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 September 30, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------- -------------
Commission File Number 0-19034
REGENERON PHARMACEUTICALS, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 13-3444607
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
777 Old Saw Mill River Road
Tarrytown, New York 10591-6707
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip code)
(914) 347-7000
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of October 29, 1999:
Class of Common Stock Number of Shares
--------------------- ----------------
Class A Stock, $0.001 par value 3,620,804
Common Stock, $0.001 par value 27,704,495
REGENERON PHARMACEUTICALS, INC.
Table of Contents
September 30, 1999
Page Numbers
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed balance sheets at September 30, 1999 (unaudited)
and December 31, 1998 3
Condensed statements of operations (unaudited) for the three
months and nine months ended September 30, 1999 and 1998 4
Condensed statement of stockholders' equity (unaudited) for the
nine months ended September 30, 1999 5
Condensed statements of cash flows (unaudited) for the
nine months ended September 30, 1999 and 1998 6
Notes to condensed financial statements 7-10
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 11-24
PART II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 25
SIGNATURE PAGE 26
Exhibit 27 Financial data schedule
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REGENERON PHARMACEUTICALS, INC.
CONDENSED BALANCE SHEETS AT SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
(In thousands, except share data)
September 30,
1999 December 31,
ASSETS (Unaudited) 1998
------------ ------------
Current assets
Cash and cash equivalents $ 23,525 $ 19,757
Marketable securities 40,457 66,022
Receivable due from The Procter & Gamble Company 7,806 3,169
Receivable due from Merck & Co., Inc. 750 1,665
Receivable due from Amgen-Regeneron Partners 709
Receivable due from Sumitomo Pharmaceuticals Company, Ltd. 100 167
Prepaid expenses and other current assets 1,643 1,412
--------- ---------
Total current assets 74,281 92,901
Marketable securities 23,451 27,751
Investment in Amgen-Regeneron Partners 1,350 3,091
Property, plant, and equipment, at cost, net of accumulated depreciation
and amortization 35,076 33,019
Other assets 222 153
--------- ---------
Total assets $ 134,380 $ 156,915
========= =========
LIABILITIES and STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 4,531 $ 5,551
Deferred revenue, current portion 3,140 2,735
Capital lease obligations, current portion 1,139 1,051
Note payable, current portion 63 65
--------- ---------
Total current liabilities 8,873 9,402
Deferred revenue 12,532 12,938
Capital lease obligations 587 1,457
Note payable 1,563 1,609
Other liabilities 298 282
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;
3,620,804 shares issued and outstanding in 1999
3,630,786 shares issued and outstanding in 1998 4 4
Common Stock, $.001 par value; 60,000,000 shares authorized;
27,697,695 shares issued and outstanding in 1999
27,386,858 shares issued and outstanding in 1998 28 27
Additional paid-in capital 309,840 308,561
Unearned compensation (90) (360)
Accumulated deficit (198,921) (177,233)
Accumulated other comprehensive (loss) income (334) 228
--------- ---------
Total stockholders' equity 110,527 131,227
--------- ---------
Total liabilities and stockholders' equity $ 134,380 $ 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 September 30, Nine months ended September 30,
1999 1998 1999 1998
-------- -------- -------- --------
Revenues
Contract research and development $ 8,570 $ 3,983 $ 15,311 $ 14,759
Research progress payments 4,500 9,500
Contract manufacturing 2,730 2,326 7,299 6,493
Investment income 1,236 1,757 4,014 5,259
-------- -------- -------- --------
12,536 12,566 26,624 36,011
-------- -------- -------- --------
Expenses
Research and development 12,924 9,891 34,963 27,095
Loss in Amgen-Regeneron Partners 952 678 2,509 1,551
General and administrative 1,578 1,323 4,691 4,400
Depreciation and amortization 898 681 2,452 2,330
Contract manufacturing 1,034 1,286 3,452 3,389
Interest 75 102 245 330
-------- -------- -------- --------
17,461 13,961 48,312 39,095
-------- -------- -------- --------
Net loss ($ 4,925) ($ 1,395) ($21,688) ($ 3,084)
======== ======== ======== ========
Net loss per share, basic and diluted ($ 0.16) ($ 0.04) ($ 0.69) ($ 0.10)
======== ======== ======== ========
The accompanying notes are an integral part of the financial statements.
4
REGENERON PHARMACEUTICALS, INC.
CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY (Unaudited)
For the nine months ended September 30, 1999
(In thousands)
Class A Stock Common Stock Additional
---------------- --------------- Paid-in Unearned Accumulated
Shares Amount Shares Amount Capital Compensation Deficit
------ ------ ------ ------ ---------- ------------ -----------
Balance, December 31, 1998 3,631 $4 27,387 $27 $308,561 ($360) ($177,233)
Amortization of unearned compensation 270
Issuance of Common Stock in connection
with exercise of stock options 263 1 971
Issuance of Common Stock in connection
with Company 401(k) Savings Plan
contribution 38 308
Conversion of Class A Stock to
Common Stock (10) 10
Net loss (21,688)
Change in net unrealized (loss) gain
on marketable securities
----------------------------------------------------------------------------
Balance, September 30, 1999 3,621 $4 27,698 $28 $309,840 ($90) ($198,921)
============================================================================
Accumulated Total
Other Comprehensive Stockholders' Comprehensive
(Loss) Income Equity Loss
------------------- ------------- -------------
Balance, December 31, 1998 $228 $131,227
Amortization of unearned compensation 270
Issuance of Common Stock in connection
with exercise of stock options 972
Issuance of Common Stock in connection
with Company 401(k) Savings Plan
contribution 308
Conversion of Class A Stock to
Common Stock
Net loss (21,688) ($21,688)
Change in net unrealized (loss) gain
on marketable securities (562) (562) (562)
-----------------------------------------------------
Balance, September 30, 1999 ($334) $110,527 ($22,250)
======================================================
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)
Nine months ended September 30,
1999 1998
-------- --------
Cash flows from operating activities
Net loss ($21,688) ($3,084)
-------- --------
Adjustments to reconcile net loss to net cash
used in operating activities
Loss in Amgen-Regeneron Partners 2,509 1,551
Depreciation and amortization 2,452 2,330
Stock issued in consideration for services rendered 270 270
Changes in assets and liabilities
Increase in amounts due from The Procter & Gamble Company (4,637) (133)
Decrease (increase) in amounts due from Merck & Co., Inc. 915 (365)
Decrease (increase) in amounts due from Amgen-Regeneron Partners 709 (371)
Decrease in amounts due from Sumitomo Pharmaceuticals Co., Ltd. 67 2,049
Increase in investment in Amgen-Regeneron Partners (768) (3,818)
Increase in prepaid expenses and other assets (300) (702)
Decrease in deferred revenue (1) (2,558)
(Decrease) increase in accounts payable, accrued expenses,
and other liabilities (322) 330
-------- --------
Total adjustments 894 (1,417)
-------- --------
Net cash used in operating activities (20,794) (4,501)
-------- --------
Cash flows from investing activities
Purchases of marketable securities (45,134) (74,108)
Sales of marketable securities 74,437 75,776
Capital expenditures (4,883) (2,380)
-------- --------
Net cash provided by (used in) investing activities 24,420 (712)
-------- --------
Cash flows from financing activities
Net proceeds from the issuance of stock 972 438
Principal payments on note payable (48) (57)
Capital lease payments (782) (1,495)
-------- --------
Net cash provided by (used in) financing activities 142 (1,114)
-------- --------
Net increase (decrease) in cash and cash equivalents 3,768 (6,327)
-------- --------
Cash and cash equivalents at beginning of period 19,757 28,921
-------- --------
Cash and cash equivalents at end of period $23,525 $22,594
======== ========
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. The December
31, 1998 Condensed Balance Sheet data was derived from audited
financial statements, but does not include all disclosures required by
generally accepted accounting principles. 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. Statements of Cash Flows
Supplemental disclosure of noncash investing and financing activities:
Included in accounts payable and accrued expenses at September 30, 1999
and December 31, 1998 were approximately $95 and $469, respectively, of
accrued capital expenditures. Included in accounts payable and accrued
expenses at September 30, 1998 and December 31, 1997 were approximately
$67 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.
Capital lease obligations of $451 were incurred during the first nine
months of 1998 when the Company leased new equipment.
3. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses as of September 30, 1999 and
December 31, 1998 consist of the following:
September 30, December 31,
1999 1998
---- ----
Accounts payable $1,479 $2,223
Accrued payroll and related costs 1,910 1,346
Accrued clinical trial expense 300 1,336
Accrued expenses, other 558 359
Deferred compensation 284 287
------ ------
$4,531 $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 entered into a collaboration agreement with
Amgen Inc. ("Amgen") to develop and attempt to commercialize BDNF and
NT-3. Pursuant to that agreement, the Company and Amgen 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 and
nine months ended September 30, 1999 and 1998 are as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- --------------------
1999 1998 1999 1998
---- ---- ---- ----
Total revenues $89 $110 $295 $193
Total expenses (1,992) (1,465) (5,312) (3,294)
------ ------ ------ ------
Net loss ($1,903) ($1,355) ($5,017) ($3,101)
======== ======= ======= =======
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 nine
months ended September 30, 1999 has been included in the Statement of
Stockholders' Equity. For the nine months ended September 30, 1998, the
components of comprehensive loss were:
1998
----
Net loss ($3,084)
Change in net unrealized gain on marketable securities 332
-------
Total comprehensive loss ($2,752)
=======
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 and nine months ended
September 30, 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 September 30,
---------------------------------------------------------------------
Net Loss Shares Net Loss
(Numerator) (Denominator) Per Share
----------- ------------- ---------
1999:
Basic and Diluted ($4,925) 31,314 ($0.16)
1998:
Basic and Diluted ($1,395) 31,014 ($0.04)
---------------------------------------------------------------------
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 September 30,
----------------------------------------------------------------------------------------------------
1999 1998
--------------------------- ----------------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Number Exercise Price Number Exercise Price
------ -------------- ------ --------------
Options with exercise prices below
the average fair market value of
the Company's common stock for the
respective period 2,763 $5.95 1,898 $4.70
Options and warrants with exercise
prices above the average fair
market value of the Company's
common stock for the respective 4,403 $11.67 4,592 $11.60
period ----- -----
Total 7,166 6,490
===== =====
----------------------------------------------------------------------------------------------------
9
REGENERON PHARMACEUTICALS, INC.
Notes to Condensed Financial Statements
(In thousands, except per share data)
6. Per Share Data (continued)
Nine Months Ended September 30,
-----------------------------------------------------------------------
Net Loss Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
1999:
Basic and Diluted ($21,688) 31,297 ($0.69)
1998:
Basic and Diluted ($3,084) 30,983 ($0.10)
-----------------------------------------------------------------------
Options and warrants which have been excluded from the diluted per
share amounts because their effect would have been antidilutive include
the following:
Nine Months Ended September 30,
--------------------------------------------------------------------------------------------------
1999 1998
--------------------------- ------------------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Number Exercise Price Number Exercise Price
------ -------------- ------ --------------
Options with exercise prices
below the average fair market
value of the Company's common
stock for the respective
period 2,449 $5.73 1,968 $4.77
Options and warrants with exercise
prices above the average fair market
value of the Company's common stock
for the respective period 4,640 $11.46 4,458 $11.71
----- -----
Total 7,089 6,426
===== =====
--------------------------------------------------------------------------------------------------
7. Long-Term Incentive Plan
In June 1999, the Regeneron Pharmaceuticals, Inc. Amended and Restated
1990 Long-Term Incentive Plan ("Incentive Plan") was amended to
increase by 1,500 the number of shares reserved for issuance under the
plan. As amended, the Incentive Plan provides for a maximum of 6,900
shares of Common Stock for awards. Such awards include Restricted Share
Rights, Incentive Stock Rights, Stock Options, Stock Appreciation
Rights, and Performance Unit Rights, as defined.
10
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. and actual events or results may differ
materially. These statements concern, among other things, the possible
therapeutic applications of Regeneron's product candidates and research
programs, the timing and nature of the clinical and research programs now
underway or planned, a variety of items described herein and in the footnotes to
Regeneron'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 Regeneron. These statements are made by Regeneron
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 drugs, primarily
protein-based.
The Company is pursuing research and development programs in a wide
variety of scientific areas, including:
o AXOKINE(Registered) second generation ciliary neurotrophic factor
for the treatment of obesity and complications of obesity such as
Type II diabetes,
o Brain-derived neurotrophic factor, or BDNF, for the treatment of
amyotrophic lateral sclerosis, or ALS, commonly known as Lou
Gehrig's disease,
o Neurotrophin-3, or 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, in part, 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 (called
IL-1), interleukin-4 (IL-4), interleukin-13 (IL-13), and
interleukin-6 (IL-6) as potential treatment of inflammatory
diseases, allergic disorders, and cancer, and
o Muscle atrophy, using a variety of approaches to identify and
validate drug targets.
11
Discussion of Third Quarter 1999 Activities. In the third quarter of
1999, Regeneron updated the status of the development of AXOKINE that is being
developed for the treatment of obesity and complications of obesity such as Type
II diabetes. Under Regeneron's collaboration agreement with The Procter & Gamble
Company, the Company and Procter & Gamble filed an Investigational New Drug
application (called an IND) with the United States Food and Drug Administration
in the first quarter of 1999 and commenced a double-blind Phase I clinical study
to determine the safety of AXOKINE administered subcutaneously for a short
duration to mildly to moderately obese healthy volunteers. In September 1999,
Regeneron summarized preliminary, interim results of the Phase I safety study.
Patients received increasing doses of AXOKINE (or placebo) administered
subcutaneously in both single and multiple dose regimens. The single dose study
demonstrated that AXOKINE is well tolerated at low doses. At higher single
doses, nausea, vomiting, and herpes cold sores were observed. Increased cold
sores caused by herpes simplex virus, or HSV, were also reported in previous
clinical studies of ciliary neurotrophic factor (also called CNTF), AXOKINE's
parent molecule. As of the date of Regeneron's summary of interim results, the
multiple dose study (daily administration for 14 days) had been conducted at
doses that were well tolerated in the single dose part of the study. Nine
patients and four placebo patients had been completed with no reports of nausea,
cough, or herpes cold sores. The treated patients lost weight and had decreased
food (caloric) intake compared with those on placebo. One patient in the
multiple low dose group, who was HSV-positive prior to treatment and had been
previously diagnosed with Bell's palsy, had a recurrence of Bell's palsy
approximately two weeks after the patient's last administration of AXOKINE. It
is not known whether AXOKINE has any role in this patient's recurrence of Bell's
palsy, and the patient recovered. Bell's palsy is a potentially permanently
disfiguring condition but most often resolves spontaneously within weeks. Many
researchers believe that Bell's palsy may be caused by HSV.
After examining the foregoing interim data from the Phase I study,
including the possibility that the market for AXOKINE might be limited to
HSV-negative patients, as part of an internal review of drug development
programs and budgets, Procter & Gamble decided to return to Regeneron the
product rights to AXOKINE. Under certain circumstances, Procter & Gamble will
continue to be entitled to receive a small royalty on sales of AXOKINE.
The Phase I study has continued to be conducted by Procter & Gamble in
HSV-negative patients. Additional information about the Phase I study will be
reported after the treatment phase and analysis of the data are complete.
Regeneron plans to continue AXOKINE development and, following completion of the
Phase I trial, plans to initiate in the first quarter of 2000 a Phase II
dose-ranging trial to study the safety and efficacy of AXOKINE in obese patients
who have not previously contracted HSV.
No assurance can be made regarding the timing or final result of the
Phase I study or the timing or result of any further clinical trial of AXOKINE.
Previous clinical studies of CNTF, the parent molecule of AXOKINE, in addition
to weight loss, resulted in the creation of neutralizing antibodies and adverse
events (side effects) in patients, including cough, nausea, malaise, and
increased herpes simplex cold sores. While certain aspects of the development of
AXOKINE 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. We discuss the risks
associated with
12
antibody development and adverse side effects in the section of this report
titled "Factors That May Affect Operating Results."
During the third quarter of 1999, Regeneron and Procter & Gamble
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 Regeneron's scientific
resources are devoted to its collaborative activities with Procter & Gamble.
Procter & Gamble's decision to return to Regeneron product rights to AXOKINE has
no impact on the broader Procter & Gamble - Regeneron relationship.
During the third quarter of 1999, Regeneron continued to develop
independent of any corporate collaboration its proprietary cytokine traps for
the potential treatment of asthma, inflammatory disease, cancer, and rheumatoid
arthritis. The Company is exploring the possibility of finding corporate
partners for some of its cytokine traps. Regeneron has conducted research with
Pharmacopeia, Inc. in the area of small molecule drugs since 1996 under a
collaboration agreement that will terminate, subject to certain continuing
obligations, in the fourth quarter of 1999.
During the third quarter of 1999, Amgen-Regeneron Partners, the
partnership equally owned by Regeneron and Amgen Inc., 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 BDNF treatment.
A multi-center study of more than 300 ALS patients who will receive BDNF
subcutaneously began in August 1999.
Regeneron and Sumitomo Pharmaceuticals Co., Ltd. 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
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 third quarter of 1999 in
patients who suffer from constipation associated with conditions such as spinal
cord injury and the use of narcotic analgesics.
13
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 Regeneron'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. Regeneron 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 its product candidates to treat human
conditions or to be approved for marketing could have a material adverse impact
on Regeneron.
Regeneron has not received any revenues from the commercial sale of
products and may never receive such revenues. Before such revenues can be
realized, Regeneron (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
Regeneron's products and technologies noncompetitive or obsolete.
From inception on January 8, 1988 through September 30, 1999, Regeneron
had a cumulative loss of $198.9 million. In the absence of revenues from
commercial product sales or other sources (the amount, timing, nature, or source
of which cannot be predicted), Regeneron's losses will continue as it 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. Regeneron'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 its research
and development efforts.
14
Results of Operations
Three months ended September 30, 1999 and 1998. Regeneron's total
revenue was $12.5 million for the third quarter of 1999 compared to $12.6
million for the same period in 1998. Contract research and development revenue
increased to $8.6 million in the third quarter of 1999 from $4.0 million in the
same period of 1998, as revenue from Procter & Gamble increased to $7.7 million
in the third quarter of 1999 from $2.6 million for the same period in 1998.
Effective in the third quarter of 1999 research support under the P&G Agreement
increased from $1.1 million per quarter to $7.0 million per quarter. The
increase in quarterly research support under the P&G Agreement was partly offset
by a reduction in AXOKINE-related revenue from Procter & Gamble, as research
activity on AXOKINE declined as AXOKINE progressed into clinical trials.
Regeneron also earned nominal revenue in the third quarter of 1999 from its
ongoing collaboration with Sumitomo Pharmaceuticals, versus $0.8 million for the
same period in 1998, as revenue from research payments under Regeneron's
collaboration agreement with Sumitomo Pharmaceuticals ended in 1998 and because
the Company did not supply any BDNF to Sumitomo Pharmaceuticals in the first
nine months of 1999 for preclinical and clinical use. In addition, in the third
quarter of 1998 a non-recurring research progress payment of $5.0 million
(reduced by $0.5 million of Japanese withholding tax) was received from Sumitomo
Pharmaceuticals related to the development of BDNF in Japan. Contract
manufacturing revenue related to the long-term manufacturing agreement with
Merck & Co., Inc. increased to $2.7 million for the third quarter of 1999,
compared to $2.3 million for the same period in 1998, primarily due to payments
earned in the third quarter related to certain expenses that were incurred by
the Company. Investment income in the third quarter of 1999 decreased to $1.2
million from $1.8 million for the same period in 1998 due mainly to lower levels
of interest-bearing investments as the Company funds its operations.
Regeneron's total operating expenses increased to $17.5 million in the
third quarter of 1999 from $14.0 million for the same period in 1998. Research
and development expenses increased to $12.9 million in the third quarter of 1999
from $9.9 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. Regeneron's share of the loss in Amgen-Regeneron Partners
increased to $1.0 million in the third 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 79% of total operating expenses in
the third quarter of 1999, compared to 76% for the same period in 1998.
General and administrative expenses increased to $1.6 million in the
third quarter of 1999 from $1.3 million for the same period in 1998 due
primarily to an increase in patent expenses related to U.S. and foreign patent
filings and higher staffing. Depreciation and amortization expense increased to
$0.9 million in the third quarter of 1999 from $0.7 million for the third
quarter of 1998 resulting primarily from improvements made to the Company's
leased research facilities and offices in Tarrytown, New York. Contract
manufacturing expenses, which are expenses directly related to the Merck
Agreement and are reimbursed by Merck, were $1.0 million for the third quarter
of 1999, compared to $1.3 million for the same period in 1998, as certain
pre-production expenses declined. Interest expense was $0.1 million for both the
third quarter of 1999 and 1998.
15
The Company's net loss for the third quarter of 1999 was $4.9 million,
or $0.16 per share (basic and diluted), compared to net loss of $1.4 million, or
$0.04 per share (basic and diluted), for the same period in 1998.
Nine months ended September 30, 1999 and 1998. The Company's total
revenue decreased to $26.6 million for the nine months ended September 30, 1999
from $36.0 million for the same period in 1998. Contract research and
development revenue increased to $15.3 million for the nine months ended
September 30, 1999 from $14.8 million for the same period in 1998, as revenue
from Procter & Gamble increased to $13.5 million in the first nine months of
1999 from $9.8 million for the same period in 1998. Effective in the third
quarter of 1999 research support under the P&G Agreement increased from $1.1
million per quarter to $7.0 million per quarter. The increase in quarterly
research support under the P&G Agreement was partly offset by a reduction in
AXOKINE-related revenues from Procter & Gamble as research activity on AXOKINE
declined as AXOKINE progressed into clinical trials in 1999. The Company also
earned nominal revenue in the first nine months of 1999 from its ongoing
collaboration with Sumitomo Pharmaceuticals, versus $3.5 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 in the first
nine months of 1999 for preclinical and clinical use. In addition, in 1998
Regeneron received non-recurring research progress payments totaling $9.5
million, consisting of $5.0 million from Sumitomo Pharmaceuticals related to the
development of BDNF in Japan (reduced by $0.5 million of Japanese withholding
tax) and $5.0 million from Procter & Gamble in connection with the AXOKINE
collaboration. Contract manufacturing revenue related to the Merck Agreement
increased to $7.3 million for the first nine months of 1999, compared to $6.5
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,
New York facility. Investment income for the nine months ended September 30,
1999 decreased to $4.0 million from $5.3 million for the same period in 1998,
due mainly to lower levels of interest-bearing investments as the Company funds
its operations.
The Company's total operating expenses increased to $48.3 million for
the nine months ended September 30, 1999 from $39.1 million for the same period
in 1998. Research and development expenses increased to $35.0 million in the
first nine months of 1999 from $27.1 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 $2.5 million in the first nine months of
1999 from $1.6 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 78% of total operating expenses in the first nine months of 1999,
compared to 73% for the same period in 1998.
General and administrative expense increased to $4.7 million for the
first nine months of 1999 from $4.4 million for the same period in 1998 due
primarily to an increase in patent expenses related to U.S. and foreign patent
filings and higher staffing. Depreciation and amortization expense increased to
$2.5 million for the first nine months of 1999 from $2.3 million for the same
period in 1998 resulting primarily from improvements made to the Company's
leased research facilities and offices in Tarrytown. Contract manufacturing
expenses, which are direct expenses related to the Merck Agreement and are
reimbursed by Merck, were $3.5 million in the first nine months of 1999 compared
to
16
$3.4 million in the same period of 1998. Interest expense was $0.2 million and
$0.3 million for the first nine months of 1999 and 1998, respectively.
The Company's net loss for the nine months ended September 30, 1999 was
$21.7 million, or $0.69 per share (basic and diluted), compared to a net loss of
$3.1 million, or $0.10 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 agreements between the Company and Amgen,
Sumitomo Chemical Company, Ltd., Sumitomo Pharmaceuticals, Merck, and Procter &
Gamble, and investment income.
In May 1997, Regeneron 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 $9.9
million was received through September 30, 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
made research progress payments to Regeneron of $5.0 million in both 1997 and
1998 in part due to the achievement of certain milestones related to AXOKINE.
During the third quarter of 1999, Procter & Gamble returned product rights to
AXOKINE to Regeneron and is not expected to make further payments to Regeneron
for activities beyond the third quarter related to AXOKINE. The decision by
Procter & Gamble to terminate the joint development of AXOKINE has no effect on
the broader ten-year collaborative P&G Agreement under which, beginning in the
third quarter of 1999, research support from Procter & Gamble, aside from
amounts related to AXOKINE, increased from $1.1 million per quarter to at least
$6.3 million per quarter through June 2002.
In connection with Regeneron'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
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 $27.6 million
through September 30, 1999 in connection with supplying BDNF for preclinical and
clinical use. Regeneron has not supplied any BDNF to Sumitomo Pharmaceuticals in
1999, but expects to resume supplying BDNF in the first quarter of 2000.
17
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 $51.1 million to Amgen-Regeneron Partners
from the partnership's inception in June 1993 through September 30, 1999. The
Company expects that its capital contributions in 1999 will total at least $2.0
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 September 30, 1999, the
Company invested approximately $64.5 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 $1.6 million is outstanding.
Under the terms of this UDC 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. 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 September 30, 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 and
equity purchases of as much as $90 million or more.
At September 30, 1999, the Company had $87.4 million in cash, cash
equivalents, and marketable securities. The Company expects to incur substantial
funding 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. Through 2000, the Company expects further increases
18
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, and the failure of clinical investigators, trial monitors
and other consultants, or trial subjects to comply with the trial
plan or protocol.
o In addition to the safety, efficacy, manufacturing, and regulatory
hurdles faced by Regeneron's drug 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
19
patient's own proteins, resulting in an "auto-immune type" disease.
Whether antibodies will be created can often not be predicted from
preclinical experiments and their appearance is often delayed, so
that there can be no assurance that neutralizing antibodies will not
be created at a later date -- in some cases even after pivotal
clinical trials have been successfully completed. Patients who have
been treated with AXOKINE, BDNF, and NT-3 have developed antibodies,
though we have no information that indicates that these antibodies
are neutralizing antibodies.
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 Regeneron and its 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.
20
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.
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 and into conditions or
diseases outside of Regeneron's current areas of experience and expertise, 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 has no 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. Regeneron is not currently Year 2000 compliant.
Although the Company believes it is developing an appropriate program to address
the Year 2000 problem, it cannot guarantee that its program will succeed or will
be timely. The following is a discussion of the Company's Year 2000 program.
The Company has appointed a Year 2000 task force with representatives
from each department of the Company and has retained independent consultants and
experts to facilitate its review. The Company's Year 2000 review includes its
computer systems
21
and software, embedded systems in non-computer equipment, and vendor operations.
The Company has identified the following three principal areas of potential
computer systems exposure at Regeneron to the Year 2000 problem, in addition to
third party issues which are discussed elsewhere:
o Process control, instruments, and environmental monitoring and
control systems: these types of systems are used in the Company's
manufacturing and research and development processes, among other
operations. These generally are systems, devices, and instruments
which use date functionality and generate, send, receive, or
manipulate date-stamped data and signals. These systems may be found
in data acquisition/processing software, laboratory instrumentation,
and other equipment with embedded code, for example. These devices
and instruments may be controlled by installed software, firmware,
or other embedded control algorithms.
o Servers, desktops, and infrastructure: these generally are desktop
computers (Macintosh and PCs) and server computer equipment,
telecommunications, local area networks, wide area networks, and
include system hardware, firmware, installed commercial application
software, e-mail, and video teleconferencing, for example.
o Custom applications and business systems: these generally are
applications purchased from an external vendor. These systems
include applications developed or purchased by a functional area on
computer systems located within Regeneron's corporate departments
and operated by departmental personnel, such as Regeneron's core
business systems (including financial systems) and personnel
management systems.
The Company has substantially completed an analysis of its computer systems.
This analysis has not revealed material Year 2000 problems related to such
embedded systems.
The Company has also substantially completed a survey and analysis of
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, others state that they
cannot 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.
The analysis of the Company's embedded systems and the information
collected regarding vendor readiness have been used to formulate a contingency
plan with respect to reasonably identifiable items of equipment and materials
that are critical to the Company's operations. 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. In some cases, Regeneron plans to stock extra inventory and qualify
alternate suppliers, although the Company cannot guarantee the availability of
additional supplies or the Year 2000 compliance of alternate suppliers. The
failure of suppliers to become Year 2000 compliant on a timely basis, or at all,
could have a material adverse effect on the Company. The failure of certain
third
22
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.
Regeneron is developing a "most reasonably likely worst case Year 2000
scenario" and identifying the principal risks to Regeneron. In developing this
scenario, Regeneron assumed, among other things, that any Year 2000 disruptions
are likely to be of limited duration (and that extended material Year
2000-related disruptions can not be reasonably guarded against based on the
resources and nature of operations of the Company), the Company plans to protect
against, avoid, or reduce exposure to Year 2000 disruptions by not conducting or
minimizing activities between December 31, 1999 and January 2, 2000, and the
most reasonably likely worst case Year 2000 scenario is that there is a local or
regional power failure or an unanticipated failure of certain key equipment to
function properly in early 2000. A failure of electrical power (for any cause,
regardless of the risk potentially created by Year 2000 problems) to provide
power to and heat or cool the Company's facilities and to maintain the
temperature of the Company's storage units could materially adversely affect
Regeneron's operations and financial condition. The Company is in the process of
implementing contingency plans to protect certain key Regeneron assets in the
event of a failure of electrical power for a limited duration or unanticipated
failure of certain essential equipment. The Company anticipates implementing its
contingency plan by December 1999. 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. It is unclear to what
extent, if any, such losses or expenses would be covered by the Company's
current insurance policies. The Company does not plan on securing additional
insurance specifically related to Year 2000 risks.
As of September 30, 1999, total projected expenditures related to the
Company's Year 2000 program, including, without limitation, back-up generators,
anticipated upgrades, remediation, and new computer systems, are less than $1.0
million, most of which are expected to be for capital expenditures. However,
these amounts are only estimates and are based on information currently
available to the Company; the Company cannot guarantee that these amounts will
be adequate to address the Company's Year 2000 compliance needs. As of September
30, 1999, the Company estimates that it has incurred approximately $0.1 million
of expenses specifically related to its Year 2000 efforts, including without
limitation, dedicated internal staff costs, outside consulting fees, and
computer system upgrades.
The statements concerning the Year 2000 problem which are not
historical facts are forward-looking statements that involve risks and
uncertainties that could cause actual results to differ materially from those in
the forward-looking statements. There can be no guarantee that any estimates or
other forward-looking statements will be achieved and actual results could
differ significantly from those planned or contemplated.
23
The Company plans to update the status of its Year 2000 program as necessary in
its periodic filings and in accordance with applicable securities laws.
24
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 September 30, 1999.
25
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: November 9, 1999 By: /s/ Murray A. Goldberg
----------------- -----------------------------------------
Murray A. Goldberg
Vice President, Finance & Administration,
Chief Financial Officer, and Treasurer
26