UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to __________
Commission File Number 0-19034
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REGENERON PHARMACEUTICALS, INC.
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(Exact name of registrant as specified in its charter)
New York 13-3444607
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
777 Old Saw Mill River Road
Tarrytown, New York 10591-6707
- -------------------------------------------- -----------------------
(Address of principal executive offices) (Zip code)
(914) 347-7000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of April 30, 1999:
Class of Common Stock Number of Shares
--------------------- ----------------
Class A Stock, $0.001 par value 3,630,786
Common Stock, $0.001 par value 27,670,663
REGENERON PHARMACEUTICALS, INC.
Table of Contents
March 31, 1999
Page Numbers
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PART I FINANCIAL INFORMATION
Item 1 Financial Statements
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Condensed balance sheets (unaudited) at March 31,
1999 and December 31, 1998 3
Condensed statements of operations (unaudited) for
the three months ended March 31, 1999 and 1998 4
Condensed statement of stockholders' equity (unaudited)
for the three months ended March 31, 1999 5
Condensed statements of cash flows (unaudited) for
the three months ended March 31, 1999 and 1998 6
Notes to condensed financial statements 7-9
Item 2 Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations 10-19
-----------------------------------
PART II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 20
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SIGNATURE PAGE 21
Exhibit 27 Financial data schedule
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2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REGENERON PHARMACEUTICALS, INC.
CONDENSED BALANCE SHEETS AT MARCH 31, 1999 AND DECEMBER 31, 1998 (Unaudited)
(In thousands, except share data)
March 31, December 31,
ASSETS 1999 1998
---- ----
Current assets
Cash and cash equivalents $21,777 $19,757
Marketable securities 46,177 66,022
Receivable due from The Procter & Gamble Company 3,555 3,169
Receivable due from Merck & Co., Inc. 2,568 1,665
Receivable due from Amgen-Regeneron Partners 590 709
Receivable due from Sumitomo Pharmaceuticals Company, Ltd. 182 167
Prepaid expenses and other current assets 1,340 1,412
---------------- ----------------
Total current assets 76,189 92,901
Marketable securities 36,617 27,751
Investment in Amgen-Regeneron Partners 2,125 3,091
Property, plant and equipment, at cost, net of accumulated depreciation
and amortization 34,239 33,019
Other assets 159 153
---------------- ----------------
Total assets $149,329 $156,915
================ ================
LIABILITIES and STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $6,032 $5,551
Capital lease obligations, current portion 1,029 1,051
Note payable, current portion 64 65
Deferred revenue, current portion 2,734 2,735
---------------- ----------------
Total current liabilities 9,859 9,402
Capital lease obligations 1,215 1,457
Note payable 1,594 1,609
Other liabilities 287 282
Deferred revenue 12,938 12,938
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;
3,630,786 shares issued and outstanding in 1999 and 1998 4 4
Common Stock, $.001 par value; 60,000,000 shares authorized;
27,670,663 shares issued and outstanding in 1999
27,386,858 shares issued and outstanding in 1998 28 27
Additional paid-in capital 309,760 308,561
Unearned compensation (270) (360)
Accumulated deficit (186,163) (177,233)
Accumulated other comprehensive income 77 228
---------------- ----------------
Total stockholders' equity 123,436 131,227
---------------- ----------------
Total liabilities and stockholders' equity $149,329 $156,915
================ ================
The accompanying notes are an integral part of the financial statements.
================================================================================
3
REGENERON PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands, except per share data)
Three months ended March 31,
1999 1998
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Revenues
Contract research and development $3,344 $4,574
Contract manufacturing 2,115 1,886
Investment income 1,459 1,790
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6,918 8,250
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Expenses
Research and development 11,221 8,150
Loss in Amgen-Regeneron Partners 966 687
General and administrative 1,593 1,384
Depreciation and amortization 725 869
Contract manufacturing 1,254 868
Interest 89 121
-------------- -------------
15,848 12,079
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Net loss ($8,930) ($3,829)
============== =============
Net loss per share, basic and diluted ($0.29) ($0.12)
============== =============
The accompanying notes are an integral part of the financial statements.
================================================================================
4
REGENERON PHARMACEUTICALS, INC.
CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY (Unaudited)
For the three months ended March 31, 1999
(In thousands)
Class A Stock Common Stock
-----------------------------------------------------------------
Shares Amount Shares Amount
------------ ------------- ------------- -------------
Balance, December 31, 1998 3,631 $4 27,387 $27
Amortization of unearned compensation
Issuance of Common Stock in connection
with exercise of stock options 246 1
Issuance of Common Stock in connection
with Company 401(k) Savings Plan
contribution 38
Net loss
Change in net unrealized gain
on marketable securities
=================================================================
Balance, March 31, 1999 3,631 $4 27,671 $28
=================================================================
Additional
Paid-in Unearned Accumulated
Capital Compensation Deficit
------------------- ------------------------ ----------------------
Balance, December 31, 1998 $308,561 ($360) ($177,233)
Amortization of unearned compensation 90
Issuance of Common Stock in connection
with exercise of stock options 891
Issuance of Common Stock in connection
with Company 401(k) Savings Plan
contribution 308
Net loss (8,930)
Change in net unrealized gain
on marketable securities
===========================================================================
Balance, March 31, 1999 $309,760 ($270) ($186,163)
===========================================================================
Accumulated Total
Other Comprehensive Stockholders' Comprehensive
Income Equity Loss
----------------------------- -------------------- ---------------------
Balance, December 31, 1998 $228 $131,227
Amortization of unearned compensation 90
Issuance of Common Stock in connection
with exercise of stock options 892
Issuance of Common Stock in connection
with Company 401(k) Savings Plan
contribution 308
Net loss (8,930) ($8,930)
Change in net unrealized gain
on marketable securities (151) (151) (151)
=========================================================================
Balance, March 31, 1999 $77 $123,436 ($9,081)
=========================================================================
The accompanying notes are an integral part of the financial statements.
================================================================================
5
REGENERON PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
Three months ended March 31,
1999 1998
---- ----
Cash flows from operating activities
Net loss ($8,930) ($3,829)
----------------- ------------------
Adjustments to reconcile net loss to net cash
used in operating activities
Loss in Amgen-Regeneron Partners 966 687
Depreciation and amortization 725 869
Stock issued in consideration for services rendered 90 90
Changes in assets and liabilities
(Increase) decrease in amounts due from The Procter & Gamble Company (386) 97
Increase in amounts due from Merck & Co., Inc. (903) (189)
Decrease (increase) in amounts due from Amgen-Regeneron Partners 119 (73)
(Increase) decrease in amounts due from Sumitomo Pharmaceuticals Co., Ltd. (15) 2,115
Increase in investment in Amgen-Regeneron Partners (1,030)
Decrease (increase) in prepaid expenses and other assets 66 (741)
Decrease in deferred revenue (1) (1,750)
Decrease in accounts payable, accrued expenses,
and other liabilities (158) (452)
----------------- ------------------
Total adjustments 503 (377)
----------------- ------------------
Net cash used in operating activities (8,427) (4,206)
----------------- ------------------
Cash flows from investing activities
Purchases of marketable securities (22,857) (26,475)
Sales of marketable securities 33,685 22,342
Capital expenditures (993) (874)
----------------- ------------------
Net cash provided by (used in) investing activities 9,835 (5,007)
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Cash flows from financing activities
Net proceeds from the issuance of stock 892 317
Principal payments on note payable (16) (17)
Capital lease payments (264) (750)
----------------- ------------------
Net cash provided by (used in) financing activities 612 (450)
----------------- ------------------
Net increase (decrease) in cash and cash equivalents 2,020 (9,663)
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Cash and cash equivalents at beginning of period 19,757 28,921
----------------- ------------------
Cash and cash equivalents at end of period $21,777 $19,258
================= ==================
The accompanying notes are an integral part of the financial statements.
================================================================================
6
REGENERON PHARMACEUTICALS, INC.
Notes to Condensed Financial Statements
(In thousands, except per share data)
1. Interim Financial Statements
The interim Condensed Financial Statements of Regeneron
Pharmaceuticals, Inc. (the "Company") have been prepared in accordance
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all information and disclosures
necessary for a presentation of the Company's financial position,
results of operations, and cash flows in conformity with generally
accepted accounting principles. In the opinion of management, these
financial statements reflect all adjustments, consisting only of normal
recurring accruals, necessary for a fair presentation of the Company's
financial position, results of operation, and cash flows for such
periods. The results of operations for any interim periods are not
necessarily indicative of the results for the full year. These
financial statements should be read in conjunction with the financial
statements and notes thereto contained in the Company's Annual Report
on Form 10-K for the year ended December 31, 1998.
2. Statement of Cash Flows
Supplemental disclosure of noncash investing and financing activities:
Included in accounts payable and accrued expenses at March 31, 1999 and
December 31, 1998 were approximately $1,421 and $469, respectively, of
accrued capital expenditures. Included in accounts payable and accrued
expenses at March 31, 1998 and December 31, 1997 were approximately
$117 and $635, respectively, of accrued capital expenditures.
Included in accounts payable and accrued expenses at December 31, 1998
was approximately $308 of accrued Company 401(k) Savings Plan
contribution expense. During January 1999 the Company contributed
approximately thirty-eight thousand shares of Common Stock to the
401(k) Savings Plan in satisfaction of this obligation.
3. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses as of March 31, 1999 and December
31, 1998 consist of the following:
March 31, December 31,
1999 1998
---- ----
Accounts payable $3,044 $2,223
Accrued payroll and related costs 1,507 1,346
Accrued clinical trial expense 775 1,336
Accrued expenses, other 419 359
Deferred compensation 287 287
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$6,032 $5,551
====== ======
7
REGENERON PHARMACEUTICALS, INC.
Notes to Condensed Financial Statements
(In thousands, except per share data)
4. Amgen-Regeneron Partners Research Collaboration Agreement
In August 1990, the Company and Amgen Inc. formed a partnership,
Amgen-Regeneron Partners (the "Partnership"), whereby the revenues
earned and expenses incurred by the Partnership for the research and
development of BDNF and NT-3 are shared equally. The Company accounts
for its investment in the Partnership in accordance with the equity
method of accounting.
Selected operating statement data of the Partnership for the three
months ended March 31, 1999 and 1998 are as follows:
Three Months Ended March 31,
----------------------------
1999 1998
---- ----
Total revenues $ 116 $ 40
Total expenses (2,048) (1,413)
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Net loss ($1,932) ($1,373)
======== ========
5. Comprehensive Loss
Comprehensive 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. Comprehensive loss of the Company
includes net loss adjusted for the change in net unrealized gain or
loss on marketable securities. The net effect of income taxes on
comprehensive loss is immaterial. The comprehensive loss for the three
months ended March 31, 1999 has been included in the Statement of
Stockholders' Equity. For the three months ended March 31, 1999 and
1998, the components of comprehensive loss were:
1999 1998
---- ----
Net loss ($8,930) ($3,829)
Change in net unrealized gain on marketable
securities (151) (39)
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Total comprehensive loss ($9,081) ($3,868)
======== ========
8
REGENERON PHARMACEUTICALS, INC.
Notes to Condensed Financial Statements
(In thousands, except per share data)
6. Per Share Data
The Company's basic net loss per share amounts have been computed by
dividing net loss by the weighted average number of Common and Class A
shares outstanding. For the three months ended March 31, 1999 and 1998,
the Company reported net losses; therefore, no common stock equivalents
were included in the computation of diluted net loss per share, since
such inclusion would have been antidilutive. The calculations of basic
and diluted net loss per share are as follows:
Three Months Ended March 31,
-----------------------------------------------------------------------
Net Loss Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
1999:
Basic and Diluted ($8,930) 31,274 ($0.29)
1998:
Basic and Diluted ($3,829) 30,932 ($0.12)
-----------------------------------------------------------------------
Options and warrants which have been excluded from the diluted per share
amounts because their effect would have been antidilutive include the
following:
Three Months Ended March 31,
----------------------------------------------------------------------------------------------------
1999 1998
------------------------------------------------------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Number Exercise Price Number Exercise Price
------ -------------- ------ --------------
Options and warrants with
exercise prices below the
average fair market value
of the Company's common stock
for the respective period 2,414 $5.78 1,848 $4.61
Options and warrants with
exercise prices above the
average fair market value
of the Company's common stock
for the respective period 4,575 $11.55 4,433 $11.72
--------------- -------------
Total 6,989 6,281
===== =====
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9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
Overview. The discussion below contains forward-looking statements that
involve risks and uncertainties relating to the future financial performance of
Regeneron Pharmaceuticals, Inc. ("Regeneron" or the "Company") and actual events
or results may differ materially. These statements concern, among other things,
the possible therapeutic applications of the Company's product candidates and
research programs, the timing and nature of the Company's clinical and research
programs now underway or planned, a variety of items described herein and in the
footnotes to the Company's financial statements (including the useful life of
assets, the anticipated length of agreements, and other matters), and the future
uses of capital and financial needs of the Company. These statements are made by
the Company based on management's current beliefs and judgment. In evaluating
such statements, stockholders and potential investors should specifically
consider the various factors identified under the caption "Factors That May
Affect Future Operating Results" which could cause actual results to differ
materially from those indicated by such forward-looking statements.
Regeneron is a leader in the application of molecular and cell biology
to discover novel potential therapeutics for human medical conditions and is
seeking to develop and commercialize these discoveries. The Company is applying
its technological expertise in protein growth factors, their receptors, and
their mechanisms of action to the discovery and development of protein-based
drugs and orally active, small molecule drugs.
The Company is pursuing research and development programs in the
following areas:
o AXOKINE(Registered) second generation ciliary neurotrophic factor
for the treatment of Type II diabetes in obese patients and
uncomplicated obesity.
o Brain-derived neurotrophic factor ("BDNF") for the treatment of
amyotrophic lateral sclerosis ("ALS," commonly known as Lou
Gehrig's disease),
o Neurotrophin-3 ("NT-3") for the treatment of constipating
conditions,
o Angiogenesis, including stimulating blood vessel growth in
settings where more blood flow is desired and blocking blood
vessel growth in abnormal conditions such as cancer. The
angiogenesis program is based on Regeneron's discovery of
Angiopoietins, a new family of ligands (and their receptors,
called the TIE family of receptors) that appears to regulate
blood vessel formation,
o Protein antagonists for cytokines such as interleukin-1 ("IL-1"),
interleukin-4 ("IL-4") and interleukin-6 ("IL-6") as potential
treatment of inflammatory diseases, allergic disorders, and
cancer,
o AXOKINE for the treatment of retinal diseases such as retinitis
pigmentosa,
o Muscle atrophy, using a variety of approaches to identify and
validate drug targets, and
10
o Research programs to discover orally active, small molecule-based
drugs, some of which may mimic or antagonize protein- or
receptor-based drug candidates that the Company is developing.
Discussion of First Quarter 1999 Activities. In the first quarter of
1999, the Company continued to develop AXOKINE under the Company's collaboration
agreement ("the P&G Agreement") with The Procter & Gamble Company ("Procter &
Gamble"). The Company and Procter & Gamble filed an Investigational New Drug
application ("IND") with the United States Food and Drug Administration ("FDA")
in the first quarter of 1999 and commenced a Phase I clinical study to determine
the safety of AXOKINE administered subcutaneously for a short duration to mildly
to moderately obese healthy volunteers. AXOKINE is being developed for the
treatment of Type II diabetes in obese patients and uncomplicated obesity. No
assurance can be made regarding the timing or result of this or any further
clinical trial of AXOKINE. AXOKINE has never been administered to people. Its
safety and efficacy in the treatment of any human condition have not been
established and can not be predicted. Previous clinical studies of ciliary
neurotrophic factor ("CNTF"), the parent molecule of AXOKINE, resulted in the
creation of antibodies and adverse events (side effects) in patients, including
weight loss, cough, nausea, and malaise. While certain aspects of the
development of AXOKINE by the Company and Procter & Gamble have focused on
attempting to avoid or minimize antibody production or adverse events, no
assurance may be given that these problems will be avoided or minimized or that
they will not lead to the failure, delay, or additional difficulty in conducting
AXOKINE clinical trials.
The Company and Procter & Gamble also continued to collaborate in
research and development in the fields of angiogenesis, bone growth and related
areas, muscle injury and atrophy, and small molecule (orally active) drugs. The
majority of the Company's scientific resources are devoted to its collaborative
activities with Procter & Gamble.
The Company continued independently to develop AXOKINE for use in
treating retinitis pigmentosa.
During the first quarter of 1999, the Company continued to develop
independent of any corporate collaboration its proprietary cytokine traps for
the potential treatment of asthma, inflammatory disease, cancer, and rheumatoid
arthritis. In addition, the Company continued to conduct research with
Pharmacopeia, Inc. in the area of small molecule (orally active) drugs.
During the first quarter of 1999, Amgen-Regeneron Partners, the
partnership equally owned by Regeneron and Amgen Inc. ("Amgen"), continued to
develop BDNF and NT-3. BDNF is currently being developed by Amgen-Regeneron
Partners for potential use in treating ALS through two routes of administration:
intrathecal (infusion into the spinal fluid through an implanted pump) and
subcutaneous (injection under the skin). In the fourth quarter of 1998, Amgen,
on behalf of the partnership, began an intrathecal study in more than 200
patients with ALS. Subcutaneous studies conducted by Regeneron on behalf of the
partnership began in the first quarter of 1998. The subcutaneous studies are
based on an analysis of the Amgen-Regeneron Partners Phase III trial of BDNF for
ALS that was completed in 1996. That trial failed to achieve its predetermined
end points, but subsequent analyses indicated that a retrospectively-defined
subset of ALS patients in the trial may have received a survival benefit from
11
BDNF treatment. A multi-center study of more than 200 ALS patients who will
receive BDNF subcutaneously is expected to begin later in 1999.
The Company and Sumitomo Pharmaceuticals Co., Ltd. ("Sumitomo
Pharmaceuticals") are collaborating in the development of BDNF in Japan,
initially for the treatment of ALS. In March 1998, Sumitomo Pharmaceuticals
commenced a Phase I safety assessment of BDNF delivered subcutaneously to normal
volunteers. In August 1998, Sumitomo Pharmaceuticals signed a license agreement
for the development of BDNF in Japan. Pursuant to the license agreement,
Sumitomo Pharmaceuticals made a $5.0 million research progress payment (reduced
by $0.5 million of Japanese withholding tax) to Regeneron in August 1998 and
will be required to make additional payments upon the achievement of specified
milestones. Sumitomo Pharmaceuticals will also be required to pay a royalty on
sales of BDNF in Japan.
Amgen-Regeneron Partners' clinical development of NT-3 is currently
focused on constipating conditions. In 1998, Regeneron, on behalf of
Amgen-Regeneron Partners, completed a small clinical study that included healthy
volunteers and patients suffering from severe idiopathic constipation, and began
additional small studies that continued through the first quarter of 1999 in
patients who suffer from constipation associated with conditions such as spinal
cord injury and Parkinson's disease.
No assurance can be given that extended administration of BDNF or NT-3
will be safe or effective. The treatment of ALS has been shown, in a number of
clinical settings using a variety of treatment modalities (including
Amgen-Regeneron Partners' earlier clinical studies), to present significant
difficulties. The design of an ALS clinical study presents special difficulties
and risks, as do the facts that ALS is a progressive disease that afflicts
individual patients differently and other ALS treatments are approved or have
been or are currently being tested, creating the possibility that patients in
any BDNF study may also receive other therapeutics during all or part of the
BDNF trial. The treatment of constipating conditions may present additional
clinical trial risks in light of the complex and not wholly understood
mechanisms of action that lead to the conditions, the concurrent use of other
drugs to treat the underlying illnesses as well as the gastrointestinal
condition, the potential difficulty of designing and achieving significant
clinical end points, and other factors. No assurance can be given that these or
any other studies of BDNF or NT-3 will be successful or that BDNF or NT-3 will
be commercialized.
Substantial risk is inherent in the research, development, and
commercialization of drugs. In addition, in each of the areas of the Company's
independent and collaborative activities, other companies and entities are
actively pursuing competitive paths toward similar objectives. The results of
the Company's and its collaborators' past activities in connection with the
research and development of AXOKINE, cytokine traps, Angiopoietins, abnormal
bone growth, muscle atrophy, small molecules, BDNF, NT-3, and other programs or
areas of research or development do not necessarily predict the results or
success of current or future activities including, but not limited to, any
additional preclinical or clinical studies. The Company cannot predict whether,
when, or under what conditions any of its research or product candidates,
including without limitation AXOKINE, BDNF, or NT-3, will be shown to be safe or
effective to treat any human condition or be approved for marketing by any
regulatory agency. The delay or failure of current or future studies to
demonstrate the safety or efficacy of the Company's product candidates to treat
human conditions or to be approved for marketing could have a material adverse
impact on the Company.
12
To date, Regeneron has not received any revenues from the commercial
sale of products and may never receive such revenues. Before such revenues can
be realized, the Company (or its collaborators) must overcome a number of
hurdles which include successfully completing its research and development
efforts and obtaining regulatory approval from the FDA or regulatory authorities
in other countries. In addition, the biotechnology and pharmaceutical industries
are rapidly evolving and highly competitive, and new developments may render the
Company's products and technologies noncompetitive and obsolete.
From inception on January 8, 1988 through March 31, 1999, Regeneron had
a cumulative loss of $186.2 million. In the absence of revenues from commercial
product sales or other sources (the amount, timing, nature, or source of which
cannot be predicted), the Company's losses will continue as the Company conducts
its research and development activities. The Company's activities may expand
over time and may require additional resources, and the Company's operating
losses may be substantial over at least the next several years. The Company's
losses may fluctuate from quarter to quarter and will depend, among other
factors, on the timing of certain expenses and on the progress of the Company's
research and development efforts.
Results of Operations
Three months ended March 31, 1999 and 1998. The Company's total revenue
decreased to $6.9 million for the first quarter of 1999 from $8.3 million for
the same period in 1998. Contract research and development revenue decreased to
$3.3 million for the first quarter of 1999 from $4.6 million for the same period
in 1998. The Company earned higher contract research and development revenue
related to the P&G Agreement in the first quarter of 1999 versus the same period
in 1998. This was more than offset by nominal revenue in the first quarter of
1999 from the Company's ongoing collaboration with Sumitomo Pharmaceuticals,
versus revenue of $1.8 million for the same period in 1998, as revenue from
research payments under the Company's collaboration agreement with Sumitomo
Pharmaceuticals ended in 1998, and because the Company did not supply any BDNF
to Sumitomo Pharmaceuticals for preclinical and clinical use in the first
quarter of 1999. Contract manufacturing revenue related to the Company's 1995
manufacturing agreement (the "Merck Agreement") with Merck & Co., Inc. ("Merck")
increased to $2.1 million for the first quarter of 1999 compared to $1.9 million
for the same period in 1998 as a result of increased activity in preparation for
manufacturing a product for Merck at the Company's Rensselaer facility. The
Company's investment income decreased to $1.5 million in the first quarter of
1999 from $1.8 million for the same period in 1998 due primarily to lower levels
of interest-bearing investments as the Company funds its operations.
The Company's total operating expenses increased to $15.8 million in
the first quarter of 1999 from $12.1 million for the same period in 1998.
Research and development expenses increased to $11.2 million in the first
quarter of 1999 from $8.2 million for the same period in 1998, primarily as a
result of higher staffing and increased activity in the Company's preclinical
and clinical research programs. The Company's share of the loss in
Amgen-Regeneron Partners increased to $1.0 million in the first quarter of 1999
from $0.7 million for the same period in 1998 as a result of the partnership's
increased clinical trial activity on BDNF and NT-3. Research and development
expenses (including loss in Amgen-Regeneron Partners) were approximately 77% of
total operating expenses in the first quarter of 1999, compared to 73% for the
same period in 1998.
13
General and administrative expenses increased to $1.6 million in the
first quarter of 1999 from $1.4 million for the same period of 1998, primarily
to support the Company's increased research and development and manufacturing
activities. Depreciation and amortization expense decreased to $0.7 million in
the first quarter of 1999 from $0.9 million in the first quarter of 1998, as
certain laboratory equipment and leasehold improvements became fully
depreciated. Contract manufacturing expenses, which are expenses directly
related to the Merck Agreement and are reimbursed by Merck, increased to $1.3
million in the first quarter of 1999 from $0.9 million in the same period of
1998, primarily due to increased activity in preparation for manufacturing a
product for Merck. Interest expense was $0.1 million for the first quarter of
both 1999 and 1998.
The Company's net loss for the first quarter of 1999 was $8.9 million,
or $0.29 per share (basic and diluted), compared to a net loss of $3.8 million,
or $0.12 per share (basic and diluted), for the same period in 1998.
Liquidity and Capital Resources
Since its inception in 1988, the Company has financed its operations
primarily through private placements and public offerings of its equity
securities, revenue earned under the several agreements between the Company and
each of Amgen, Sumitomo Chemical Company, Ltd., Sumitomo Pharmaceuticals, Merck,
and Procter & Gamble and investment income.
In May 1997, the Company and Procter & Gamble entered into the P&G
Agreement. Procter & Gamble agreed over the first five years of the P&G
Agreement to purchase up to $60.0 million in Regeneron equity (of which $42.9
million was purchased in June 1997) and provide up to $94.7 million in support
of Regeneron's research efforts related to the collaboration (of which $7.7
million was received through March 31, 1999). During the second five years of
the P&G Agreement, the companies will share all research costs equally. Clinical
testing and commercialization expenses for jointly developed products will
generally be shared equally throughout the ten years of the collaboration. The
companies expect jointly to develop and market worldwide any products resulting
from the collaboration and share equally in profits. Either company may
terminate the P&G Agreement at the end of five years with at least one year
prior notice or earlier if a defined event of default occurs. In September 1997,
the Company and Procter & Gamble expanded the P&G Agreement to include AXOKINE
and related molecules (delivered systemically), and agreed to develop AXOKINE
initially to treat obesity associated with Type II diabetes. Procter & Gamble
agreed to reimburse the Company for certain research and development costs and
pay as much as $15.0 million in additional funding, partly subject to achieving
certain milestones related to AXOKINE. Of the $15.0 million, $5.0 million was
paid in 1997 and $5.0 million was paid in 1998. Beginning in the third quarter
of 1999, research support provided from Procter & Gamble, in addition to amounts
paid to support development of AXOKINE (which vary from quarter to quarter),
will increase from the current rate of $1.1 million per quarter to at least $6.3
million per quarter for the following three years of the companies'
collaboration agreement.
In connection with the Company's agreement to collaborate with Sumitomo
Pharmaceuticals in the research and development of BDNF in Japan, Sumitomo
Pharmaceuticals paid the Company $25.0 million through December 1997. The
14
Company also received a $5.0 million research progress payment from Sumitomo
Pharmaceuticals (reduced by $0.5 million of Japanese withholding tax) in August
1998. In addition, Sumitomo Pharmaceuticals has paid the Company $27.4 million
through March 31, 1999 in connection with supplying BDNF for preclinical and
clinical use. Regeneron expects to resume supplying BDNF to Sumitomo
Pharmaceuticals later in 1999.
The Company's activities relating to BDNF and NT-3, as agreed upon by
Amgen and Regeneron, are being reimbursed by Amgen-Regeneron Partners, and the
Company recognizes such reimbursement as revenue. The funding of Amgen-Regeneron
Partners is through capital contributions from Amgen and Regeneron, who must
make equal payments in order to maintain equal ownership and equal sharing of
any profits or losses from the partnership. The Company has made capital
contributions totaling approximately $50.4 million to Amgen-Regeneron Partners
from the partnership's inception in June 1993 through March 31, 1999. The
Company expects that its capital contributions in 1999 will total at least $3.0
million for the full year. These contributions could increase or decrease,
depending upon (among other things) the nature and cost of BDNF and NT-3 studies
that Amgen-Regeneron Partners may conduct and the outcomes of those studies.
From its inception in January 1988 through March 31, 1999, the Company
invested approximately $61.6 million in property, plant, and equipment. This
includes $16.8 million to acquire and renovate the Rensselaer facility and an
additional $14.1 million to complete construction at the facility pursuant to
the Merck Agreement. In connection with the purchase and renovation of the
Rensselaer facility, the Company obtained financing of $2.0 million from the New
York State Urban Development Corporation, of which $1.7 million is outstanding.
Under the terms of such financing, the Company is not permitted to declare or
pay dividends on its equity securities.
The Company expects that expenses related to the filing, prosecution,
defense, and enforcement of patent and other intellectual property claims will
continue to be substantial as a result of patent filings and prosecutions in the
United States and foreign countries. The Company is currently involved in
interference proceedings in the Patent and Trademark Office between Regeneron's
patent applications and patents relating to CNTF issued to Synergen, Inc.
("Synergen"). Amgen acquired all outstanding shares of Synergen in 1994. In
March 1998, the Company and Amgen entered into a covenant not to sue each other
which, among other things, resolved their patent interference and related patent
proceedings relating to CNTF and AXOKINE. The Company also granted Amgen a
license to use CNTF and second generation CNTFs other than AXOKINE to treat
retinal degenerative conditions. Neither party will pay royalties or make other
payments to the other party in consideration of this agreement.
As of March 31, 1999, the Company had no established banking
arrangements through which it could obtain short-term financing or a line of
credit. Additional funds may be raised through, among other things, the issuance
of additional securities, other financing arrangements, and future collaboration
agreements. No assurance can be given that additional financing will be
available or, if available, that it will be available on acceptable terms. In
addition, the Company estimates that through mid-2002 it could receive
additional payments from Procter & Gamble in the form of research funding,
milestones, and equity purchases of as much as $100 million or more.
At March 31, 1999, the Company had $104.6 million in cash, cash
equivalents, and marketable securities. The Company expects to incur substantial
funding
15
requirements for, among other things, research and development activities
(including preclinical and clinical testing), validation of manufacturing
facilities, and the acquisition of equipment. The Company expects to incur
ongoing funding requirements for capital contributions to Amgen-Regeneron
Partners to support the continued development and clinical trials of BDNF and
NT-3. In 1999, the Company expects further increases in the level of quarterly
research and development expenses as the Company continues to add staff and
increases its clinical activity. The amount needed to fund operations will also
depend on other factors, including the status of competitive products, the
success of the Company's research and development programs, the status of
patents and other intellectual property rights developments, and the
continuation, extent, and success of any collaborative research programs
(including those with Amgen and Procter & Gamble). The Company believes that its
existing capital resources will enable it to meet operating needs for at least
several years. No assurance can be given that there will be no change in
projected revenues or expenses that would lead to the Company's capital being
consumed significantly before such time.
Factors That May Affect Future Operating Results
Regeneron cautions stockholders and potential investors that the
following important factors, among others, in some cases have affected, and in
the future could affect, Regeneron's actual results and could cause Regeneron's
actual results to differ materially from those expressed in any forward-looking
statements made by, or on behalf of, Regeneron. The statements under this
caption are intended to serve as cautionary statements within the meaning of the
Private Securities Litigation Reform Act of 1995. The following information is
not intended to limit in any way the characterization of other statements or
information under other captions as cautionary statements for such purpose:
o Delay, difficulty, or failure of the Company's research and development
programs to produce product candidates that are scientifically or
commercially appropriate for further development by the Company or
others.
o Cancellation or termination of material collaborative or licensing
agreements (including in particular, but not limited to, those with
Procter & Gamble and Amgen) and the resulting loss of research or other
funding could have a material adverse effect on the Company and its
operations. A change of control of one or more of the Company's
material collaborators or licensees could also have a material adverse
effect on the Company.
o Delay, difficulty, or failure of a clinical trial of any of the
Company's product candidates. A clinical trial can fail or be delayed
as a result of many causes, including, among others, failure of the
product candidate to demonstrate safety or efficacy, the development of
serious or life-threatening adverse events (side effects) caused by or
connected with exposure to the product candidate, the creation of
antibodies (in the case of protein-based therapeutics) that weaken or
neutralize the effect of the product candidate (and possibly could have
other adverse effects on patients), the failure of clinical
investigators, trial monitors and other consultants, or trial subjects
to comply with the trial plan or protocol.
16
o Delay, difficulty, or failure in obtaining regulatory approval
(including approval of its facilities for production) for the Company's
products (including vaccine intermediate for Merck), including delays
or difficulties in development because of insufficient proof of safety
or efficacy.
o Increased and irregular costs of development, manufacture, regulatory
approval, sales, and marketing associated with the introduction of
products in the late stage of development.
o Competitive or market factors that may cause use of the Company's
products to be limited or otherwise fail to achieve broad acceptance.
o The ability to obtain, maintain, and prosecute intellectual property
rights, and the cost of acquiring in-process technology and other
intellectual property rights, either by license, collaboration, or
purchase of another entity.
o Difficulties or high costs of obtaining adequate financing to meet the
Company's obligations under its collaboration and licensing agreements
or to fund 50 percent of the cost of developing product candidates in
order to retain 50 percent of the commercialization rights.
o Amount and rate of growth of Regeneron's general and administrative
expenses, and the impact of unusual charges resulting from Regeneron's
ongoing evaluation of its business strategies and organizational
structure.
o Failure of corporate partners to develop or commercialize successfully
the Company's products or to retain and expand the markets served by
the commercial collaborations; conflicts of interest, priorities, and
commercial strategies which may arise between the Company and such
corporate partners.
o Delays or difficulties in developing and acquiring production
technology and technical and managerial personnel to manufacture novel
biotechnology products in commercial quantities at reasonable costs and
in compliance with applicable quality assurance and environmental
regulations and governmental permitting requirements.
o Difficulties in obtaining key raw materials and supplies for the
manufacture of the Company's product candidates.
o The costs and other effects of legal and administrative cases and
proceedings (whether civil, such as product- or employment-related, or
environmental, or criminal); settlements and investigations;
developments or assertions by or against Regeneron relating to
intellectual property rights and licenses; the issuance and use of
patents and proprietary technology by Regeneron and its competitors,
including the possible negative effect on the Company's ability to
develop, manufacture, and sell its products in circumstances where it
is unable to obtain licenses to patents which may be required for such
products.
17
o Underutilization of the Company's existing or new manufacturing
facilities or of any facility expansions, resulting in inefficiencies
and higher costs; start-up costs, inefficiencies, delays, and increased
depreciation costs in connection with the start of production in new
plants and expansions.
o Health care reform, including reductions or changes in reimbursement
available for prescription medications or other reforms.
o The ability to attract and retain key personnel.
As Regeneron's scientific efforts lead to potentially promising new
directions, both outside of recombinant protein therapies (into orally active,
small molecule pharmaceuticals) and outside of treatments for neurological and
neurodegenerative conditions (into, for example, potential programs in obesity,
diabetes, cancer, inflammation, muscle disease, bone growth disorders, and
angiogenesis), the Company will require additional internal expertise or
external collaborations in areas in which it currently does not have substantial
resources and personnel.
The Company is evaluating its operations to determine the impact, if
any, that Year 2000 problems may have. The Year 2000 problem results from
computer programs and devices that do not differentiate between the year 1900
and the year 2000 because they were written using two digits rather than four to
define the applicable year. Accordingly, computer systems that have
time-sensitive calculations may not properly recognize the year 2000. Like many
corporations, Regeneron does not have any previous experience with an issue like
the Year 2000 problem.
The Year 2000 problem could affect Regeneron's ability to conduct its
normal operations that are date sensitive or depend on computers or equipment
that contain embedded chips that are date sensitive. It could adversely affect
Regeneron's ability to maintain or operate its facilities in a safe and
effective manner or undertake other activities necessary and customary to
carrying out its business. In addition, the Year 2000 problem could have
material adverse effects on the operations or financial condition of the
Company's licensees, licensors, collaborators, suppliers, vendors, and others,
and, in particular, utility companies that provide energy to the Company's
facilities and equipment, which could, in turn, have a material direct or
indirect effect on Regeneron.
The Company's Year 2000 review includes its computer systems and
software, embedded systems in non-computer equipment, and vendor operations. The
Company has appointed a Year 2000 task force with representatives from each
department of the Company and has retained independent consultants to facilitate
its review. To date, the Company has not learned of any material Year 2000 issue
with respect to its computer systems and software. The Company is in the process
of analyzing its laboratory and manufacturing equipment with embedded systems.
This analysis is incomplete. The Company is also in the process of surveying its
vendors who support critical business processes to determine their level of
readiness with respect to Year 2000 issues. While many vendors indicate that
they believe they are or will be Year 2000 compliant, many others state that
they can not represent that they have achieved compliance or guarantee the
efficacy of their remediation efforts. Many vendors state that the problem is
too complex for such a claim to have legitimacy; that efforts to solve Year 2000
problems are merely in the nature of risk mitigation; and that success in such
efforts will be measured, with hindsight, by the minimization of the level of
technical failures and by the prompt identification and repair of failures.
18
The analysis of the Company's embedded systems and the information
collected regarding vendor readiness will be used to formulate a contingency
plan with respect to reasonably identifiable items of equipment and supply of
materials that are critical to the Company's operations. These analyses and
plans are not complete. No assurance can be made that the Company's computer
systems and software, embedded systems in non-computer equipment, and vendors
will be Year 2000 compliant in a timely or cost-effective manner. The failure of
certain third parties (such as Procter & Gamble, Amgen, Sumitomo
Pharmaceuticals, Merck, and utility and communications companies) to operate in
a normal and customary manner and to maintain Year 2000 compliance (or to assure
that their vendors and suppliers are Year 2000 compliant) could have a material
adverse effect on the operations and financial condition of Regeneron. It is
possible that Regeneron could be adversely affected by the failure of other
third parties to be year 2000 compliant even though these third parties do not
directly conduct business with Regeneron. It is not possible to guarantee that
the Company's Year 2000 contingency plan will succeed or be timely.
The costs of addressing Year 2000 issues have been minor to date, but
may increase if substantial consultant or personnel resources are required or if
operationally-critical equipment must be remediated or replaced, or if back-up
energy sources must be secured (assuming such personnel, equipment, or back-up
energy sources are reasonably available). Because the Company's analysis of Year
2000 issues is incomplete, at this time management cannot estimate the total
expected costs of the Year 2000 problem. The risks that Year 2000 problems could
present to the Company include, without limitation, disruption, delay, or
cessation of manufacturing or other operations, including operations that are
subject to regulatory compliance, and loss of research and manufacturing
material and experiments that are difficult, costly, or impossible to replace.
In each case, the correction of the problem could result in substantial expense
and disruption or delay of the Company's operations.
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PART II. OTHER INFORMATION
-----------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
27 Financial Data Schedule
(b) Reports
No reports on Form 8-K were filed by the Registrant during the
quarter ended March 31, 1999.
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SIGNATURE
Pursuant to the requirements 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.
Date: May 14, 1999 By: /s/ Murray A. Goldberg
----------------------------- -------------------------------
Murray A. Goldberg
Vice President, Finance &
Administration, Chief
Financial Officer, and
Treasurer
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