Aventis Agreement”) with theAventis Pharmaceuticals Inc. (predecessor to sanofi-aventis Group,U.S.), to jointly develop and commercialize the Company’s Vascular Endothelial Growth Factor (“VEGF”) Trap throughout the world with the exception of Japan, where product rights remain with Regeneron.aflibercept. In connection with this agreement, sanofi-aventis made a non-refundable, up-front payment of $80.0 million and purchased 2,799,552 newly issued unregistered shares of the Company’s Common Stock for $45.0 million, based upon the average closing price of the Common Stock for the five consecutive trading days ending September 4, 2003.million.
In January 2005, the Company and sanofi-aventis amended the s-aAventis Agreement to exclude local administrationintraocular delivery of the VEGF Trapaflibercept to the eye (the “Excluded Field”(“Intraocular Delivery”) from joint development under the agreement, and product rights to the VEGF Trapaflibercept in the Excluded FieldIntraocular Delivery reverted to Regeneron. In connection with this amendment, sanofi-aventis made a $25.0 million non-refundable payment to Regeneron (the “Excluded Field“Intraocular Termination Payment”) in January 2005.
In December 2005, the Company and sanofi-aventis amended the Aventis Agreement to expand the territory in which the companies are collaborating on the development of aflibercept to include Japan. In connection with this amendment, sanofi-aventis agreed to make a $25.0 million non-refundable, up-front payment to the Company, which was received in January 2006. Under the s-aAventis Agreement, as amended, Regeneronthe Company and sanofi-aventis will share co-promotion rights and profits on sales, if any, of the VEGF Trap,aflibercept outside of Japan, for disease indications
F-22
REGENERON PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
(Unless otherwise noted, dollars in thousands, except for salesper share data)
included in the Excluded Field. In December 2004, Regeneron earnedcompanies’ collaboration. The Company is entitled to a $25.0 million payment from sanofi-aventis, which was receivedroyalty of approximately 35% on annual sales of aflibercept in January 2005, upon achievement of an early-stage clinical milestone.Japan, subject to certain potential adjustments. The Company may also receive up to $360.0$400.0 million in additional milestone payments upon receipt of specified marketing approvals. This total includes up to $360.0 million in milestone payments related to the receipt of marketing approvals for up to eight VEGF Trapaflibercept oncology and other indications in Europethe United States or the United States.European Union. Another $40.0 million of milestone payments relate to receipt of marketing approvals for up to five aflibercept oncology indications in Japan.
Under the s-aAventis Agreement, as amended, agreed upon worldwide development expenses incurred by both companies during the term of the agreement will be funded by sanofi-aventis. If the collaboration becomes profitable, Regeneron will be obligated to reimburse sanofi-aventis for 50% of these development expenses, or half of $86.5$306.8 million as of December 31, 2004,2007, in accordance with a formula based on the amount of development expenses and Regeneron’s share of the collaboration profits and Japan royalties, or at a faster rate at Regeneron’s option. Regeneron has the option to conduct additional pre-Phase III studies at its own expense. In connection with the January 2005 amendment to the s-aAventis Agreement, the Excluded FieldIntraocular Termination Payment of $25.0 million will be considered a VEGF Trapan aflibercept development expense and will be subject to 50% reimbursement by Regeneron to sanofi-aventis, as described above, if the collaboration becomes profitable. In addition, if the first commercial sale of a VEGF Trapan aflibercept product in the Excluded Field (“First Excluded Sale”)Intraocular Delivery predates the first commercial sale of a VEGF Trapan aflibercept product under the collaboration (“First Collaboration Sale”),by two years, Regeneron will begin reimbursing sanofi-aventis for up to $7.5 million of VEGF Trapaflibercept development expenses commencing two years after the First Excluded Sale in accordance with a defined formula until the First Collaboration Salefirst commercial aflibercept sale under the collaboration occurs.
Sanofi-aventis has the right to terminate the agreement without cause with at least twelve months advance notice. Upon termination of the agreement for any reason, Regeneron’s obligation to reimburse sanofi-aventis, for 50% of VEGF Trapaflibercept development expenses will terminate, and the Company will retain all rights to the VEGF Trap.aflibercept.
Revenue related to payments from sanofi-aventis under the Aventis Agreement, as amended, is being recognized under the Substantive Milestone Method (see Note 2) in accordance with SAB 104.104 andEITF 00-21 (see Note 2). The up-front paymentpayments received in September 2003 and January 2006, of $80.0 million and $25.0 million, respectively, and reimbursement of Regeneron-incurred development expenses, are being recognized as contract research and development revenue over the related performance period. The Company recognized $47.1 million, $47.8 million, and $43.4 million of contract research and development period. Milestone payments arerevenue in 2007, 2006, and 2005, respectively, in connection with the Aventis Agreement, as amended. The Company also recognized as research progress payments. In addition to the $25.0 million research progress payment earnedIntraocular Termination Payment as other contract income in 2004,2005. At December 31, 2007 and 2006, amounts receivable from sanofi-aventis totaled $10.5 million and $6.9 million, respectively, and deferred revenue was $61.2 million and $70.0 million, respectively, in connection with the Aventis Agreement.
Antibodies
In November 2007, the Company entered into a global, strategic collaboration (the “Antibody Collaboration”) with sanofi-aventis to discover, develop, and commercialize fully human monoclonal antibodies. In connection with the collaboration, in December 2007, sanofi-aventis purchased 12 million newly issued, unregistered shares of the Company’s Common Stock for $312.0 million (see Note 9).
The Antibody Collaboration is governed by a Discovery and Preclinical Development Agreement (the “Discovery Agreement”) and a License and Collaboration Agreement (the “License Agreement”). The Company received a non-refundable, up-front payment of $85.0 million from sanofi-aventis under the Discovery Agreement. In addition, sanofi-aventis will fund up to $475.0 million of the Company’s research for identifying and validating potential drug discovery targets and developing fully human monoclonal antibodies against such targets through December 31, 2012, subject to specified funding limits of $75.0 million for the period from the collaboration’s inception through December 31, 2008, and $100.0 million annually in each of the next four years. The Discovery
F-23
F-23
REGENERON PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
recognized $78.3 million
Agreement will expire on December 31, 2012; however, sanofi-aventis has an option to extend the agreement for up to an additional three years for further antibody development and $14.3 million of contract research and development revenue in 2004 and 2003, respectively, in connectionpreclinical activities.
For each drug candidate identified under the Discovery Agreement, sanofi-aventis has the option to license rights to the candidate under the License Agreement. If it elects to do so, sanofi-aventis will co-develop the drug candidate with the s-a Agreement. At December 31, 2004 and 2003, amounts receivable fromCompany through product approval. If sanofi-aventis totaled $39.4 million and $8.9 million, respectively, and deferred revenue was $65.8 million and $76.4 million, respectively.
In March 2003,does not exercise its option to license rights to a particular drug candidate under the License Agreement, the Company entered into a collaboration agreement (the “Novartis Agreement”) with Novartis Pharma AGwill retain the exclusive right to jointly develop and commercialize the Company’s Interleukin-1 Cytokine Trap (“IL-1 Trap”). In connection with this agreement, Novartis madesuch drug candidate, and sanofi-aventis will receive a non-refundable up-front payment of $27.0 million and purchased $48.0 million of newly issued unregistered sharesroyalty on sales, if any. Upon inception of the Company’s Common Stock. Regeneron issued 2,400,000 shares of Common Stock to Novartis in March 2003 and an additional 5,127,050 shares in May 2003 for a total of 7,527,050 shares based upon the average closing price of the Common Stock for the 20 consecutive trading days ending May 12, 2003.
Development expenses incurred during 2003 were shared equally byAntibody Collaboration, the Company and Novartis. Regeneron funded its share of 2003sanofi-aventis began co-developing the first therapeutic antibody, REGN88, under the License Agreement.
Under the License Agreement, agreed upon worldwide development expenses throughincurred by both companies during the term of the agreement will be funded by sanofi-aventis, except that following receipt of the first positive Phase 3 trial results for a loan (the “2003 Loan”co-developed drug candidate, subsequent Phase 3 trial-related costs for that drug candidate (“Shared Phase 3 Trial Costs”) from Novartis, which bore interest at a rate per annum equalwill be shared 80% by sanofi-aventis and 20% by Regeneron. If the Antibody Collaboration becomes profitable, Regeneron will be obligated to the LIBOR rate plus 2.5%, compounded quarterly. Asreimburse sanofi-aventis for 50% of development expenses that were fully funded by sanofi-aventis (or half of $0.7 million as of December 31, 2003, the 2003 Loan balance due Novartis, including accrued interest, totaled $13.8 million. In March 2004, Novartis forgave the 2003 Loan2007) and accrued interest thereon, totaling $17.8 million,30% of Shared Phase 3 Trial Costs, in accordance with a defined formula based on Regeneron’s achievingthe amounts of these expenses and the Company’s share of collaboration profits from commercialization of collaboration products.
Sanofi-aventis will lead commercialization activities for products developed under the License Agreement, subject to the Company’s right to co-promote such products. The parties will equally share profits and losses from sales within the United States. The parties will share profits outside the United States on a pre-definedsliding scale based on sales starting at 65% (sanofi-aventis)/35% (Regeneron) and ending at 55% (sanofi-aventis)/45% (Regeneron), and losses outside the United States at 55% (sanofi-aventis)/45% (Regeneron). In addition to profit 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 rolling12-month basis.
Regeneron is obligated to use commercially reasonable efforts to supply clinical requirements of each drug candidate under the Antibody Collaboration until commercial supplies of that drug candidate are being manufactured.
With respect to each antibody product which enters development milestone.
In February 2004, Novartis providedunder the License Agreement, sanofi-aventis or the Company may, by giving twelve months notice, opt-out of its intention notfurther developmentand/or commercialization of the product, in which event the other party retains exclusive rights to proceed withcontinue the developmentand/or commercialization of the product. The Company may also opt-out of the further development of an antibody product if it gives notice to sanofi-aventis within thirty days of the date that sanofi-aventis enters joint development of such antibody product under the IL-1 Trap. In March 2004, Novartis agreedLicense Agreement. Each of the Discovery Agreement and the License Agreement contains other termination provisions, including for material breach by the other party and, in the case of the Discovery Agreement, a termination right for sanofi-aventis under certain circumstances, including if certain minimal criteria for the discovery program are not achieved. Prior to December 31, 2012, sanofi-aventis has the right to terminate the Discovery Agreement without cause with at least three months advance written notice; however, except under defined circumstances, sanofi-aventis would be obligated to immediately pay to the Company $42.75 million to satisfythe full amount of unpaid research funding during the remaining term of the research agreement through December 31, 2012. Upon termination of the collaboration in its entirety, the Company’s obligation to fundreimburse sanofi-aventis for development costs for the IL-1 Trap for the nine month period following its notification and for the two months prior to that notice. The Company recorded the $42.75 million as other contract income in 2004. Regeneron and Novartis each retain rights under theout of any future profits from collaboration agreement to elect to collaborate in the future on the development and commercialization of certain other IL-1 antagonists.
Revenue related to payments from Novartis was recognized under the Substantive Milestone Method (see Note 2) in accordance with SAB 104. The up-front payment of $27.0 million and reimbursement of Novartis’ share of Regeneron-incurred development expenses were recognized as contract research and development revenue. Forgivenessproducts will terminate. Upon expiration of the 2003 Loan and accrued interest in 2004 was recognized as a research progress payment. In 2003Discovery Agreement, sanofi-aventis has an option to license the Company recognized $21.4 million of contract research and development revenue in connection with the Novartis Agreement. At December 31, 2003, amounts receivable from Novartis totaled $3.2 million and deferred revenue was $22.1 million. In 2004, the Company recognized contract research and development revenue of $22.1 million, which represented the remaining amount of the $27.0 million up-front payment from Novartis that had previously been deferred. At December 31, 2004 there were no amounts receivable from Novartis and no deferred revenue.
In August 1990, the Company entered into a collaboration agreement (the “Amgen Agreement”) with Amgen Inc. to develop and attempt to commercialize two proprietary products (the “Products”). The Amgen Agreement, among other things, providedCompany’sVelocImmunetechnology for Amgen and the Company to form a partnership (“Amgen-Regeneron Partners” or the “Partnership”) to complete the development and to commercialize the Products. Amgen and the Company hold equal ownership interests (subject to adjustment for any future inequities in capital contributions, as defined) in the Partnership. The Company accounts for its investment in the Partnership in accordance with the equity method of accounting. In 2004, 2003, and 2002, the Company recognized its share of the Partnership net income (loss) in the amounts of $134 thousand, ($63 thousand), and ($27 thousand), respectively, which represents 50% of the total Partnership net income (loss). In September 2002, the Company and Amgen each made capital withdrawals of $0.5 million from theagreed upon consideration.
F-24
F-24
REGENERON PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
Partnership. At
Revenue related to payments from sanofi-aventis under the Antibody Collaboration is being recognized in accordance with SAB 104 andEITF 00-21 (see Note 2). The $85.0 million up-front payment received in December 31, 2004,2007 and reimbursement of Regeneron-incurred expenses under the Company continues to be an equal partner in Amgen-Regeneron Partners. Selected financial data ofDiscovery and License Agreements are being recognized as contract research and development revenue over the Partnership as of and for the years ended December 31, 2004, 2003, and 2002 are not significant. The Partnership has no ongoing development activities at this time.
related performance period. In October 2000, Amgen and Regeneron entered into an agreement whereby Regeneron acquired Amgen’s patents and patent applications relating to ciliary neurotrophic factor (“CNTF”) and related molecules for $1.0 million. As part of this agreement, Regeneron granted back to Amgen exclusive, royalty free rights under these patents and patent applications solely for human ophthalmic uses. In addition, Regeneron entered into a covenant not to sue Amgen under Regeneron’s patents and patent applications relating to CNTF and related molecules solely for human ophthalmic uses.
In July 2002, Amgen and Immunex Corporation (now part of Amgen) granted the Company a non-exclusive license to certain patents and patent applications which may be used in the development and commercialization of the IL-1 Trap. The license followed two other licensing arrangements under which Regeneron obtained a non-exclusive license to patents owned by ZymoGenetics, Inc. and Tularik Inc. for use in connection with the IL-1 Trap program. These license agreements would requireAntibody Collaboration, the Company to pay royalties based on the net salesrecognized $4.6 million of the IL-1 Trap ifcontract research and when it is approved for sale.development revenue in 2007. In total, the royalty rate under these three agreements would be in the mid-single digits.addition, at December 31, 2007, amounts receivable from sanofi-aventis totaled $3.7 million and deferred revenue was $84.1 million.
| |
| b. | d. Sumitomo Chemical Company, Ltd.Bayer HealthCare LLC |
During 1989, Sumitomo Chemical Co., Ltd.
In October 2006, the Company entered into a Technology Developmentlicense and collaboration agreement with Bayer HealthCare LLC to globally develop, and commercialize outside the United States, the Company’s VEGF Trap for the treatment of eye disease by local administration (“VEGF Trap-Eye”). Under the terms of the agreement, Bayer HealthCare made a non-refundable, up-front payment to the Company of $75.0 million. In addition, the Company is eligible to receive up to $110.0 million in development and regulatory milestones related to the VEGF Trap-Eye program, of which the Company received a $20.0 million milestone payment in August 2007 in connection with the initiation of a Phase 3 trial of the VEGF Trap-Eye in the neovascular form of age-related macular degeneration (“wet AMD”). The Company is also eligible to receive up to an additional $135.0 million in sales milestones when and if total annual sales of the VEGF Trap-Eye outside the United States achieve certain specified levels starting at $200.0 million.
The Company will share equally with Bayer HealthCare in any future profits arising from the commercialization of the VEGF Trap-Eye outside the United States. If the VEGF Trap-Eye is granted marketing authorization in a major market country outside the United States and the collaboration becomes profitable, the Company will be obligated to reimburse Bayer HealthCare out of its share of the collaboration profits for 50% of the agreed upon development expenses that Bayer HealthCare has incurred (or half of $25.4 million as of December 31, 2007) in accordance with a formula based on the amount of development expenses that Bayer HealthCare has incurred and the Company’s share of the collaboration profits, or at a faster rate at the Company’s option. Within the United States, the Company is responsible for any future commercialization of the VEGF Trap-Eye and retains exclusive rights to any future profits from commercialization.
Agreed upon development expenses incurred by both companies in 2007 under a global development plan were shared as follows: The first $50.0 million were shared equally and the Company was solely responsible for up to the next $40.0 million. Neither party was reimbursed for any development expenses that it incurred prior to 2007.
In 2008, agreed upon VEGF Trap-Eye development expenses incurred by both companies under a global development plan will be shared as follows: Up to the first $70.0 million will be shared equally, the Company is solely responsible for up to the next $30.0 million; and over $100.0 million will be shared equally. In 2009 and thereafter, all development expenses will be shared equally. Regeneron is also obligated to use commercially reasonable efforts to supply clinical and commercial product requirements.
Bayer HealthCare has the right to terminate the Bayer Agreement (“TDA”)without cause with at least six months or twelve months advance notice depending on defined circumstances at the time of termination. In the event of termination of the agreement for any reason, the Company retains all rights to the VEGF Trap-Eye.
For the period from the collaboration’s inception in October 2006 through September 30, 2007, all up-front licensing, milestone, and cost-sharing payments received or receivable from Bayer HealthCare had been fully deferred and included in deferred revenue for financial statement purposes. In the fourth quarter of 2007, Regeneron and paidBayer HealthCare approved a global development plan for the VEGF Trap-Eye in wet AMD. The plan includes estimated development steps, timelines, and costs, as well as the projected responsibilities of and costs to be incurred by each of the companies. In addition, in the fourth quarter of 2007, Regeneron and Bayer
F-25
REGENERON PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
HealthCare reaffirmed the companies’ commitment to a DME development program and had initial estimates of development costs for the VEGF Trap-Eye in DME. As a result, effective in the fourth quarter of 2007, the Company $5.6 million. In considerationdetermined the appropriate accounting policy for this payment, Sumitomo Chemical received a fifteen year limited right of first negotiation to license up to threepayments from Bayer HealthCare andcost-sharing of the Company’s product candidatesand Bayer HealthCare’s VEGF Trap-Eye development expenses, and the financial statement classifications and periods in Japan. In connection withwhich past and future payments from Bayer HealthCare (including the $75.0 million up-front payment and development and regulatory milestone payments) and cost-sharing of VEGF Trap-Eye development expenses will be recognized in the Company’s implementationStatement of Operations.
The $75.0 million up-front licensing payment and $20.0 million milestone payment (which was not considered substantive) from Bayer HealthCare are being recognized as contract research and development revenue over the related estimated performance period in accordance with SAB 101104 andEITF 00-21 (see Note 2),. In periods when the Company recognizes VEGF Trap-Eye development expenses that the Company incurs under the collaboration, the Company also recognizes, as contract research and development revenue, the portion of those VEGF Trap-Eye development expenses that is reimbursable from Bayer HealthCare. In periods when Bayer HealthCare incurs agreed upon VEGF Trap-Eye development expenses that benefit the collaboration and Regeneron, the Company also recognizes, as additional research and development expense, the portion of Bayer HealthCare’s VEGF Trap-Eye development expenses that the Company is obligated to reimburse. In the fourth quarter of 2007, when the Company commenced recognizing previously deferred payments from Bayer HealthCare and cost-sharing of the Company’s and Bayer HealthCare’s 2007 VEGF Trap-Eye development expenses, the Company recognized, thisas a cumulativecatch-up, contract research and development revenue of $35.9 million, consisting of (i) $15.9 million related to the $75.0 million up-front licensing payment as revenue on a straight-line basis overand the term$20.0 million milestone payment, and (ii) $20.0 million related to the portion of the TDA. The TDA expiredCompany’s 2007 VEGF Trap-Eye development expenses that is reimbursable from Bayer HealthCare. In addition, in March 2004.the fourth quarter of 2007, the Company recognized as additional research and development expense a cumulativecatch-up of $10.6 million of 2007 VEGF Trap-Eye development expenses that the Company was obligated to reimburse to Bayer HealthCare.
At December 31, 2007, in connection with cost-sharing of VEGF Trap-Eye development expenses under the collaboration, $4.9 million was payable to Bayer HealthCare and $2.8 million was receivable from Bayer HealthCare. In addition, at December 31, 2007 and 2006, deferred revenue from the Company’s collaboration with Bayer HealthCare was $79.1 million and $75.0 million, respectively.
| |
| c. | e. The Procter & Gamble Company |
In May 1997, the Company entered into a long-term collaboration agreement with The Procter & Gamble Company to discover, develop, and commercialize pharmaceutical products, (the “P&G Agreement”) and Procter & Gamble agreed to provide funding for Regeneron’s research efforts related to the collaboration. In connectionaccordance with the companies’ collaboration in June 1997 and August 2000,agreement (the “P&G Agreement”), Procter & Gamble purchased 4.35 million and 573,630 shares of the Company’s Common Stock at $9.87 and $29.75 per share for a total of $42.9 million and $17.1 million, respectively. In June 1997, Procter & Gamble also received five year warrants to purchase an additional 1.45 million shares of the Company’s stock at $9.87 per share, which were exercised in August 2000. As consideration for the exercise price, Procter & Gamble tendered 511,125 shares of the Company’s Common Stock which had an aggregate value at the time of exercise, based upon the average market price of the Company’s Common Stock over approximately the prior 30 trading days, equal to the aggregate exercise price of the warrants. The net result of this warrant exercise was that Procter & Gamble acquired an additional 938,875 shares of the Company’s Common Stock. The 511,125 shares of Common Stock delivered to the Company by Procter & Gamble were retired upon receipt. These equity purchases were in addition to a purchase by Procter & Gamble Pharmaceuticals, Inc. of 800,000 shares of the Company’s Common Stock for $10.0 million that was completed in March 1997.
Effective December 31, 2000, the Company and Procter & Gamble entered into a new collaboration agreement, replacing the P&G Agreement. The new agreement extends Procter & Gamble’s obligationobligated to fund Regeneron research on therapeutic areas that were of particular interest to Procter & Gamble through December 2005, with no further research obligations by either party thereafter, and focuses the companies’ collaborative research on therapeutic areas that are of particular interest to Procter & Gamble.thereafter. Under the new agreement,P&G Agreement, research support from Procter & Gamble was $2.5 million per quarter, plus adjustments for inflation, through December 2005.
In June 2005, the Company and Procter & Gamble amended the P&G Agreement. Pursuant to the terms of the modified agreement, the Company and Procter & Gamble agreed that the research activities of the parties under the P&G Agreement were completed on June 30, 2005, six months prior to the December 31, 2005 expiration date in the P&G Agreement. In connection with the amendment, Procter & Gamble made a one-time $5.6 million payment to Regeneron and the Company paid approximately $1.0 million to Procter & Gamble to acquire certain capital equipment owned by Procter & Gamble and located at the Company’s facilities. Procter & Gamble and the Company divided rights to research programs and pre-clinical product candidates that were developed during the research term of the P&G Agreement. Neither party has the right to participate in the development or commercialization of the other party’s product candidates. The Company is entitled to receive royalties based on any future
F-26
F-25
REGENERON PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
$2.5 million per quarter, before adjustments for inflation, through December 2005. Any drugs that result
product sales of a Procter & Gamble pre-clinical candidate arising from the collaboration, will continue to be jointly developed and marketed worldwide, with the companies equally sharing development costs and profits. Procter & Gamble and the Company divided rights to programs from the P&G Agreement that are no longer part of the companies’ collaboration. Research funding from Procter & Gamble related to the collaboration totaled $90.8 million through December 31, 2004. In addition, in 1997 through 1999, Procter & Gamble also provided research support for the Company’s AXOKINE program and, as a result, will beis entitled to receive a small royalty on any sales of AXOKINE.a single Regeneron candidate that is currently not being developed. Neither party is entitled to receive royalties or other payments based on any other products arising from the collaboration.
Contract research and development revenue related to the Company’s collaboration with Procter & Gamble was $10.5 million, $10.6 million, and $10.5$6.0 million in 2004, 2003, and 2002, respectively. At December 31, 2004, 2003, and 2002,2005. In addition, the one-time $5.6 million payment made by Procter & Gamble to the Company in connection with the amendment to the P&G Agreement was recognized as other contract research revenue receivable was $2.3 million, $2.7 million, and $2.6 million, respectively.income in 2005.
| |
| d. | f. Serono, S.A. (now part of Merck KGaA) |
In December 2002, the Company entered into an agreement (the “Serono Agreement”) with Serono S.A. to use Regeneron’s proprietary VelocigeneVelociGene® technology platform to provide Serono with knock-out and transgenic mammalian models of gene function (“Materials”). The Serono made anAgreement contains provisions for minimum yearly order quantities. In connection with its orders for Materials, Serono makes advance payment of $1.5 million (the “Retainer”)payments to Regeneron, in December 2002, which wasare accounted for as deferred revenue. Regeneron recognizes revenue and reduces the Retainerdeferred revenue balance as Materials are shipped to and accepted by Serono. The Serono Agreement contains provisions for minimum yearly order quantitiesIn 2007, 2006, and replenishment of the Retainer when the balance declines below a specified threshold. In 2004 and 2003,2005, the Company recognized $2.1$2.4 million, $1.8 million, and $0.7$2.2 million, respectively, of contract research and development revenue in connection with the Serono Agreement.
| |
12.e. | Manufacturing AgreementNational Institutes of Health |
In September 2006, the Company was awarded a grant from the National Institutes of Health (“NIH”) as part of the NIH’s Knockout Mouse Project. The NIH grant provides a minimum of $17.9 million in funding over a five-year period, subject to compliance with its terms and annual funding approvals, for the Company’s use of itsVelociGenetechnology to generate a collection of targeting vectors and targeted mouse embryonic stem cells which can be used to produce knockout mice. The Company will also receive another $1.0 million in funding to optimize certain existing technology for use in the Knockout Mouse Project. In 2007 and 2006, the Company recognized contract research and development revenue of $5.5 million and $0.5 million, respectively, from the NIH Grant.
| |
| 12. | Technology Licensing Agreements |
In February 2007, the Company entered into a non-exclusive license agreement with AstraZeneca UK Limited that allows AstraZeneca to utilize the Company’sVelocImmunetechnology in its internal research programs to discover human monoclonal antibodies. Under the terms of the agreement, AstraZeneca made a $20.0 millionnon-refundable, up-front payment to the Company which was deferred and is being recognized as revenue ratably over the twelve month period beginning in February 2007. AstraZeneca is required to make up to five additional annual payments of $20.0 million, subject to its ability to terminate the agreement after making the first three additional payments or earlier if the technology does not meet minimum performance criteria. These additional payments will be recognized as revenue ratably over their respective annual license periods. The Company is entitled to receive a mid-single-digit royalty on any future sales of antibody products discovered by AstraZeneca using the Company’sVelocImmunetechnology. In connection with the AstraZeneca license agreement, for the year ended December 31, 2007, the Company recognized $17.1 million of revenue and, at December 31, 2007, deferred revenue was $2.9 million.
In March 2007, the Company entered into a non-exclusive license agreement with Astellas Pharma Inc. that allows Astellas to utilize the Company’sVelocImmunetechnology in its internal research programs to discover human monoclonal antibodies. Under the terms of the agreement, Astellas made a $20.0 million non-refundable,up-front payment to the Company, which was deferred and is being recognized as revenue ratably over the twelve month period beginning in June 2007. Astellas is required to make up to five additional annual payments of
F-27
REGENERON PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
$20.0 million, subject to its ability to terminate the agreement after making the first three additional payments or earlier if the technology does not meet minimum performance criteria. These additional payments will be recognized as revenue ratably over their respective annual license periods. The Company is entitled to receive a mid-single-digit royalty on any future sales of antibody products discovered by Astellas using the Company’sVelocImmunetechnology. In connection with the Astellas license agreement, for the year ended December 31, 2007, the Company recognized $11.3 million of revenue and, at December 31, 2007, deferred revenue was $8.7 million.
| |
| 13. | Manufacturing Agreement |
During 1995, the Company entered into a long-term manufacturing agreement with Merck & Co., Inc., as amended, (the “Merck Agreement”) to produce an intermediate (the “Intermediate”) for a Merck pediatric vaccine at the Company’s Rensselaer, New York facility. The Company agreed to modifymodified portions of its facility for manufacture of the Intermediate and to assistassisted Merck in securing regulatory approval for such manufacture in the Company’s facility. The Merck Agreement callscalled for the Company to manufacture Intermediate for Merck for a specified period of time (the “Production Period”), with certain minimum order quantities each year. The Production Period commenced in November of 1999 and originally extended for six years. In February 2005, the Company and Merck amended the Merck Agreement to extend the Production Period through October 2006, and provideat which time the Merck an opportunity, upon twelve-months’ prior notice, to extend the Production Period for an additional year through October 2007. Merck may terminate the agreement at any time upon the payment by Merck of a termination fee.Agreement terminated.
Merck agreed to reimburse the Company for the capital costs to modify the facility (“Capital Costs”). Merck also agreed to pay an annual facility fee (the “Facility Fee”) of $1.0 million beginning March 1995, subject to annual adjustment for inflation. During the Production Period, Merck agreed to reimburse the Company for certain manufacturing costs, pay the Company a variable fee based on the quantity of Intermediate supplied to Merck, and make additional bi-annual payments (“Additional Payments”), as defined. In addition, Merck agreed to reimburse the Company for the cost of Company activities performed on behalf of Merck prior to the Production Period and for miscellaneous costs during the Production Period (“Internal Costs”). These payments arewere recognized as contract manufacturing revenue as follows: (i) payments for Internal Costs arewere recognized as the activities arewere performed, (ii) the Facility Fee and Additional Payments arewere recognized over the period to which they relate,related, (iii) payments for Capital Costs were deferred and are recognized as Intermediate iswas shipped to Merck, and (iv) payments related to the
F-26
REGENERON PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
manufacture of Intermediate during the Production Period (“Manufacturing Payments”) arewere recognized after the Intermediate iswas tested and approved by, and shipped (FOB Shipping Point) to, Merck.
In 2004, 2003,2006 and 2002,2005, Merck contract manufacturing revenue totaled $18.1 million, $10.1$12.3 million and $11.1$13.7 million, respectively. Such amounts include $3.6 million, $1.7$1.2 million and $1.8$1.4 million of previously deferred Capital Costs, respectively. In addition, Merck contract manufacturing revenue for 2002 includes a non-recurring $1.0 million payment received in August 2002 related to services the Company provided in prior years.
| |
13. | Incentive and Stock Purchase Plans |
| |
| 14. | a. Long-Term Incentive Plans |
During 2000, the Company established the Regeneron Pharmaceuticals, Inc. 2000 Long-Term Incentive Plan (“2000 Incentive Plan”) which, as amended, provides for the issuance of up to 18,500,000 shares of Common Stock in respect of awards. In addition, shares of Common Stock previously approved by shareholders for issuance under the Regeneron Pharmaceuticals, Inc. 1990 Long-Term Incentive Plan (“1990 Incentive Plan”) that are not issued under the 1990 Incentive Plan, may be issued as awards under the 2000 Incentive Plan. Employees of the Company, including officers, and nonemployees, including consultants and nonemployee members of the BoardCompany’s board of Directors,directors, (collectively, “Participants”) may receive awards as determined by a committee of independent directors (“Committee”). The awards that may be made under the 2000 Incentive Plan include: (a) Incentive Stock Options (“ISOs”) and Nonqualified Stock Options, (b) shares of Restricted Stock, (c) shares of Phantom Stock, (d) Stock Bonuses, and (e) Other Awards.
F-28
REGENERON PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
Stock Option awards grant Participants the right to purchase shares of Common Stock at prices determined by the Committee; however, in the case of an ISO, the option exercise price will not be less than the fair market value of a share of Common Stock on the date the Option is granted. Options vest over a period of time determined by the Committee, generally on a pro rata basis over a three to five year period. The Committee also determines the expiration date of each Option; however, no ISO is exercisable more than ten years after the date of grant. The maximum term of options that have been awarded under the 2000 Incentive Plan is ten years.
Restricted Stock awards grant Participants shares of restricted Common Stock or allow Participants to purchase such shares at a price determined by the Committee. Such shares are nontransferable for a period determined by the Committee (“vesting period”). Should employment terminate, as defined by the 2000 Incentive Plan, the ownership of the Restricted Stock, which has not vested, will be transferred to the Company, except under defined circumstances with Committee approval, in consideration of amounts, if any, paid by the Participant to acquire such shares. In addition, if the Company requires a return of the Restricted Shares, it also has the right to require a return of all dividends paid on such shares.
Phantom Stock awards provide the Participant the right to receive, within 30 days of the date on which the share vests, an amount, in cashand/or shares of the Company’s Common Stock as determined by the Committee, equal to the sum of the fair market value of a share of Common Stock on the date such share of Phantom Stock vests and the aggregate amount of cash dividends paid with respect to a share of Common Stock during the period from the grant date of the share of Phantom Stock to the date on which the share vests. Stock Bonus awards are bonuses payable in shares of Common Stock which are granted at the discretion of the Committee.
Other Awards are other forms of awards which are valued based on the Company’s Common Stock. Subject to the provisions of the 2000 Incentive Plan, the terms and provisions of such Other Awards are determined solely on the authority of the Committee.
During 1990, the Company established the 1990 Incentive Plan which, as amended, provided for a maximum of 6,900,000 shares of Common Stock in respect of awards. Employees of the Company, including
F-27
REGENERON PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
officers, and nonemployees, including consultants and nonemployee members of the BoardCompany’s board of Directors,directors, received awards as determined by a committee of independent directors. Under the provisions of the 1990 Incentive Plan, there will be no future awards from the plan. Awards under the 1990 Incentive Plan consisted of Incentive Stock Options and Nonqualified Stock Options which generally vestvested on a pro rata basis over a three or five year period and have a term of ten years.
The 1990 and 2000 Incentive Plans contain provisions that allow for the Committee to provide for the immediate vesting of awards upon a change in control of the Company, as defined.
The Company may incur charges to operations in connection with awards from these
As of December 31, 2007, there were 744,879 shares available for future grants under the 2000 Incentive Plans. In accordance with APB No. 25 and related interpretations, the Company will record compensation expense from employee stock-based awards under certain conditions. Generally, when the terms of the award and the amount the employee must pay to acquire the stock are fixed, compensation expense for options, restricted stock, and stock bonus awards will total the grant date intrinsic value, if any, amortized over the vesting period. For other awards, including phantom stock, compensation expense will be recognized over the life of the award based on the cash remitted to settle the award or the intrinsic value of the award on the date of exercise.Plan.
Transactions involving stock option awards during 2004, 2003,2005, 2006, and 2002,2007 under the 1990 and 2000 Incentive Plans are summarized in the table below. Option
F-29
REGENERON PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
| | | | | | | | | | | | | | | | | |
| | | | | | | | | Weighted-
| | | | |
| | | | | | | | | Average
| | | | |
| | | | | | Weighted-
| | | Remaining
| | | | |
| | | Number of
| | | Average
| | | Contractual
| | | Intrinsic
| |
Stock Options: | | Shares | | | Exercise Price | | | Term | | | Value | |
| | | | | | | | | (in years) | | | (in thousands) | |
| |
| Outstanding at December 31, 2004 | | | 15,140,568 | | | $ | 18.68 | | | | | | | | | |
2005: | | | | | | | | | | | | | | | | |
| Granted | | | 4,551,360 | | | $ | 10.08 | | | | | | | | | |
| Forfeited | | | (1,975,108 | ) | | $ | 20.83 | | | | | | | | | |
| Expired | | | (2,399,410 | ) | | $ | 30.18 | | | | | | | | | |
| Exercised | | | (597,918 | ) | | $ | 9.50 | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Outstanding at December 31, 2005 | | | 14,719,492 | | | $ | 14.23 | | | | | | | | | |
2006: | | | | | | | | | | | | | | | | |
| Granted | | | 2,742,260 | | | $ | 19.59 | | | | | | | | | |
| Forfeited | | | (338,122 | ) | | $ | 10.51 | | | | | | | | | |
| Expired | | | (172,218 | ) | | $ | 24.23 | | | | | | | | | |
| Exercised | | | (1,408,907 | ) | | $ | 9.84 | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Outstanding at December 31, 2006 | | | 15,542,505 | | | $ | 15.54 | | | | | | | | | |
2007: | | | | | | | | | | | | | | | | |
| Granted | | | 3,415,743 | | | $ | 21.78 | | | | | | | | | |
| Forfeited | | | (220,342 | ) | | $ | 14.43 | | | | | | | | | |
| Expired | | | (50,759 | ) | | $ | 13.73 | | | | | | | | | |
| Exercised | | | (1,014,791 | ) | | $ | 10.58 | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Outstanding at December 31, 2007 | | | 17,672,356 | | | $ | 17.05 | | | | 6.68 | | | $ | 146,827 | |
| | | | | | | | | | | | | | | | | |
| Vested and expected to vest at December 31, 2007 | | | 16,945,428 | | | $ | 17.09 | | | | 6.62 | | | $ | 140,881 | |
| Exercisable at December 31, 2005 | | | 7,321,256 | | | $ | 17.79 | | | | | | | | | |
| Exercisable at December 31, 2006 | | | 7,890,856 | | | $ | 17.41 | | | | | | | | | |
| Exercisable at December 31, 2007 | | | 9,369,665 | | | $ | 17.02 | | | | 5.27 | | | $ | 86,252 | |
The Company satisfies stock option exercises with newly issued shares of the Company’s Common Stock. The total intrinsic value of stock options exercised during 2007, 2006, and 2005 was $12.6 million, $13.2 million, and $1.6 million, respectively. The intrinsic value represents the amount by which the market price of the underlying stock exceeds the exercise price of an option.
The Company grants stock options with exercise prices werethat are equal to or greater than or equal to the fair market valueprice of the Company’s Common Stock on the date of grant. The total numbertable below summarizes the weighted-average exercise prices and weighted-average grant-date fair values of options exercisable atissued during the years ended December 31, 2004, 2003,2005, 2006, and 2002 was 8,628,873, 5,940,268, and 4,670,695, respectively, with weighted average exercise prices of $21.05, $19.45, and $15.80, respectively.2007.
| | | | | | | | | | |
| | | | | Weighted-Average | |
| | | Number of Shares | | | Exercise Price | |
| | | | | | | |
| Stock options outstanding at December 31, 2001 | | | 9,328,039 | | | $ | 21.10 | |
2002: | | | | | | | | |
| | Stock options granted | | | 2,693,010 | | | $ | 19.97 | |
| | Stock options canceled | | | (183,031 | ) | | $ | 22.63 | |
| | Stock options exercised | | | (274,068 | ) | | $ | 9.96 | |
| | | | | | | |
| | Stock options outstanding at December 31, 2002 | | | 11,563,950 | | | $ | 21.08 | |
2003: | | | | | | | | |
| | Stock options granted | | | 2,634,570 | | | $ | 13.45 | |
| | Stock options canceled | | | (265,107 | ) | | $ | 22.62 | |
| | Stock options exercised | | | (795,114 | ) | | $ | 7.07 | |
| | | | | | | |
| | Stock options outstanding at December 31, 2003 | | | 13,138,299 | | | $ | 20.36 | |
2004: | | | | | | | | |
| | Stock options granted | | | 2,828,484 | | | $ | 9.90 | |
| | Stock options canceled | | | (514,947 | ) | | $ | 21.10 | |
| | Stock options exercised | | | (311,268 | ) | | $ | 5.98 | |
| | | | | | | |
| | Stock options outstanding at December 31, 2004 | | | 15,140,568 | | | $ | 18.68 | |
| | | | | | | |
F-30
F-28
REGENERON PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
| | | | | | | | | | | | | |
| | | | | | Weighted-
| | | Weighted-
| |
| | | Number of
| | | Average Exercise
| | | Average Fair
| |
| | | Options Granted | | | Price | | | Value | |
| |
2005: | | | | | | | | | | | | |
| Exercise price equal to market price | | | 4,551,360 | | | $ | 10.08 | | | $ | 6.68 | |
2006: | | | | | | | | | | | | |
| Exercise price equal to market price | | | 2,742,260 | | | $ | 19.59 | | | $ | 12.82 | |
2007: | | | | | | | | | | | | |
| Exercise price equal to market price | | | 3,415,743 | | | $ | 21.78 | | | $ | 11.13 | |
The following table summarizes stock option information as of December 31, 2004:2007:
| | | | | | | | | | | | | | | | | | | | | |
| | | Options Outstanding | | | Options Exercisable | |
| | | | | | | |
| | | | | Weighted Average | | | Weighted | | | | | Weighted | |
| Range of | | Number | | | Remaining | | | Average | | | Number | | | Average | |
| Exercise Prices | | Outstanding | | | Contractual Life | | | Exercise Price | | | Exercisable | | | Exercise Price | |
| | | | | | | | | | | | | | | | |
| $ 5.25 to $ 9.49 | | | 4,572,718 | | | | 7.22 | | | $ | 8.78 | | | | 2,070,420 | | | $ | 8.00 | |
| $ 9.50 to $13.00 | | | 3,282,599 | | | | 7.07 | | | $ | 12.36 | | | | 1,693,510 | | | $ | 11.88 | |
| $13.05 to $23.29 | | | 2,624,114 | | | | 7.97 | | | $ | 18.86 | | | | 1,338,769 | | | $ | 19.30 | |
| $23.66 to $28.81 | | | 2,551,117 | | | | 6.67 | | | $ | 27.30 | | | | 1,725,554 | | | $ | 27.61 | |
| $28.84 to $50.38 | | | 2,049,520 | | | | 5.86 | | | $ | 38.94 | | | | 1,740,220 | | | $ | 39.30 | |
| $51.56 to $51.56 | | | 60,500 | | | | 5.16 | | | $ | 51.56 | | | | 60,400 | | | $ | 51.56 | |
| | | | | | | | | | | | | | | | |
| $ 5.25 to $51.56 | | | 15,140,568 | | | | 7.03 | | | $ | 18.68 | | | | 8,628,873 | | | $ | 21.05 | |
| | | | | | | | | | | | | | | | |
The effect on the Company’s net loss and net loss per share had
| | | | | | | | | | | | | | | | | | | | | |
| | | Options Outstanding | | | Options Exercisable | |
| | | | | | Weighted-Average
| | | Weighted-
| | | | | | Weighted-
| |
Range of
| | Number
| | | Remaining
| | | Average
| | | Number
| | | Average
| |
| Exercise Prices | | Outstanding | | | Contractual Life | | | Exercise Price | | | Exercisable | | | Exercise Price | |
| |
| $ 4.83 to $ 8.50 | | | 2,075,472 | | | | 3.35 | | | $ | 8.19 | | | | 840,272 | | | $ | 7.80 | |
| $ 8.52 to $ 9.49 | | | 2,539,210 | | | | 5.76 | | | $ | 9.30 | | | | 1,973,719 | | | $ | 9.26 | |
| $ 9.50 to $11.64 | | | 2,122,728 | | | | 7.79 | | | $ | 11.61 | | | | 1,028,792 | | | $ | 11.59 | |
| $11.70 to $17.89 | | | 2,300,442 | | | | 6.28 | | | $ | 13.47 | | | | 2,018,882 | | | $ | 13.25 | |
| $18.17 to $20.32 | | | 3,481,247 | | | | 7.91 | | | $ | 19.96 | | | | 1,496,971 | | | $ | 19.73 | |
| $20.79 to $27.07 | | | 3,221,553 | | | | 9.72 | | | $ | 22.05 | | | | 79,325 | | | $ | 23.50 | |
| $27.53 to $37.94 | | | 1,871,704 | | | | 3.45 | | | $ | 32.85 | | | | 1,871,704 | | | $ | 32.85 | |
| $51.56 to $51.56 | | | 60,000 | | | | 2.16 | | | $ | 51.56 | | | | 60,000 | | | $ | 51.56 | |
| | | | | | | | | | | | | | | | | | | | | |
| $ 4.83 to $51.56 | | | 17,672,356 | | | | 6.68 | | | $ | 17.05 | | | | 9,369,665 | | | $ | 17.02 | |
| | | | | | | | | | | | | | | | | | | | | |
Non-cash stock-based employee compensation costs for the Incentive Plans been determinedexpense recognized in accordance with the fair value based method of accounting for stock-based compensation as prescribed by SFAS No. 123operating expenses is shownprovided in Note 2. ForAs of December 31, 2007, there was $60.6 million of stock-based compensation cost related to outstanding nonvested stock options, net of estimated forfeitures, which had not yet been recognized in operating expenses. The Company expects to recognize this compensation cost over a weighted-average period of 1.8 years. In addition, there are 723,092 options which are unvested as of December 31, 2007 and would become vested upon the purposeattainment of certain performance and service conditions. Potential compensation cost, measured on the pro forma calculation, thegrant date, related to these performance options totals $2.7 million and will begin to be recognized only if, and when, these options’ performance condition is considered to be probable of attainment.
Fair value Assumptions:
The fair value of each option granted fromunder the Regeneron Pharmaceuticals, Inc. 2000 Incentive PlansPlan during 2004, 2003,2007, 2006, and 20022005 was estimated on the date of grant using the Black-Scholes option-pricing model. The weighted-averageUsing this model, fair value is calculated based on assumptions with respect to (i) expected volatility of the Company’s Common Stock price, (ii) the periods of time over which employees and members of the Company’s board of directors are expected to hold their options granted during 2004, 2003,prior to exercise (expected lives), (iii) expected dividend yield on the Company’s Common Stock, and 2002 was $7.53, $10.12(iv) risk-free interest rates, which are based on quoted U.S. Treasury rates for securities with maturities approximating the options’ expected lives. Expected volatility has been estimated based on actual movements in the Company’s stock price over the most recent historical periods equivalent to the options’ expected lives. Expected lives are principally based on the Company’s limited historical exercise experience with option grants with similar exercise prices. The expected dividend yield is zero as the Company has never paid dividends and $14.10, respectively.does not currently anticipate paying any in the foreseeable future. The following table summarizes
F-31
REGENERON PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
the weighted average values of the assumptions used in computing the fair value of option grants.
| | | | | | | | | | | | | |
| | | 2004 | | | 2003 | | | 2002 | |
| | | | | | | | | | |
| Expected volatility | | | 80% | | | | 80% | | | | 70% | |
| Expected lives from vest date | | | 5 years | | | | 5 years | | | | 5 years | |
| Dividend yield | | | 0% | | | | 0% | | | | 0% | |
| Risk-free interest rate | | | 4.03% | | | | 3.75% | | | | 4.34% | |
During 2004, 2003,grants during 2007, 2006, and 2002, 105,052, 219,367, and 139,611 shares, respectively, of Restricted Stock were awarded under the 2000 Incentive Plan. These shares are nontransferable with such restriction lapsing (i) for 2004 awards with respect to 50% of the shares at nine months and eighteen months from date of grant and (ii) for 2003 and 2002 awards with respect to 25% of the shares every six months over the two-year period from date of grant. In accordance with generally accepted accounting principles, the Company recorded unearned compensation within Stockholders’ Equity of $1.0 million, $2.9 million, and $2.7 million in 2004, 2003, and 2002, respectively, related to these awards. This amount was based on the fair market value of shares of the Company’s Common Stock on the date of grant and will be expensed, on a pro rata basis, over the period that the restriction on these shares lapses. During 2004, 2003, and 2002, 18,194, 4,431, and 2,183 shares, respectively, of Restricted Stock were forfeited due to employee terminations. The Company reduced unearned compensation within Stockholders’ Equity by $0.3 million, $0.1 million, and $0.1 million in 2004, 2003, and 2002, respectively, related to these forfeited awards.2005.
The Company recognized compensation expense from stock-based awards of $2.5 million $2.3 million, and $1.8 million in 2004, 2003, and 2002, respectively.
| | | | | | | | | | | | | |
| | | 2007 | | | 2006 | | | 2005 | |
| |
| Expected volatility | | | 53% | | | | 67% | | | | 71% | |
| Expected lives from grant date | | | 5.6 years | | | | 6.5 years | | | | 5.9 years | |
| Expected dividend yield | | | 0% | | | | 0% | | | | 0% | |
| Risk-free interest rate | | | 3.60% | | | | 4.51% | | | | 4.16% | |
As of December 31, 2004, there were 5,553,915 shares available for future grants under the 2000 Incentive Plan.
2005 Stock Option Exchange:
In December 2004, the Company’s shareholders approved a stock option exchange program. Under the program, Company regular employees who work an average of 20 hours per week, other than the Company’s chairman and the Company’s president and chief executive officer, were provided the opportunity to make a
F-29
REGENERON PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
one-time election to surrender options granted under the 1990 and 2000 Incentive Plans that had an exercise price per share of at least $18.00 and exchange them for replacement options granted under the 2000 Incentive Plan in accordance with the following exchange ratios:
| | | | | |
| | | Exchange Ratio
| |
| | | (Number of Eligible
| |
| | | Options to be
| |
| | | Surrendered and
| |
| | | Cancelled for Each
| |
Exercise Price of Eligible Options | | Replacement Option) | |
| | | | |
| $18.00 to $28.00 | | | 1.50 | |
| $28.01 to $37.00 | | | 2.00 | |
| $37.01 and up | | | 3.00 | |
Participation in the stock option exchange program was voluntary, and non-employee directors, consultants, former employees, and retirees were not eligible to participate. The participation deadline for the program was January 5, 2005. Eligible2005 and 329 eligible employees participated in the program. These employees elected to exchange options with a total of 3,665,819 underlying shares of Common Stock, and the Company issued 1,977,840 replacement options with an exercise price of $8.50 per share on January 5, 2005.
Each replacement option was completely unvested upon grant. Each replacement option granted to an employee other than our executive vice president and senior vice presidents will ordinarily become vested and exercisable with respect to one-fourth of the shares initially underlying such option on each of the first, second, third and fourth anniversaries of the grant date so that such replacement option will be fully vested and exercisable four years after it was granted. Each replacement option granted to ourthe Company’s executive vice president and senior vice presidents will ordinarily vest with respect to all the shares underlying such option if both (i) the Company’s products have achieved gross sales of at least $100 million during any consecutive twelve-monthtwelve month period (either directly by the Company or through its licensees)licenses) and (ii) the specific seniorexecutive or executivesenior vice president has remained employed by the Company for at least three years from the date of grant. For all replacement options, the recipient’s vesting and exercise rights are contingent upon the recipient’srecipients continued employment through the applicable vesting date and subject to the other terms of the 2000 Incentive Plan and the applicable option award agreement. As is generally the case with respect to the option award agreements for options that were eligible for exchange pursuant to the stock option exchange program, the option award agreements for replacement options include provisions whereby the replacement options may becomebe fully vested in connection with a “Change in Control” of the Company, as defined in the 2000 Incentive Plan.
Under the stock option exchange program, each replacement option has a term equal to the greater of (i) the remaining term of the surrendered option it replaces and (ii) six years from the date of grant of the replacement
F-32
REGENERON PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
option. This was intended to ensure that the employees who participated in the stock option exchange program would not derive any additional benefit from an extended option term unless the surrendered option had a remaining term of less than six years.
In connection with the replacement options issued under the stock option exchange program, the Company intends to adopt, effective January 1, 2005, the fair value based method of accounting for stock-based employee compensation under the provisions of SFAS No. 123, as modified by SFAS No. 148, using the modified prospective method. In accordance with SFAS Nos. 123/148, as a result of the Company’s grant of the replacement options pursuant to the stock option exchange program, the Company incurredwill recognize total incremental compensation cost that will be recognizedof $2.0 million over the vesting periodperiods of the replacement option. The compensation cost equals the sum of (i) the unamortized fair value of the surrendered options on the date of the exchange and (ii) the incremental value of the replacement option measured as the difference between (a) the fair value of the replacement option on the date of the exchange and (b) the fair value of the surrendered options immediately prior to the exchange. The
F-30
REGENERON PHARMACEUTICALS, INC.these options.
NOTES TO FINANCIAL STATEMENTS — (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
Company will begin recognizing this compensation cost in the first quarter of 2005 in each of the categories of expense in the Company’s Statement of Operations.
A summary of the Company’s activity related to Restricted Stock awards for the years ended December 31, 2005 and 2006 is summarized below:
| | | | | | | | | | | |
| | | | | | Weighted-
| |
| | | | | | Average
| |
| | | Number of
| | | Grant Date
| |
Restricted Stock: | | Shares | | | Fair Value | |
| |
| Outstanding at December 31, 2004 | | | 286,417 | | | $ | 12.40 | |
2005: | | Forfeited | | | (4,601 | ) | | $ | 11.70 | |
| | | Released | | | (186,628 | ) | | $ | 13.05 | |
| | | | | | | | | | | |
| | | Outstanding at December 31, 2005 | | | 95,188 | | | $ | 11.16 | |
2006: | | Forfeited | | | (1,703 | ) | | $ | 9.74 | |
| | | Released | | | (93,485 | ) | | $ | 11.18 | |
| | | | | | | | | | | |
| | | Outstanding at December 31, 2006 | | | — | | | | | |
2007: | | Granted | | | 500,000 | | | $ | 21.92 | |
| | | | | | | | | | | |
| | | Outstanding at December 31, 2007 | | | 500,000 | | | $ | 21.92 | |
| | | | | | | | | | | |
In December 2007, the Company awarded a grant of Restricted Stock to the Company’s executive vice president. In accordance with generally accepted accounting principles, the Company records unearned compensation in Stockholders’ Equity related to grants of Restricted Stock awards. This amount is based on the fair market value of shares of the Company’s Common Stock on the date of grant and is expensed, on a pro rata basis, over the period that the restriction on these shares lapse, which is five years for the grant made in 2007, approximately two years for grants made in 2003, and 18 months for grants made in 2004. In addition, unearned compensation in Stockholders’ Equity is reduced due to forfeitures of Restricted Stock resulting from employee terminations. Prior to the adoption of SFAS 123R, unearned compensation was included as a separate component of Stockholders’ Equity. Effective January 1, 2006, unearned compensation is combined with additional paid-in capital in accordance with the provisions of SFAS 123R.
In connection with the 2007 grant of Restricted Stock, the Company recorded unearned compensation in Stockholder’s Equity of $11.0 million, which was combined with additional paid-in capital. In connection with forfeitures of past Restricted Stock awards, the Company reduced unearned compensation by $17 thousand and $0.1 million in 2006 and 2005, respectively. The Company recognized non-cash compensation expense from Restricted Stock awards of $0.1 million, $0.3 million, and $1.9 million in 2007, 2006, and 2005, respectively. As of December 31, 2007, there were 500,000 unvested shares of Restricted Stock outstanding and $10.9 million of stock-based compensation cost related to these unvested shares which had not yet been recognized in operating expenses.
| |
| 15. | Executive Stock Purchase Plan |
In 1989, the Company adopted an Executive Stock Purchase Plan (the “Plan”) under which 1,027,500 shares of Class A Stock were reserved for restricted stock awards. The Plan provides for the compensation committee of the Boardboard of Directorsdirectors to award employees, directors, consultants, and other individuals (“Plan participants”) who render service to the Company the right to purchase Class A Stock at a price set by the compensation committee. The Plan provides for the vesting of shares as determined by the compensation committee and, should the
F-33
REGENERON PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
Company’s relationship with a Plan participant terminate before all shares are vested, unvested shares will be repurchased by the Company at a price per share equal to the original amount paid by the Plan participant. During 1989 and 1990, a total of 983,254 shares were issued, all of which vested as of December 31, 1999. As of December 31, 2004,2007, there were 44,246 shares available for future grants under the Plan.
| |
14.16. | Employee Savings Plan |
In 1993, the Company adopted the provisions of the Regeneron Pharmaceuticals, Inc. 401(k) Savings Plan (the “Savings Plan”). The terms of the Savings Plan provide for employees who have met defined service requirements to participate in the Savings Plan by electing to contribute to the Savings Plan a percentage of their compensation to be set aside to pay their future retirement benefits, as defined. The Savings Plan, as amended and restated, during 1998, provides for the Company to make discretionary contributions (“Contribution”), as defined. The Company recorded Contribution expense of $0.8$1.4 million in 2004, $0.92007, $1.3 million in 2003,2006, and $0.8$2.0 million in 2002;2005; such amounts were accrued as liabilities at December 31, 2004, 2003,2007, 2006, and 2002,2005, respectively. During the first quarter of 2005, 2004,2008, 2007, and 2003,2006, the Company contributed 90,385, 64,333,58,575, 64,532, and 42,543120,960 shares, respectively, of Common Stock to the Savings Plan in satisfaction of these obligations.
In 2004, 2003,2007, 2006, and 2002,2005, the Company recognized aincurred net operating losslosses for tax purposes and accordingly,recognized a full tax valuation against deferred taxes. Accordingly, no provision or benefit for income taxes has been recorded in the accompanying financial statements. There is no benefit for federal or state income taxes for the years ended December 31, 2004, 2003, and 2002 since the Company has incurred net operating losses for tax purposes since inception and established a valuation allowance equal to the total deferred tax asset.
The tax effect of temporary differences, net operating loss carry-forwards, and research and experimental tax credit carry-forwards as of December 31, 20042007 and 20032006 was as follows:
| | | | | | | | | | |
| | | 2004 | | | 2003 | |
| | | | | | | |
| Deferred tax assets | | | | | | | | |
| | Net operating loss carry-forward | | $ | 135,099 | | | $ | 135,357 | |
| | Fixed assets | | | 9,772 | | | | 7,177 | |
| | Deferred revenue | | | 28,527 | | | | 43,372 | |
| | Research and experimental tax credit carry-forward | | | 20,772 | | | | 18,233 | |
| | Capitalized research and development costs | | | 28,559 | | | | 33,102 | |
| | Other | | | 4,168 | | | | 3,832 | |
| | Valuation allowance | | | (226,897 | ) | | | (241,073 | ) |
| | | | | | | |
| | | | — | | | | — | |
| | | | | | | |
| | | | | | | | | |
| | | 2007 | | | 2006 | |
| |
| Deferred tax assets: | | | | | | | | |
| Net operating loss carry-forward | | $ | 166,714 | | | $ | 177,034 | |
| Fixed assets | | | 17,245 | | | | 15,640 | |
| Deferred revenue | | | 96,148 | | | | 58,739 | |
| Deferred compensation | | | 15,159 | | | | 14,213 | |
| Research and experimental tax credit carry-forward | | | 25,446 | | | | 23,248 | |
| Capitalized research and development costs | | | 15,236 | | | | 19,555 | |
| Other | | | 7,036 | | | | 3,897 | |
| Valuation allowance | | | (342,984 | ) | | | (312,326 | ) |
| | | | | | | | | |
| | | | — | | | | — | |
| | | | | | | | | |
The Company’s valuation allowance increased by $30.7 million in 2007, due primarily to the temporary difference related to deferred revenue, principally resulting from the non-refundable up-front payment received from sanofi-aventis in December 2007 (see Note 11). In 2006, the Company’s valuation allowance increased by $41.6 million, due primarily to increases in the Company’s net operating loss carry-forward and the temporary difference related to deferred revenue, principally resulting from the non-refundable up-front payment received from Bayer HealthCare in 2006 (see Note 11).
Effective January 1, 2007, the Company adopted the provisions of FASB Interpretation No. 48 (“FIN 48”),Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109.The implementation of FIN 48 had no impact on the Company’s financial statements as the Company has not recognized any uncertain income tax positions.
F-34
F-31
REGENERON PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
The Company is primarily subject to U.S. federal and New York State income tax. For all years presented, the Company’s effective income tax rate is zero. The difference between the Company’s effective income tax rate and the Federal statutory rate of 34%35% is attributable to state tax benefits and tax credit carry-forwards offset by an increase in the deferred tax valuation allowance. The Company’s 1992 and subsequent tax years remain open to examination by U.S. federal and state tax authorities.
The Company’s policy is to recognize interest and penalties related to income tax matters in income tax expense. As of January 1 and December 31, 2007, the Company had no accruals for interest or penalties related to income tax matters.
As of December 31, 2004,2007, the Company had available for tax purposes unused net operating loss carry-forwards of $339.5$423.2 million which will expire in various years from 20062008 to 2024.2027 and included $12.7 million of net operating loss carry-forwards related to exercises of Nonqualified Stock Options and disqualifying dispositions of Incentive Stock Options, the tax benefit from which, if realized, will be credited to additional paid-in capital. The Company’s research and experimental tax credit carry-forwards expire in various years from 20052008 to 2024.2027. Under the Internal Revenue Code and similar state provisions, substantial changes in the Company’s ownership have resulted in an annual limitation on the amount of net operating loss and tax credit carry-forwards that can be utilized in future years to offset future taxable income. This annual limitation may result in the expiration of net operating losses and tax credit carry-forwards before utilization.
In May 2003, securities class action lawsuits were commenced against Regeneron and certain
From time to time, the Company is a party to legal proceedings in the course of the Company’s officers and directors in the United States District Court for the Southern District of New York. A consolidated amended class action complaint was filed in October 2003. The complaint, which purports to be brought on behalf of a class consisting of investors in the Company’s publicly traded securities between March 28, 2000 and March 30, 2003, alleges that the defendants misstated or omitted material information concerning the safety and efficacy of AXOKINE, in violation of Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. Damages are sought in an unspecified amount. The ultimate outcome of this matter cannot presently be determined. Accordingly, no provision for any liability that may result upon the resolution of this matter has been made in the accompanying financial statements.
business. The Company from timedoes not expect any such current legal proceedings to time, has been subject to other legal claims arising in connection with its business. While the ultimate outcome of these other legal claims cannot be predicted with certainty, at December 31, 2004 there were no such other asserted claims against the Company which, in the opinion of management, if adversely determined would have a material adverse effect on the Company’s business or financial position, resultscondition. Costs associated with the Company’s resolution of operations, and cash flows.legal proceedings are expensed as incurred.
| |
17.19. | Net Income (Loss)Loss Per Share Data |
The Company’s basic net income (loss)loss per share amounts have been computed by dividing net income (loss)loss by the weighted average number of Common and Class A shares outstanding. The diluted net incomeNet loss per share is based upon the weighted average number of sharespresented on a combined basis, inclusive of Common Stock and Class A Stock outstanding, as each class of stock has equivalent economic rights. In 2007, 2006, and the common stock equivalents outstanding when dilutive. In 2003 and 2002,2005, the Company reported net losses and,losses; therefore, no common stock equivalents were included in the computation of diluted net loss per share since
F-32
REGENERON PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
such inclusion would have been antidilutive. The calculations of basic and diluted net loss per share are as follows:
| | | | | | | | | | | | | | |
| | | December 31, | |
| | | | |
| | | 2004 | | | 2003 | | | 2002 | |
| | | | | | | | | | |
| Net income (loss) (Numerator) | | $ | 41,699 | | | $ | (107,458 | ) | | $ | (124,377 | ) |
| Shares, in thousands (Denominator): | | | | | | | | | | | | |
| Weighted-average shares for basic per share calculations | | | 55,419 | | | | 50,490 | | | | 43,918 | |
| Effect of stock options | | | 711 | | | | | | | | | |
| Effect of restricted stock awards | | | 42 | | | | — | | | | — | |
| | | | | | | | | | |
| | Adjusted weighted-average shares for diluted per share calculations | | | 56,172 | | | | 50,490 | | | | 43,918 | |
| | | | | | | | | | |
| | Basic net income (loss) per share | | $ | 0.75 | | | $ | (2.13 | ) | | $ | (2.83 | ) |
| | Diluted net income (loss) per share | | $ | 0.74 | | | $ | (2.13 | ) | | $ | (2.83 | ) |
| | | | | | | | | | | | | |
| | | December 31, | |
| | | 2007 | | | 2006 | | | 2005 | |
| |
| Net loss (Numerator) | | $ | (105,600 | ) | | $ | (102,337 | ) | | $ | (95,446 | ) |
| Weighted-average shares, in thousands (Denominator) | | | 66,334 | | | | 57,970 | | | | 55,950 | |
| Basic and diluted net loss per share | | $ | (1.59 | ) | | $ | (1.77 | ) | | $ | (1.71 | ) |
F-35
REGENERON PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
Shares issuable upon the exercise of options, and warrants, vesting of restricted stock awards, and conversion of convertible debt, which have been excluded from the diluted per share amounts because their effect would have been antidilutive, include the following:
| | | | | | | | | | | | | | |
| | | December 31, | |
| | | | |
| | | 2004 | | | 2003 | | | 2002 | |
| | | | | | | | | | |
| Options and Warrants: | | | | | | | | | | | | |
| | Weighted average number, in thousands | | | 10,110 | | | | 11,299 | | | | 9,533 | |
| | Weighted average exercise price | | $ | 23.82 | | | $ | 22.07 | | | $ | 19.43 | |
| Restricted Stock: | | | | | | | | | | | | |
| | Weighted average number, in thousands | | | 6 | | | | 159 | | | | 88 | |
| Convertible Debt: | | | | | | | | | | | | |
| | Weighted average number, in thousands | | | 6,611 | | | | 6,611 | | | | 6,611 | |
| | Conversion price | | $ | 30.25 | | | $ | 30.25 | | | $ | 30.25 | |
| | | | | | | | | | | | | |
| | | December 31, | |
| | | 2007 | | | 2006 | | | 2005 | |
| |
| Options: | | | | | | | | | | | | |
| Weighted average number, in thousands | | | 15,385 | | | | 14,139 | | | | 13,299 | |
| Weighted average exercise price | | $ | 15.97 | | | $ | 14.41 | | | $ | 14.59 | |
| Restricted Stock: | | | | | | | | | | | | |
| Weighted average number, in thousands | | | 21 | | | | 23 | | | | 165 | |
| Convertible Debt: | | | | | | | | | | | | |
| Weighted average number, in thousands | | | 6,611 | | | | 6,611 | | | | 6,611 | |
| Conversion price | | $ | 30.25 | | | $ | 30.25 | | | $ | 30.25 | |
In connection with the Company’s stock option exchange program (see Note 13a)14), on January 5, 2005, eligible employees elected to exchange options with a total of 3,665,819 underlying shares of Common Stock, and the Company issued 1,977,8401,997,840 replacement options with an exercise price of $8.50 per share.
| |
18.20. | Segment Information |
The
Through 2006, the Company’s operations arewere managed in two business segments: research and development, and contract manufacturing.
Research and development: Includes all activities related to the discovery of potential therapeuticspharmaceutical products for humanthe treatment of serious medical conditions, and the development and commercialization of these discoveries. AlsoThis segment includes revenues and expenses related to (i) theactivities conducted under research and development of manufacturing processes prior to commencing commercial production of a product under contract manufacturing arrangements and (ii) the supply of specified, ordered research materials using Regeneron-developed proprietary technologyagreements (see Note 13)11) and technology licensing agreements (see Note 12).
Contract manufacturing: Includes all revenues and expenses related to the commercial production of products under contract manufacturing arrangements. During 2004, 2003,2006 and 2002,2005, the Company produced Intermediatea vaccine intermediate for Merck & Co., Inc. under the Merck Agreementa manufacturing agreement, which expired in October 2006 (see Note 12)13).
The accounting policies for the segments are the same as those described in Note 2, Summary of Significant Accounting Policies. Due to the expiration of the Company’s manufacturing agreement with Merck in October 2006, beginning in 2007, the Company only has a research and development business segment. Therefore, segment information has not been provided for 2007 in the table below.
F-36
F-33
REGENERON PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
The following table below presents information about reported segments for the years ended December 31, 2004, 2003,2006 and 2002:2005.
| | | | | | | | | | | | | | | | | |
| | | Research & | | | Contract | | | Reconciling | | | |
| | | Development | | | Manufacturing | | | Items | | | Total | |
| | | | | | | | | | | | | |
2004 | | | | | | | | | | | | | | | | |
| Revenues | | $ | 155,927 | | | $ | 18,090 | | | | — | | | $ | 174,017 | |
| Depreciation and amortization | | | 14,319 | | | | — | (1) | | $ | 1,043 | | | | 15,362 | |
| Interest expense | | | 126 | | | | — | | | | 12,049 | | | | 12,175 | |
| Other contract income | | | 42,750 | | | | — | | | | | | | | 42,750 | |
| Net income (loss) | | | 45,395 | | | | 2,876 | | | | (6,572 | )(2) | | | 41,699 | |
| Capital expenditures | | | 5,972 | | | | — | | | | — | | | | 5,972 | |
| Total assets | | | 111,038 | | | | 6,532 | | | | 355,538 | (3) | | | 473,108 | |
2003 | | | | | | | | | | | | | | | | |
| Revenues | | $ | 47,366 | | | $ | 10,131 | | | | — | | | $ | 57,497 | |
| Depreciation and amortization | | | 11,894 | | | | — | (1) | | $ | 1,043 | | | | 12,937 | |
| Interest expense | | | 161 | | | | — | | | | 11,771 | | | | 11,932 | |
| Net (loss) income | | | (103,604 | ) | | | 3,455 | | | | (7,309 | )(2) | | | (107,458 | ) |
| Capital expenditures | | | 16,944 | | | | — | | | | — | | | | 16,944 | |
| Total assets | | | 92,369 | | | | 12,889 | | | | 374,297 | (3) | | | 479,555 | |
2002 | | | | | | | | | | | | | | | | |
| Revenues | | $ | 10,924 | | | $ | 11,064 | | | | — | | | $ | 21,988 | |
| Depreciation and amortization | | | 7,411 | | | | — | (1) | | $ | 1,043 | | | | 8,454 | |
| Interest expense | | | 36 | | | | 2 | | | | 11,821 | | | | 11,859 | |
| Net (loss) income | | | (126,597 | ) | | | 4,579 | | | | (2,359 | )(2) | | | (124,377 | ) |
| Capital expenditures | | | 45,878 | | | | 36 | | | | — | | | | 45,914 | |
| Total assets | | | 75,589 | | | | 12,479 | | | | 303,506 | (3) | | | 391,574 | |
| | | | | | | | | | | | | | | | | |
| | | Research &
| | | Contract
| | | Reconciling
| | | | |
| | | Development | | | Manufacturing | | | Items | | | Total | |
| |
2006 | | | | | | | | | | | | | | | | |
| Revenues | | $ | 51,136 | | | $ | 12,311 | | | | — | | | $ | 63,447 | |
| Depreciation and amortization | | | 13,549 | | | | — | (1) | | $ | 1,043 | | | | 14,592 | |
| Non-cash compensation expense | | | 18,357 | | | | 318 | | | | (813 | )(2) | | | 17,862 | |
| Interest expense | | | | | | | — | | | | 12,043 | | | | 12,043 | |
| Net income (loss) | | | (111,820 | ) | | | 4,165 | | | | 5,318 | (3) | | | (102,337 | ) |
| Capital expenditures | | | 3,339 | | | | — | | | | — | | | | 3,339 | |
| Total assets | | | 56,843 | | | | 3 | | | | 528,244 | (4) | | | 585,090 | |
2005 | | | | | | | | | | | | | | | | |
| Revenues | | $ | 52,447 | | | $ | 13,746 | | | | — | | | $ | 66,193 | |
| Depreciation and amortization | | | 14,461 | | | | — | (1) | | $ | 1,043 | | | | 15,504 | |
| Non-cash compensation expense | | | 21,492 | | | | 367 | | | | — | | | | 21,859 | |
| Interest expense | | | — | | | | — | | | | 12,046 | | | | 12,046 | |
| Other contract income | | | 30,640 | | | | — | | | | — | | | | 30,640 | |
| Net income (loss) | | | (97,970 | ) | | | 4,189 | | | | (1,665 | )(3) | | | (95,446 | ) |
| Capital expenditures | | | 4,667 | | | | — | | | | — | | | | 4,667 | |
| Total assets | | | 95,645 | | | | 4,315 | | | | 323,541 | (4) | | | 423,501 | |
| | |
| (1) | | Depreciation and amortization related to contract manufacturing is capitalized into inventory and included in contract manufacturing expense when the product is shipped. |
| |
| (2) | | Represents the cumulative effect of adopting SFAS 123R (see Note 2). |
|
| (3) | | Represents investment income net of interest expense related to convertible notes issued in October 2001 (see Note 10d)10). For the year ended December 31, 2006, also includes the cumulative effect of adopting SFAS 123R (see Note 2). |
| |
(3) (4) | | Includes cash and cash equivalents, marketable securities, restricted marketable securitiescash (where applicable), prepaid expenses and other current assets, and other assets. |
| |
| 21. | Unaudited Quarterly Results |
Summarized quarterly financial data for the years ended December 31, 2007 and 2006 are set forth in the following tables.
| | | | | | | | | | | | | | | | | |
| | | First Quarter
| | | Second Quarter
| | | Third Quarter
| | | Fourth Quarter
| |
| | | Ended
| | | Ended
| | | Ended
| | | Ended
| |
| | | March 31,
| | | June 30,
| | | September 30,
| | | December 31,
| |
| | | 2007 | | | 2007 | | | 2007 | | | 2007 (1) | |
| | | (Unaudited) | |
| |
| Revenues | | $ | 15,788 | | | $ | 22,195 | | | $ | 22,311 | | | $ | 64,730 | |
| Net loss | | | (29,917 | ) | | | (26,774 | ) | | | (35,838 | ) | | | (13,071 | ) |
| Net loss per share, basic and diluted: | | $ | (0.46 | ) | | $ | (0.41 | ) | | $ | (0.54 | ) | | $ | (0.19 | ) |
F-37
F-34
REGENERON PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
| | | | | | | | | | | | | | | | | |
| | | First Quarter
| | | Second Quarter
| | | Third Quarter
| | | Fourth Quarter
| |
| | | Ended
| | | Ended
| | | Ended
| | | Ended
| |
| | | March 31,
| | | June 30,
| | | September 30,
| | | December 31,
| |
| | | 2006 | | | 2006 | | | 2006 | | | 2006 | |
| | | (Unaudited) | |
| |
| Revenues | | $ | 18,219 | | | $ | 19,258 | | | $ | 15,624 | | | $ | 10,346 | |
| Net loss before cumulative effect of a change in accounting principle | | | (21,193 | ) | | | (23,576 | ) | | | (27,410 | ) | | | (30,971 | ) |
| Net loss | | | (20,380 | ) | | | (23,576 | ) | | | (27,410 | ) | | | (30,971 | ) |
| Net loss per share, basic and diluted: | | | | | | | | | | | | | | | | |
| Net loss before cumulative effect of a change in accounting principle | | $ | (0.37 | ) | | $ | (0.41 | ) | | $ | (0.48 | ) | | $ | (0.51 | ) |
| Net loss | | $ | (0.36 | ) | | $ | (0.41 | ) | | $ | (0.48 | ) | | $ | (0.51 | ) |
| | |
19.(1) | Unaudited Quarterly Results | As described in Note 11, effective in the fourth quarter of 2007, the Company determined the appropriate accounting policy for payments from Bayer HealthCare. As a result, in the fourth quarter of 2007, when the Company commenced recognizing previously deferred payments from Bayer HealthCare and cost-sharing of the Company’s and Bayer HealthCare’s 2007 VEGF Trap-Eye development expenses, the Company recognized contract research and development revenue from Bayer HealthCare of $35.9 million and additional research and development expense of $10.6 million. |
F-38
EXHIBIT INDEX
Summarized quarterly financial data for the years ended December 31, 2004 and 2003 are displayed in the following tables.
| | | | | | | | | | | | | | | | | |
| | | First Quarter | | | Second Quarter | | | Third Quarter | | | Fourth Quarter | |
| | | Ended | | | Ended | | | Ended | | | Ended | |
| | | March 31, | | | June 30, | | | September 30, | | | December 31, | |
| | | 2004 | | | 2004 | | | 2004 | | | 2004 | |
| | | | | | | | | | | | | |
| | | (Unaudited) | | | (Unaudited) | | | (Unaudited) | | | (Unaudited) | |
| Revenues | | $ | 61,990 | | | $ | 28,418 | | | $ | 36,519 | | | $ | 47,090 | |
| Net income (loss) | | | 64,532 | | | | (14,549 | ) | | | (11,076 | ) | | | 2,792 | |
| Basic net income (loss) per share | | $ | 1.17 | | | $ | (0.26 | ) | | $ | (0.20 | ) | | $ | 0.05 | |
| Diluted net income (loss) per share | | $ | 1.06 | | | $ | (0.26 | ) | | $ | (0.20 | ) | | $ | 0.05 | |
| | | | | | | | | | | | | | | | | |
| | | First Quarter | | | Second Quarter | | | Third Quarter | | | Fourth Quarter | |
| | | Ended | | | Ended | | | Ended | | | Ended | |
| | | March 31, | | | June 30, | | | September 30, | | | December 31, | |
| | | 2003 | | | 2003 | | | 2003 | | | 2003 | |
| | | | | | | | | | | | | |
| | | (Unaudited) | | | (Unaudited) | | | (Unaudited) | | | (Unaudited) | |
| Revenues | | $ | 9,925 | | | $ | 8,908 | | | $ | 17,392 | | | $ | 21,272 | |
| Net loss | | | (30,321 | ) | | | (30,360 | ) | | | (27,400 | ) | | | (19,377 | ) |
| Net loss per share, basic and diluted | | $ | (0.68 | ) | | $ | (0.61 | ) | | $ | (0.52 | ) | | $ | (0.35 | ) |
| | | | | | | | | |
Exhibit
| | |
Number | | Description |
| |
| | 3 | .1 | | | | — | | Restated Certificate of Incorporation, filed February 11, 2008 with the New York Secretary of State. |
| | 3 | .2 | | (a) | | — | | By-Laws of the Company, currently in effect (amended through November 9, 2007). |
| | 10 | .1 | | (b) | | — | | 1990 Amended and Restated Long-Term Incentive Plan. |
| | 10 | .2 | | (c) | | — | | 2000 Long-Term Incentive Plan. |
| | 10 | .3.1 | | (d) | | — | | Amendment No. 1 to 2000 Long-Term Incentive Plan, effective as of June 14, 2002. |
| | 10 | .3.2 | | (d) | | — | | Amendment No. 2 to 2000 Long-Term Incentive Plan, effective as of December 20, 2002. |
| | 10 | .3.3 | | (e) | | — | | Amendment No. 3 to 2000 Long-term Incentive Plan, effective as of June 14, 2004. |
| | 10 | .3.4 | | (f) | | — | | Amendment No. 4 to 2000 Long-term Incentive Plan, effective as of November 15, 2004. |
| | 10 | .3.5 | | (g) | | — | | Form of option agreement and related notice of grant for use in connection with the grant of options to the Registrant’s non-employee directors and named executive officers. |
| | 10 | .3.6 | | (g) | | — | | Form of option agreement and related notice of grant for use in connection with the grant of options to the Registrant’s executive officers other than the named executive officers. |
| | 10 | .3.7 | | (h) | | — | | Form of restricted stock award agreement and related notice of grant for use in connection with the grant of restricted stock awards to the Registrant’s executive officers. |
| | 10 | .4 | | (d) | | — | | Employment Agreement, dated as of December 20, 2002, between the Company and Leonard S. Schleifer, M.D., Ph.D. |
| | 10 | .5* | | (i) | | — | | Employment Agreement, dated as of December 31, 1998, between the Company and P. Roy Vagelos, M.D. |
| | 10 | .6 | | (j) | | — | | Regeneron Pharmaceuticals, Inc. Change in Control Severance Plan, effective as of February 1, 2006. |
| | 10 | .7 | | (k) | | — | | Indenture, dated as of October 17, 2001, between Regeneron Pharmaceuticals, Inc. and American Stock Transfer & Trust Company, as trustee. |
| | 10 | .8 | | (k) | | — | | Registration Rights Agreement, dated as of October 17, 2001, among Regeneron Pharmaceuticals, Inc., Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, and Robertson Stephens, Inc. |
| | 10 | .9* | | (l) | | — | | IL-1 License Agreement, dated June 26, 2002, by and among the Company, Immunex Corporation, and Amgen Inc. |
| | 10 | .10* | | (m) | | — | | Collaboration, License and Option Agreement, dated as of March 28, 2003, by and between Novartis Pharma AG, Novartis Pharmaceuticals Corporation, and the Company. |
| | 10 | .11* | | (n) | | — | | Collaboration Agreement, dated as of September 5, 2003, by and between Aventis Pharmaceuticals Inc. and Regeneron Pharmaceuticals, Inc. |
| | 10 | .11.1* | | (i) | | — | | Amendment No. 1 to Collaboration Agreement, by and between Aventis Pharmaceuticals Inc. and Regeneron Pharmaceuticals, Inc., effective as of December 31, 2004. |
| | 10 | .11.2 | | (o) | | — | | Amendment No. 2 to Collaboration Agreement, by and between Aventis Pharmaceuticals Inc. and Regeneron Pharmaceuticals, Inc., effective as of January 7, 2005. |
| | 10 | .11.3* | | (p) | | — | | Amendment No. 3 to Collaboration Agreement, by and between Aventis Pharmaceuticals Inc. and Regeneron Pharmaceuticals, Inc., effective as of December 21, 2005. |
| | 10 | .11.4* | | (p) | | — | | Amendment No. 4 to Collaboration Agreement, by and between sanofi-aventis U.S., LLC (successor in interest to Aventis Pharmaceuticals, Inc.) and Regeneron Pharmaceuticals, Inc., effective as of January 31, 2006. |
| | 10 | .12 | | (n) | | — | | Stock Purchase Agreement, dated as of September 5, 2003, by and between Aventis Pharmaceuticals Inc. and Regeneron Pharmaceuticals, Inc. |
| | 10 | .13* | | (q) | | — | | License and Collaboration Agreement, dated as of October 18, 2006, by and between Bayer HealthCare LLC and Regeneron Pharmaceuticals, Inc. |
| | 10 | .14* | | (r) | | — | | Non Exclusive License and Material Transfer Agreement, dated as of February 5, 2007 by and between AstraZeneca UK Limited and Regeneron Pharmaceuticals, Inc. |
F-35
| | | | | | | | | |
Exhibit
| | |
Number | | Description |
| |
| | 10 | .15 | | (s) | | — | | Lease, dated as of December 21, 2006, by and between BMR-Landmark at Eastview LLC and Regeneron Pharmaceuticals, Inc. |
| | 10 | .16* | | (t) | | — | | Non Exclusive License and Material Transfer Agreement, dated as of March 30, 2007, by and between Astellas Pharma Inc. and Regeneron Pharmaceuticals, Inc. |
| | 10 | .17* | | (u) | | — | | First Amendment to Lease, by and between BMR-Landmark at Eastview LLC and Regeneron Pharmaceuticals, Inc., effective as of October 24, 2007. |
| | 10 | .18* | | | | — | | Discovery and Preclinical Development Agreement, dated as of November 28, 2007, by and between Aventis Pharmaceuticals Inc. and Regeneron Pharmaceuticals, Inc. |
| | 10 | .19* | | | | — | | License and Collaboration Agreement, dated as of November 28, 2007, by and among Aventis Pharmaceuticals Inc., sanofi-aventis Amerique du Nord and Regeneron Pharmaceuticals, Inc. |
| | 10 | .20 | | | | — | | Stock Purchase Agreement, dated as of November 28, 2007, by and among sanofi-aventis Amerique du Nord, sanofi-aventis US LLC and Regeneron Pharmaceuticals, Inc. |
| | 10 | .21 | | | | — | | Investor Agreement, dated as of December 20, 2007, by and among sanofi-aventis, sanofi-aventis US LLC, Aventis Pharmaceuticals Inc., sanofi-aventis Amerique du Nord, and Regeneron Pharmaceuticals, Inc. |
| | 12 | .1 | | | | — | | Statement re: computation of ratio of earnings to combined fixed charges of Regeneron Pharmaceuticals, Inc. |
| | 23 | .1 | | | | — | | Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm. |
| | 31 | .1 | | | | — | | Certification of CEO pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934. |
| | 31 | .2 | | | | — | | Certification of CFO pursuant to Rule 13a-14 (a) under the Securities and Exchange Act of 1934. |
| | 32 | | | | | — | | Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350. |
Description:
| | |
| (a) | | Incorporated by reference from theForm 8-K for Regeneron Pharmaceuticals, Inc., filed November 13, 2007. |
|
| (b) | | Incorporated by reference from the Company’s registration statement onForm S-1 (file number33-39043). |
|
| (c) | | Incorporated by reference from theForm 10-K for Regeneron Pharmaceuticals, Inc., for the fiscal year ended December 31, 2001, filed March 22, 2002. |
|
| (d) | | Incorporated by reference from theForm 10-K for Regeneron Pharmaceuticals, Inc., for the fiscal year ended December 31, 2002, filed March 31, 2003. |
|
| (e) | | Incorporated by reference from theForm 10-Q for Regeneron Pharmaceuticals, Inc. for the quarter ended June 30, 2004, filed August 5, 2004. |
|
| (f) | | Incorporated by reference from theForm 8-K for Regeneron Pharmaceuticals, Inc., filed November 17, 2004. |
|
| (g) | | Incorporated by reference from theForm 8-K for Regeneron Pharmaceuticals, Inc., filed December 16, 2005. |
|
| (h) | | Incorporated by reference from theForm 8-K for Regeneron Pharmaceuticals, Inc., filed December 13, 2004. |
|
| (i) | | Incorporated by reference from theForm 10-K for Regeneron Pharmaceuticals, Inc. for the fiscal year ended December 31, 2004, filed March 11, 2005. |
|
| (j) | | Incorporated by reference from theForm 8-K for Regeneron Pharmaceuticals, Inc., filed January 25, 2006. |
|
| (k) | | Incorporated by reference from the Company’s registration statement onForm S-3 (file number333-74464). |
|
| (l) | | Incorporated by reference from theForm 10-Q for Regeneron Pharmaceuticals, Inc. for the quarter ended June 30, 2002, filed August 13, 2002. |
|
| (m) | | Incorporated by reference from theForm 10-Q for Regeneron Pharmaceuticals, Inc. for the quarter ended March 31, 2003, filed May 15, 2003. |
|
| (n) | | Incorporated by reference from theForm 10-Q for Regeneron Pharmaceuticals, Inc. for the quarter ended September 30, 2003, filed November 11, 2003. |
|
| (o) | | Incorporated by reference from theForm 8-K for Regeneron Pharmaceuticals, Inc., filed January 11, 2005. |
|
| (p) | | Incorporated by reference from theForm 10-K for Regeneron Pharmaceuticals, Inc., for the fiscal year ended December 31, 2005, filed February 28, 2006. |
| | |
| (q) | | Incorporated by reference from theForm 8-K for Regeneron Pharmaceuticals, Inc., filed October 18, 2006. |
|
| (r) | | Incorporated by reference from theForm 10-K for Regeneron Pharmaceuticals, Inc for the year ended December 31, 2006, filed March 12, 2007. |
|
| (s) | | Incorporated by reference from theForm 8-K for Regeneron Pharmaceuticals, Inc., filed December 22, 2006. |
|
| (t) | | Incorporated by reference from theForm 10-Q for Regeneron Pharmaceuticals, Inc for the quarter ended March 31, 2007, filed May 4, 2007. |
|
| (u) | | Incorporated by reference from theForm 10-Q for Regeneron Pharmaceuticals, Inc for the quarter ended September 31, 2007, filed November 7, 2007. |
|
| * | | Portions of this document have been omitted and filed separately with the Commission pursuant to requests for confidential treatment pursuant toRule 24b-2. |
