REGN-09/30/14-10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
 
(Mark One)
 
 
(X)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2014
 
 
 
 
 
 
OR
 
 
 
 
 
 
( )
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from __________ to __________
 
Commission File Number  
0-19034
 
REGENERON PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
New York
 
13-3444607
(State or other jurisdiction of
 
(I.R.S. Employer Identification No.)
incorporation or organization)
 
 
 
 
 
777 Old Saw Mill River Road, Tarrytown, New York
 
10591-6707
(Address of principal executive offices)
 
(Zip Code)
 
 
 
(914) 847-7000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes 
X
 
No 
 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes 
X
 
No 
 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
X   
 
Accelerated filer
 
Non-accelerated filer
 
(Do not check if a smaller reporting company)
Smaller reporting company
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes 
 
 
No 
X
 
Number of shares outstanding of each of the registrant’s classes of common stock as of October 16, 2014:
Class of Common Stock
 
Number of Shares
Class A Stock, $.001 par value
 
1,973,368
Common Stock, $.001 par value
 
99,691,909


Table of Contents

REGENERON PHARMACEUTICALS, INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS

 
 
 
 
Page Numbers
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 










"ARCALYST®", "EYLEA®", "ZALTRAP®", "VelocImmune®", "VelociGene®", "VelociMouse®", "VelociMab®", and "VelociSuite®" are trademarks of Regeneron Pharmaceuticals, Inc. Trademarks and trade names of other companies appearing in this report are, to the knowledge of Regeneron Pharmaceuticals, Inc., the property of their respective owners.



2

Table of Contents

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REGENERON PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands, except share data)
 
September 30,
 
December 31,
 
2014
 
2013
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
646,554

 
$
535,608

Marketable securities
395,650

 
158,376

Accounts receivable - trade, net
673,915

 
787,071

Accounts receivable from Sanofi
110,720

 
104,707

Accounts receivable from Bayer HealthCare
142,619

 
63,189

Inventories
120,317

 
70,354

Deferred tax assets
49,005

 
44,677

Prepaid expenses and other current assets
61,732

 
32,952

Total current assets
2,200,512

 
1,796,934

 
 
 
 
Marketable securities
453,443

 
389,891

Property, plant, and equipment, at cost, net of accumulated depreciation and amortization
818,967

 
526,983

Deferred tax assets
263,081

 
231,878

Other assets
3,416

 
5,327

Total assets
$
3,739,419

 
$
2,951,013

 
 
 
 
LIABILITIES and STOCKHOLDERS' EQUITY
Current liabilities:
 
 
 
Accounts payable and accrued expenses
$
337,976

 
$
250,896

Deferred revenue from Sanofi, current portion
13,368

 
12,815

Deferred revenue - other, current portion
57,604

 
34,185

Facility lease obligations, current portion
1,252

 
939

Total current liabilities
410,200

 
298,835

 
 
 
 
Deferred revenue from Sanofi
75,283

 
76,522

Deferred revenue - other
114,339

 
107,677

Facility lease obligations
276,112

 
184,258

Convertible senior notes
287,950

 
320,315

Other long-term liabilities
23,747

 
11,330

Total liabilities
1,187,631

 
998,937

 
 
 
 
Stockholders' equity:
 
 
 
Preferred stock, $.01 par value; 30,000,000 shares authorized; issued and outstanding - none
—

 
—

Class A Stock, convertible, $.001 par value; 40,000,000 shares authorized; shares issued and outstanding - 1,973,368 in 2014 and 2,020,481 in 2013
2

 
2

Common Stock, $.001 par value; 160,000,000 shares authorized; shares issued and outstanding - 100,195,822 in 2014 and 97,666,814 in 2013
100

 
97

Additional paid-in capital
2,423,434

 
2,045,857

Retained earnings (accumulated deficit)
145,206

 
(92,692
)
Accumulated other comprehensive income (loss)
26,895

 
(1,188
)
Treasury stock, at cost; 521,892 shares in 2014 and none in 2013
(43,849
)
 
—

Total stockholders' equity
2,551,788

 
1,952,076

Total liabilities and stockholders' equity
$
3,739,419

 
$
2,951,013

 
 
 
 
The accompanying notes are an integral part of the financial statements.

3

Table of Contents

REGENERON PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited)
(In thousands, except per share data)
 
 
Three months ended
September 30,
 
Nine months ended
September 30,
 
 
2014
 
2013
 
2014
 
2013
Statements of Operations
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
Net product sales
 
$
448,844

 
$
367,118

 
$
1,229,244

 
$
1,019,751

Sanofi collaboration revenue
 
132,925

 
134,359

 
406,028

 
319,161

Bayer HealthCare collaboration revenue
 
135,853

 
88,583

 
358,460

 
134,594

Technology licensing and other revenue
 
8,166

 
6,967

 
23,496

 
20,827

 
 
725,788

 
597,027

 
2,017,228

 
1,494,333

 
 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
 
Research and development
 
337,728

 
224,045

 
919,608

 
591,807

Selling, general, and administrative
 
149,748

 
97,607

 
361,012

 
247,330

Cost of goods sold
 
33,655

 
28,253

 
91,073

 
83,557

Cost of collaboration manufacturing
 
21,938

 
10,320

 
54,471

 
23,684

 
 
543,069

 
360,225

 
1,426,164

 
946,378

 
 
 
 
 
 
 
 
 
Income from operations
 
182,719

 
236,802

 
591,064

 
547,955

 
 
 
 
 
 
 
 
 
Other income (expense):
 
 
 
 
 
 
 
 
Investment and other income
 
2,591

 
618

 
5,205

 
2,028

Interest expense
 
(9,232
)
 
(11,736
)
 
(31,022
)
 
(34,776
)
Loss on extinguishment of debt
 
—

 
—

 
(10,787
)
 
—

 
 
(6,641
)
 
(11,118
)
 
(36,604
)
 
(32,748
)
 
 
 
 
 
 
 
 
 
Income before income taxes
 
176,078

 
225,684

 
554,460

 
515,207

 
 
 
 
 
 
 
 
 
Income tax expense
 
(96,358
)
 
(84,378
)
 
(316,562
)
 
(187,651
)
 
 
 
 
 
 
 
 
 
Net income
 
$
79,720

 
$
141,306

 
$
237,898

 
$
327,556

 
 
 
 
 
 
 
 
 
Net income per share - basic
 
$
0.79

 
$
1.44

 
$
2.37

 
$
3.36

Net income per share - diluted
 
$
0.70

 
$
1.25

 
$
2.10

 
$
2.95

 
 
 
 
 
 
 
 
 
Weighted average shares outstanding - basic
 
100,796

 
98,226

 
100,325

 
97,602

Weighted average shares outstanding - diluted
 
117,423

 
116,713

 
113,203

 
115,554

 
 
 
 
 
 
 
 
 
Statements of Comprehensive Income
 
 
 
 
 
 
 
 
Net income
 
$
79,720

 
$
141,306

 
$
237,898

 
$
327,556

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
Unrealized gain (loss) on marketable securities, net of tax
 
22,632

 
578

 
28,083

 
(1,685
)
Comprehensive income
 
$
102,352

 
$
141,884

 
$
265,981

 
$
325,871

 
 
 
 
 
 
 
 
 
The accompanying notes are an integral part of the financial statements.



4

Table of Contents

REGENERON PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited)
For the nine months ended September 30, 2014 and 2013
(In thousands)
 
 
Class A Stock
 
Common Stock
 
Additional Paid-in Capital
 
Retained Earnings (Accumulated Deficit)
 
Treasury Stock
 
Accumulated Other Comprehensive Income (Loss)
 
Total Stockholders' Equity
 
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
Shares
 
Amount
 
 
Balance, December 31, 2013
 
2,020

 
$
2

 
97,667

 
$
97

 
$
2,045,857

 
$
(92,692
)
 
—

 
—

 
$
(1,188
)
 
$
1,952,076

Issuance of Common Stock in connection with exercise of stock options
 
—

 
—

 
2,460

 
3

 
79,695

 
—

 
—

 
—

 
—

 
79,698

Common Stock tendered upon exercise of stock options in connection with employee tax obligations
 
—

 
—

 
(526
)
 
—

 
(175,866
)
 
—

 
—

 
—

 
—

 
(175,866
)
Issuance of Common Stock in connection with conversion of convertible senior notes
 
—

 
—

 
522

 
—

 
156,373

 
—

 
—

 
—

 
—

 
156,373

Issuance of Common Stock in connection with Company 401(k) Savings Plan contribution
 
—

 
—

 
21

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Issuance of restricted Common Stock under Long-Term Incentive Plan
 
—

 
—

 
5

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Conversion of Class A Stock to Common Stock
 
(47
)
 
—

 
47

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Stock-based compensation charges
 
—

 
—

 
—

 
—

 
229,692

 
—

 
—

 
—

 
—

 
229,692

Excess tax benefit from stock-based compensation
 
—

 
—

 
—

 
—

 
343,532

 
—

 
—

 
—

 
—

 
343,532

Acquisition of Common Stock in connection with exercise of convertible note hedges
 
—

 
—

 
—

 
—

 
43,849

 
—

 
(522
)
 
$
(43,849
)
 
—

 
—

Reduction of warrants in connection with conversion of senior notes
 
—

 
—

 
—

 
—

 
(143,041
)
 
—

 
—

 
—

 
—

 
(143,041
)
Reduction of equity component of convertible senior notes
 
—

 
—

 
—

 
—

 
(156,657
)
 
—

 
—

 
—

 
—

 
(156,657
)
Net income
 
—

 
—

 
—

 
—

 
—

 
237,898

 
—

 
—

 
—

 
237,898

Other comprehensive income, net of tax
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
28,083

 
28,083

Balance, September 30, 2014
 
1,973

 
$
2


100,196


$
100


$
2,423,434


$
145,206


(522
)
 
$
(43,849
)
 
$
26,895


$
2,551,788

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

5

Table of Contents

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited) - Continued
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Class A Stock
 
Common Stock
 
Additional Paid-in Capital
 
Retained Earnings (Accumulated Deficit)
 
Treasury Stock
 
Accumulated Other Comprehensive Income (Loss)
 
Total Stockholders' Equity
 
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
Shares
 
Amount
 
 
Balance, December 31, 2012
 
2,069

 
$
2

 
95,223

 
$
95

 
$
1,763,508

 
$
(517,054
)
 
—

 
—

 
$
(1,166
)
 
$
1,245,385

Issuance of Common Stock in connection with exercise of stock options
 
—

 
—

 
2,641

 
3

 
42,622

 
—

 
—

 
—

 
—

 
42,625

Common Stock tendered upon exercise of stock options in connection with employee tax obligations
 
—

 
—

 
(597
)
 
(1
)
 
(166,357
)
 
—

 
—

 
—

 
—

 
(166,358
)
Issuance of Common Stock in connection with Company 401(k) Savings Plan contribution
 
—

 
—

 
38

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Issuance of restricted Common Stock under Long-Term Incentive Plan
 
—


—


6


—


—


—


—


—


—

 
—

Conversion of Class A Stock to Common Stock
 
(40
)
 
—

 
40

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Stock-based compensation charges
 
—

 
—

 
—

 
—

 
144,808

 
—

 
—

 
—

 
—

 
144,808

Excess tax benefit from stock-based compensation
 
—

 
—

 
—

 
—

 
97,840

 
—

 
—

 
—

 
—

 
97,840

Net income
 
—

 
—

 
—

 
—

 
—

 
327,556

 
—

 
—

 
—

 
327,556

Other comprehensive loss
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(1,685
)
 
(1,685
)
Balance, September 30, 2013
 
2,029

 
$
2


97,351


$
97


$
1,882,421


$
(189,498
)

—

 
—

 
$
(2,851
)

$
1,690,171

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The accompanying notes are an integral part of the financial statements.



6

Table of Contents

REGENERON PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
 
 
Nine months ended
September 30,
 
 
2014
 
2013
Cash flows from operating activities:
 
 
 
 
Net income
 
$
237,898

 
$
327,556

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
38,551

 
29,912

Non-cash compensation expense
 
225,784

 
143,217

Non-cash interest expense
 
15,629

 
17,316

Loss on extinguishment of debt
 
10,787

 
—

Other non-cash charges and expenses, net
 
12,844

 
15,710

Deferred taxes
 
(50,466
)
 
82,890

Changes in assets and liabilities:
 
 
 
 
Decrease (increase) in Sanofi, Bayer HealthCare, and trade accounts receivable
 
27,713

 
(350,809
)
Increase in inventories
 
(50,917
)
 
(36,742
)
(Increase) decrease in prepaid expenses and other assets
 
(28,850
)
 
3,738

Increase (decrease) in deferred revenue
 
29,395

 
(20,815
)
Increase in accounts payable, accrued expenses, and other liabilities
 
76,506

 
94,894

Total adjustments
 
306,976

 
(20,689
)
Net cash provided by operating activities
 
544,874

 
306,867

 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
Purchases of marketable securities
 
(478,436
)
 
(477,312
)
Sales or maturities of marketable securities
 
216,478

 
319,152

Capital expenditures
 
(215,464
)
 
(87,347
)
Net cash used in investing activities
 
(477,422
)
 
(245,507
)
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
Payments in connection with facility and capital lease obligations
 
(810
)
 
(1,625
)
Repayments of convertible senior notes
 
(61,125
)
 
—

Payments in connection with reduction of outstanding warrants
 
(143,041
)
 
—

Proceeds from issuance of Common Stock
 
80,804

 
41,718

Payments in connection with Common Stock tendered for employee tax obligations
 
(175,866
)
 
(166,358
)
Excess tax benefit from stock-based compensation
 
343,532

 
97,840

Net cash provided by (used in) financing activities
 
43,494

 
(28,425
)
 
 
 
 
 
Net increase in cash and cash equivalents
 
110,946

 
32,935

 
 
 
 
 
Cash and cash equivalents at beginning of period
 
535,608

 
230,276

 
 
 
 
 
Cash and cash equivalents at end of period
 
$
646,554

 
$
263,211

 
 
 
 
 
The accompanying notes are an integral part of the financial statements.


7

Table of Contents

REGENERON PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Unless otherwise noted, dollars in thousands, except per share data)

1. Interim Financial Statements
The interim Condensed Consolidated Financial Statements of Regeneron Pharmaceuticals, Inc. ("Regeneron" or the "Company") have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all information and disclosures necessary for a presentation of the Company’s financial position, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States of America. In the opinion of management, these financial statements reflect all normal recurring adjustments and accruals necessary for a fair statement of the Company’s financial position, results of operations, and cash flows for such periods. The results of operations for any interim periods are not necessarily indicative of the results for the full year. The December 31, 2013 Condensed Consolidated Balance Sheet data were derived from audited financial statements, but do not include all disclosures required by accounting principles generally accepted in the United States of America. These financial statements should be read in conjunction with the financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.
Certain reclassifications have been made to prior period amounts to conform with the current period’s presentation.
2. Product Sales
EYLEA® net product sales in the United States totaled $445.0 million and $363.1 million for the three months ended September 30, 2014 and 2013, respectively, and $1,218.8 million and $1,006.8 million for the nine months ended September 30, 2014 and 2013, respectively. In addition, ARCALYST® net product sales totaled $3.8 million and $4.0 million for the three months ended September 30, 2014 and 2013, respectively, and $10.4 million and $12.9 million for the nine months ended September 30, 2014 and 2013, respectively.
The Company recorded 72% and 75% for the three months ended September 30, 2014 and 2013, respectively, and 75% and 76% for the nine months ended September 30, 2014 and 2013, respectively, of its total gross product revenue from sales to Besse Medical, a subsidiary of AmerisourceBergen Corporation.
Revenue from product sales is recorded net of applicable provisions for rebates and chargebacks under governmental programs, distribution-related fees, prompt pay discounts, and other sales-related deductions. The following table summarizes the provisions, and credits/payments, for these sales-related deductions during the nine months ended September 30, 2014.
 
Rebates &
Chargebacks
 
Distribution-
Related
Fees
 
Other Sales-
Related
Deductions
 
Total
Balance as of December 31, 2013
$
4,400

 
$
19,663

 
$
538

 
$
24,601

Provision related to current period sales
23,265

 
53,689

 
1,202

 
78,156

Credits/payments
(23,873
)
 
(54,878
)
 
(1,211
)
 
(79,962
)
Balance as of September 30, 2014
$
3,792

 
$
18,474

 
$
529

 
$
22,795

Under the provisions of the Patient Protection and Affordable Care Act ("PPACA") and the Health Care and Education Reconciliation Act of 2010, a non-tax deductible annual fee (the "Branded Prescription Drug Fee") is imposed on pharmaceutical manufacturers that sell branded prescription drugs to specified government programs. The legislation imposed an annual fee on companies for each calendar year beginning in 2011. This fee is allocated to companies based on their prior year market share of total branded prescription drug sales into these government programs. Orphan drugs sales, including ARCALYST, are not subject to the fee. In July 2014, the Internal Revenue Service ("IRS") issued final regulations that provide guidance on the Branded Prescription Drug Fee. The final regulations differ in some respects from the temporary regulations issued by the IRS in 2011, including that a company is liable for the fee based on its branded prescription drug sales in the current year, instead of the liability only being applicable upon the first qualifying branded prescription drug sale of the following fee year under the temporary regulations. As a result of the issuance of these final IRS regulations, the Company will record an estimate of the fee in the same period in which its qualifying branded prescription drug sales occur. Therefore, in the third quarter of 2014, an incremental charge was recorded to (i) recognize a liability for the estimated fee payable based on 2014 sales through the first nine months of 2014, and (ii) expense the remaining prepaid asset recorded under the previous accounting for the estimated fee payable based on 2013

8

Table of Contents

REGENERON PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Unless otherwise noted, dollars in thousands, except per share data)


sales. The impact of the incremental charge in the third quarter was $40.6 million, which was included in selling, general, and administrative expenses.
3. Collaboration Agreements
Sanofi
Sanofi collaboration revenue, as detailed below, consisted primarily of reimbursement for research and development expenses that the Company incurred, partly offset by sharing of pre-launch commercialization expenses in connection with the companies' antibody collaboration. In addition, Sanofi collaboration revenue for the nine months ended September 30, 2013 was reduced by two $10.0 million up-front payments to Sanofi in connection with the Company's acquisition from Sanofi of full exclusive rights to two families of novel antibodies, as described below.
 
 
Three months ended
September 30,
Sanofi Collaboration Revenue
 
2014
 
2013
ZALTRAP:
 
 
 
 
Regeneron's share of losses in connection with commercialization of ZALTRAP
 
$
(1,008
)
 
$
(6,575
)
Reimbursement of Regeneron research and development expenses
 
1,261

 
1,316

Other
 
756

 
2,625

Total ZALTRAP
 
1,009

 
(2,634
)
Antibody:
 
 
 
 
Reimbursement of Regeneron research and development expenses
 
140,497

 
133,128

Regeneron's share of commercialization expenses
 
(12,830
)
 
—

Other
 
4,249

 
3,865

Total Antibody
 
131,916

 
136,993

Total Sanofi collaboration revenue
 
$
132,925

 
$
134,359


9

Table of Contents

REGENERON PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Unless otherwise noted, dollars in thousands, except per share data)


 
 
Nine months ended
September 30,
Sanofi Collaboration Revenue
 
2014
 
2013
ZALTRAP:
 
 
 
 
Regeneron's share of losses in connection with commercialization of ZALTRAP
 
$
(4,912
)
 
$
(22,581
)
Reimbursement of Regeneron research and development expenses
 
3,691

 
5,497

Other
 
4,417

 
6,610

Total ZALTRAP
 
3,196

 
(10,474
)
Antibody:
 
 
 
 
Reimbursement of Regeneron research and development expenses
 
405,212

 
338,027

Regeneron's share of commercialization expenses
 
(17,125
)
 
—

Up-front payments to Sanofi for acquisition of rights related to two antibodies
 
—

 
(20,000
)
Other
 
14,745

 
11,608

Total Antibody
 
402,832

 
329,635

Total Sanofi collaboration revenue
 
$
406,028

 
$
319,161

Sanofi commenced sales of ZALTRAP® (ziv-aflibercept) Injection for Intravenous Infusion, in combination with 5-fluorouracil, leucovorin, irinotecan ("FOLFIRI"), for patients with metastatic colorectal cancer that is resistant to or has progressed following an oxaliplatin-containing regimen, in the United States in the third quarter of 2012 and in certain European and other countries in the first quarter of 2013. The Company and Sanofi globally collaborate on the development and commercialization of ZALTRAP. Under the terms of the companies' September 2003 collaboration agreement, as amended, Regeneron and Sanofi share co-promotion rights and profits and losses on sales of ZALTRAP outside of Japan. The Company is entitled to receive a percentage of sales of ZALTRAP in Japan.
Under the Company's antibody collaboration agreement with Sanofi, agreed upon worldwide development expenses incurred by both companies during the term of the agreement are funded by Sanofi, except that following receipt of the first positive Phase 3 trial results for a co-developed drug candidate, which first occurred in the fourth quarter of 2013, subsequent Phase 3 trial-related costs for that drug candidate ("Shared Phase 3 Trial Costs") are shared 80% by Sanofi and 20% by Regeneron. Consequently, during the three and nine months ended September 30, 2014, the Company recognized as additional research and development expense $28.4 million and $81.3 million, respectively, of antibody development expenses that the Company was obligated to reimburse to Sanofi related to alirocumab and sarilumab.
Effective in the second quarter of 2014, the Company and Sanofi began sharing pre-launch commercialization expenses related to alirocumab in accordance with the companies’ antibody collaboration agreement.
In May 2013, the Company acquired from Sanofi full exclusive rights to two families of novel antibodies invented at Regeneron and previously included in the Company's antibody collaboration with Sanofi. The Company acquired full rights to antibodies targeting the platelet derived growth factor (PDGF) family of receptors and ligands in ophthalmology and all other indications and to antibodies targeting the angiopoietin-2 (Ang2) receptor and ligand in ophthalmology. With respect to PDGF antibodies, the Company made a $10.0 million up-front payment to Sanofi in the second quarter of 2013. In addition, with respect to Ang2 antibodies in ophthalmology, the Company made a $10.0 million up-front payment to Sanofi in the second quarter of 2013.
With respect to PDGF antibodies, the Company made two $5.0 million development milestone payments to Sanofi in the first quarter of 2014, which were recorded in the Company's Statements of Operations as research and development expense. The Company is also obligated to pay up to $30.0 million in additional potential development milestones as well as royalties on any future sales of PDGF antibodies.
In July 2014, in connection with the Company’s antibody collaboration with Sanofi, the Company purchased a U.S. Food and Drug Administration ("FDA") priority review voucher from a third party for $67.5 million. The Company and Sanofi equally

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REGENERON PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Unless otherwise noted, dollars in thousands, except per share data)


shared the priority review voucher's purchase price, and the Company's share of the cost, or $33.8 million, was recorded as a research and development expense during the third quarter of 2014. The Company subsequently transferred the voucher to Sanofi, which intends to use the priority review voucher in connection with a planned Biologics License Application submission to the FDA for alirocumab.
Bayer HealthCare LLC
The Company and Bayer HealthCare globally collaborate on the development and commercialization of EYLEA outside of the United States. Bayer HealthCare commenced sales of EYLEA outside the United States for the treatment of wet AMD in the fourth quarter of 2012, for the treatment of macular edema secondary to CRVO in the fourth quarter of 2013, and for the treatment of DME in the third quarter of 2014. In addition, in January 2014, the Company entered into a license and collaboration agreement with Bayer HealthCare governing the joint development and commercialization outside the United States of an antibody product candidate to Platelet Derived Growth Factor Receptor Beta (PDGFR-beta).
The collaboration revenue the Company earned from Bayer HealthCare is detailed below:
 
 
Three months ended
September 30,
Bayer HealthCare Collaboration Revenue
 
2014
 
2013
EYLEA:
 
 
 
 
Regeneron's net profit in connection with commercialization of EYLEA outside the United States
 
$
85,351

 
$
31,769

Sales and substantive development milestones
 
30,000

 
45,000

Cost-sharing of Regeneron EYLEA development expenses
 
4,394

 
3,739

Other
 
12,745

 
8,075

Total EYLEA
 
132,490

 
88,583

PDGFR-beta antibody:
 
 
 
 
Cost-sharing of REGN2176-3 development expenses
 
518

 
—

Other
 
2,845

 
—

Total PDGFR-beta
 
3,363

 
—

Total Bayer HealthCare collaboration revenue
 
$
135,853

 
$
88,583


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REGENERON PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Unless otherwise noted, dollars in thousands, except per share data)


 
 
Nine months ended
September 30,
Bayer HealthCare Collaboration Revenue
 
2014
 
2013
EYLEA:
 
 
 
 
Regeneron's net profit in connection with commercialization of EYLEA outside the United States
 
$
213,291

 
$
57,186

Sales and substantive development milestones
 
75,000

 
45,000

Cost-sharing of Regeneron EYLEA development expenses
 
26,235

 
13,207

Other
 
34,490

 
19,201

Total EYLEA
 
349,016

 
134,594

PDGFR-beta antibody:
 
 
 
 
Cost-sharing of REGN2176-3 development expenses
 
1,657

 
—

Other
 
7,787

 
—

Total PDGFR-beta
 
9,444

 
—

Total Bayer HealthCare collaboration revenue
 
$
358,460

 
$
134,594

EYLEA
During the nine months ended September 30, 2014, the Company earned, and recorded as revenue, five $15.0 million sales milestones (two of which were recorded in the third quarter of 2014) from Bayer HealthCare upon total aggregate net sales of EYLEA outside the United States exceeding $500 million, $600 million, $700 million, $800 million, and $900 million, respectively, over a twelve-month period. The Company is eligible to receive one additional $15.0 million sales milestone payment if twelve-month sales of EYLEA outside the United States exceed $1 billion. In addition, in connection with a November 2013 agreement under which Bayer HealthCare obtained rights to use certain of the Company’s EYLEA clinical data for a regulatory filing, the Company became eligible to receive up to $30.0 million in additional sales milestone payments if twelve-month sales of specific commercial supplies of EYLEA outside the United States achieve certain specified levels up to $200 million.
In January 2014, Bayer HealthCare decided to participate in the global development and commercialization of EYLEA outside the United States for the treatment of macular edema following branch retinal vein occlusion ("BRVO"). In connection with this decision, Bayer HealthCare reimbursed Regeneron $15.7 million for a defined share of the EYLEA global development costs that the Company had incurred prior to February 2014 for the BRVO indication, which was recognized as Bayer HealthCare collaboration revenue in the first quarter of 2014 and is included with "Cost-sharing of Regeneron EYLEA development expenses" for the nine months ended September 30, 2014 in the table above. In addition, all future agreed upon global EYLEA development expenses incurred in connection with BRVO are being shared equally, and any future profits or losses on sales of EYLEA outside of the United States for the treatment of macular edema following BRVO will also be shared (for countries other than Japan). The Company is entitled to receive a tiered percentage of EYLEA net sales in Japan.
PDGFR-beta Antibody
In January 2014, the Company also entered into an agreement with Bayer HealthCare governing the joint development and commercialization outside the United States of an antibody product candidate to PDGFR-beta, including in combination with EYLEA, for the treatment of ocular diseases or disorders. REGN2176-3, a combination product candidate comprised of an antibody to PDGFR-beta co-formulated with EYLEA, is being developed under the agreement. Under the agreement, the Company will conduct the initial development of the PDGFR-beta antibody through completion of the first proof-of-concept study, upon which Bayer HealthCare will have a right to opt-in to license and collaborate on further development and commercialization outside the United States.

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REGENERON PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Unless otherwise noted, dollars in thousands, except per share data)


In connection with the agreement, Bayer HealthCare made a $25.5 million non-refundable upfront payment to the Company in January 2014, and is obligated to pay 25% of global development costs and 50% of development costs exclusively for the territory outside the United States under the initial development plan. In addition, Bayer HealthCare is obligated to reimburse the Company for 50% of development milestone payments to Sanofi related to the Company's acquisition of rights to antibodies targeting the PDGF family of receptors in May 2013, as described above. In that regard, Bayer HealthCare made two $2.5 million development milestone payments to the Company in the first quarter of 2014 (both of which, for the purpose of revenue recognition, were not considered substantive). Further, in connection with the Company’s initial development of the PDGFR-beta antibody through completion of the first proof-of-concept study, the Company is eligible to receive up to $15.0 million in future development milestone payments from Bayer HealthCare, although certain of these development milestone payments could be reduced by half if Bayer HealthCare does not opt-in to the collaboration.
From inception of the agreement until Bayer HealthCare has the right to opt-in to the collaboration, the Company's sole significant deliverable is research and development services provided in accordance with the agreement. Therefore, the $25.5 million upfront payment was allocated to this deliverable, initially recorded as deferred revenue, and will be recognized as revenue over the related performance period. In addition, the two $2.5 million non-substantive development milestone payments from Bayer HealthCare were also initially recorded as deferred revenue and will be recognized over the same performance period as the upfront payment.
If Bayer HealthCare exercises its right to opt-in to the collaboration, it will obtain exclusive commercialization rights to the product outside the United States, continue to pay for 25% of global development costs and 50% of development costs exclusively for the territory outside the United States, pay a $20.0 million opt-in payment to the Company, pay a $20.0 million development milestone to the Company upon receipt of the first marketing approval in the European Union or Japan, share profits and losses from sales outside the United States equally with the Company, and be responsible for the payment of royalties on sales outside the United States to Sanofi.
Within the United States, the Company has exclusive commercialization rights and will retain all of the profits from sales. If Bayer HealthCare does not opt-in to the collaboration, the Company will have exclusive rights to develop and commercialize PDGFR-beta antibodies (except as a combination product with EYLEA) for use outside the United States.
The Company also has the right to opt-out of the collaboration upon completion of the first proof-of-concept study for the PDGFR-beta antibody. If the Company opts-out of the collaboration and Bayer HealthCare exercises its right to opt-in to the collaboration, Bayer HealthCare will obtain exclusive rights to the PDGFR-beta antibody (except as a combination product with EYLEA) outside of the United States, be responsible for all development costs outside of the United States, be responsible for all royalty and milestone payments to a third party, and will retain all of the profits from sales of the PDGFR-beta antibody outside of the United States.
Unless terminated earlier in accordance with its provisions, the agreement will continue to be in effect until such time as neither party or its respective affiliates or sublicensees is developing or commercializing a PDGFR-beta antibody in the specified field outside of the United States and such discontinuation is acknowledged as permanent by both the Company and Bayer HealthCare in writing.
Avalanche Biotechnologies, Inc.
In May 2014, the Company entered into a research collaboration and license agreement with Avalanche Biotechnologies, Inc. to discover, develop, and commercialize novel gene therapy products for the treatment of ophthalmologic diseases. In connection with the agreement, the Company made a $2.0 million upfront payment and a $6.0 million pre-payment of collaboration research costs, and is obligated to pay potential additional research costs, an aggregate amount of up to $80.0 million per product upon meeting certain potential development and regulatory milestones (for products directed to as many as eight therapeutic targets, or up to an aggregate of $640.0 million), and royalties on any future sales of such products. The Company also purchased an aggregate of $5.0 million of Avalanche preferred stock. Under the agreement, the Company will collaborate with Avalanche to conduct research for the discovery of novel gene therapy vectors. Subsequent to the filing of an Investigational New Drug application ("IND") with the FDA for a product candidate developed under the agreement, Regeneron may exercise its right to obtain exclusive worldwide rights to further research, develop, and commercialize such product candidates directed to the applicable therapeutic target. In addition, Avalanche has the option to share in development costs and profits for products directed toward up to two therapeutic targets of its choice.

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REGENERON PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Unless otherwise noted, dollars in thousands, except per share data)


In July 2014, Avalanche commenced an initial public offering ("IPO") of its common stock and thereby triggered the Company's obligation under the research collaboration and license agreement to purchase up to $10.0 million of Avalanche common stock in a concurrent private placement. As part of the concurrent private placement, the Company purchased from Avalanche at the closing of the IPO 588,235 shares of Avalanche common stock for an aggregate purchase price of $10.0 million. In addition, at the closing of the IPO, Avalanche preferred stock, including the Avalanche preferred stock held by the Company, automatically converted on a one-for-one basis into Avalanche common stock.
4. Net Income Per Share
The Company’s basic net income per share amounts have been computed by dividing net income by the weighted average number of shares of Common Stock and Class A Stock outstanding. Net income per share is presented on a combined basis, inclusive of Common Stock and Class A Stock outstanding, as each class of stock has equivalent economic rights. Diluted net income per share includes the potential dilutive effect of other securities as if such securities were converted or exercised during the period, when the effect is dilutive. The calculations of basic and diluted net income per share are as follows:
 
 
Three months ended September 30,
 
 
2014
 
2013
Net income - basic
 
$
79,720

 
$
141,306

Effective of dilutive securities:
 
 
 
 
Convertible senior notes - interest expense related to contractual coupon interest rate and amortization of discount and note issuance costs
 
2,803

 
4,678

Net income - diluted
 
$
82,523

 
$
145,984

 
 
 
 
 
(Shares in thousands)
 
 
 
 
Weighted average shares - basic
 
100,796

 
98,226

Effect of dilutive securities:
 
 
 
 
Stock options
 
9,377

 
10,379

Restricted stock
 
430

 
462

Convertible senior notes
 
4,033

 
4,761

Warrants
 
2,787

 
2,885

Dilutive potential shares
 
16,627

 
18,487

Weighted average shares - diluted
 
117,423

 
116,713

 
 
 
 
 
Net income per share - basic
 
$
0.79

 
$
1.44

Net income per share - diluted
 
$
0.70

 
$
1.25


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REGENERON PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Unless otherwise noted, dollars in thousands, except per share data)


 
 
Nine months ended September 30,
 
 
2014
 
2013
Net income - basic
 
$
237,898

 
$
327,556

Effective of dilutive securities:
 
 
 
 
Convertible senior notes - interest expense related to contractual coupon interest rate and amortization of discount and note issuance costs
 
—

 
13,857

Net income - diluted
 
$
237,898

 
$
341,413

 
 
 
 
 
(Shares in thousands)
 
 
 
 
Weighted average shares - basic
 
100,325

 
97,602

Effect of dilutive securities:
 
 
 
 
Stock options
 
9,515

 
10,220

Restricted stock
 
413

 
415

Convertible senior notes
 
—

 
4,761

Warrants
 
2,950

 
2,556

Dilutive potential shares
 
12,878

 
17,952

Weighted average shares - diluted
 
113,203

 
115,554

 
 
 
 
 
Net income per share - basic
 
$
2.37

 
$
3.36

Net income per share - diluted
 
$
2.10

 
$
2.95

Shares which have been excluded from the September 30, 2014 and 2013 diluted per share amounts because their effect would have been antidilutive include the following:
 
 
Three months ended September 30,
(Shares in thousands)
 
2014
 
2013
Stock options
 
1,227

 
135

 
 
Nine months ended September 30,
(Shares in thousands)
 
2014
 
2013
Stock options
 
3,741

 
1,265

Convertible senior notes
 
4,483

 
—



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REGENERON PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Unless otherwise noted, dollars in thousands, except per share data)


5. Marketable Securities
Marketable securities at September 30, 2014 and December 31, 2013 consist of both debt securities issued by investment grade institutions as well as equity securities. The Company also held restricted marketable securities as of September 30, 2014, consisting of the Company's investment in Avalanche common shares (see Note 3), which are subject to customary transfer restrictions until January 2015 under a lock-up agreement with the underwriters of Avalanche's IPO.
The following tables summarize the Company's investments in marketable securities at September 30, 2014 and December 31, 2013.
 
 
Amortized
 
Unrealized
 
Fair
At September 30, 2014
 
Cost Basis
 
Gains
 
Losses
 
Value
Unrestricted
 
 
 
 
 
 
 
 
U.S. government and government agency obligations
 
$
51,059

 
$
71

 
$
(1
)
 
$
51,129

Corporate bonds
 
696,149

 
574

 
(1,131
)
 
695,592

Municipal bonds
 
42,756

 
94

 
(8
)
 
42,842

Equity securities
 
1,166

 
3,933

 
—

 
5,099

 
 
791,130

 
4,672

 
(1,140
)
 
794,662

Restricted
 
 
 
 
 
 
 
 
Equity securities
 
15,000

 
39,431

 
—

 
54,431

 
 
$
806,130

 
$
44,103

 
$
(1,140
)
 
$
849,093

 
 
 
 
 
 
 
 
 
At December 31, 2013
 
 
 
 
 
 
 
 
Unrestricted
 
 
 
 
 
 
 
 
U.S. government and government agency obligations
 
$
107,493

 
$
55

 
$
(27
)
 
$
107,521

Corporate bonds
 
369,321

 
233

 
(361
)
 
369,193

Commercial paper
 
23,891

 
53

 
—

 
23,944

Municipal bonds
 
36,935

 
45

 
(59
)
 
36,921

International government agency obligations
 
2,007

 
1

 
—

 
2,008

Certificates of deposit
 
7,509

 
5

 
—

 
7,514

Equity securities
 
1,166

 
—

 
—

 
1,166

 
 
$
548,322

 
$
392

 
$
(447
)
 
$
548,267


The Company classifies its debt security investments based on their contractual maturity dates. The debt securities listed at September 30, 2014 mature at various dates through August 2024. The fair values of debt security investments by contractual maturity as of September 30, 2014 and December 31, 2013 consist of the following:
 
 
September 30, 2014
 
December 31, 2013
Maturities within one year
 
$
287,739

 
$
158,376

Maturities after one year through five years
 
496,700

 
383,410

Maturities after five years through ten years
 
5,124

 
4,138

Maturities after ten years
 
—

 
1,177

 
 
$
789,563

 
$
547,101


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REGENERON PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Unless otherwise noted, dollars in thousands, except per share data)


The following table shows the fair value of the Company’s marketable securities that have unrealized losses and that are deemed to be only temporarily impaired, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, at September 30, 2014 and December 31, 2013.
 
Less than 12 Months
 
12 Months or Greater
 
Total
At September 30, 2014
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
U.S. government and government agency obligations
$
1,401

 
$
(1
)
 
—

 
—

 
$
1,401

 
$
(1
)
Corporate bonds
343,835

 
(1,131
)
 
—

 
—

 
343,835

 
(1,131
)
Municipal bonds
10,502

 
(8
)
 
—

 
—

 
10,502

 
(8
)
 
$
355,738


$
(1,140
)
 
—

 
—

 
$
355,738

 
$
(1,140
)
 
 
 
 
 
 
 
 
 
 
 
 
At December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
U.S. government and government agency obligations
$
49,241

 
$
(27
)
 
—

 
—

 
$
49,241

 
$
(27
)
Corporate bonds
176,140

 
(361
)
 
—

 
—

 
176,140

 
(361
)
Municipal bonds
14,431

 
(59
)
 
—

 
—

 
14,431

 
(59
)
 
$
239,812

 
$
(447
)
 
—

 
—

 
$
239,812

 
$
(447
)
Realized gains and losses are included as a component of investment income. For both the three and nine months ended September 30, 2014, total realized gains and losses on sales of marketable securities were not material. For both the three and nine months ended September 30, 2013, total realized gains on sales of marketable securities were $0.5 million and $1.0 million, respectively, and there were no realized losses. Changes in the Company's accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2014 and 2013 related to unrealized gains and losses on available-for-sale marketable securities. For the three and nine months ended September 30, 2014 and 2013, amounts reclassified from accumulated other comprehensive income (loss) into investment income in the Company's Statements of Operations were related to realized gains and losses on sales of marketable securities.

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REGENERON PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Unless otherwise noted, dollars in thousands, except per share data)


6. Fair Value Measurements
The Company’s assets that are measured at fair value on a recurring basis, at September 30, 2014 and December 31, 2013, consist of the following:
 
 
 
Fair Value Measurements at Reporting Date Using
At September 30, 2014
Fair Value
 
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
Available-for-sale marketable securities:
 
 
 
 
 
Unrestricted
 
 
 
 
 
U.S. government and government agency obligations
$
51,129

 
—

 
$
51,129

Corporate bonds
695,592

 
—

 
695,592

Municipal bonds
42,842

 
—

 
42,842

Equity securities
5,099

 
$
5,099

 
—

 
794,662

 
5,099

 
789,563

Restricted
 
 
 
 
 
Equity securities
54,431

 
—

 
54,431

 
$
849,093

 
$
5,099


$
843,994

 
 
 
 
 
 
At December 31, 2013
 
 
 
 
 
Available-for-sale marketable securities:
 
 
 
 
 
Unrestricted
 
 
 
 
 
U.S. government and government agency obligations
$
107,521

 
—

 
$
107,521

Corporate bonds
369,193

 
—

 
369,193

Commercial paper
23,944

 
—

 
23,944

Municipal bonds
36,921

 
—

 
36,921

International government agency obligations
2,008

 
—

 
2,008

Certificates of deposit
7,514

 
—

 
7,514

Equity securities
1,166

 
$
1,166

 
—

 
$
548,267

 
$
1,166

 
$
547,101

Marketable securities included in Level 2 are valued using quoted market prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, or model-based valuations in which significant inputs used are observable. The Company considers market liquidity in determining the fair value for these securities. The Company did not record any charges for other-than-temporary impairment of its Level 2 marketable securities during the three and nine months ended September 30, 2014 and 2013.
During the three months ended September 30, 2013, the Company sold a Level 3 marketable security and realized a $0.4 million gain on its sale. There were no other sales, or purchases or maturities of, Level 3 marketable securities and no unrealized gains or losses related to Level 3 marketable securities for the three and nine months ended September 30, 2014 and 2013. There were no transfers of marketable securities between Levels 1, 2, or 3 classifications during the three and nine months ended September 30, 2014 and 2013.

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REGENERON PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Unless otherwise noted, dollars in thousands, except per share data)


As of September 30, 2014 and December 31, 2013, the Company had $338.9 million and $400.0 million, respectively, in aggregate principal amount of 1.875% convertible senior notes (the "Notes") that will mature on October 1, 2016 unless earlier converted or repurchased. As described in Note 9, a portion of the Notes was surrendered for conversion during the second quarter of 2014. The fair value of the outstanding Notes was estimated to be $1,433.8 million and $1,327.2 million as of September 30, 2014 and December 31, 2013, respectively, and was determined based on Level 2 inputs, such as market and observable sources.
7. Inventories
Inventories consist of the following:
 
September 30,
 
December 31,
 
2014
 
2013
Raw materials
$
10,170

 
$
9,120

Work-in-process
70,965

 
35,868

Finished goods
11,368

 
14,352

Deferred costs
27,814

 
11,014

 
$
120,317

 
$
70,354

Deferred costs represent the costs of product manufactured and shipped to the Company's collaborators for which recognition of revenue has been deferred. For the three months ended September 30, 2014, cost of goods sold included inventory write-downs and reserves totaling $1.6 million; such amounts were not material for the three months ended September 30, 2013. For the nine months ended September 30, 2014 and 2013, cost of goods sold included inventory write-downs and reserves totaling $3.5 million and $4.8 million, respectively.
8. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following:
 
September 30,
 
December 31,
 
2014
 
2013
Accounts payable
$
47,342

 
$
61,936

Accrued payroll and related costs
75,159

 
69,429

Accrued clinical trial expense
45,384

 
23,654

Accrued sales-related charges, deductions, and royalties
114,408

 
66,855

Other accrued expenses and liabilities
55,683

 
29,022

 
$
337,976

 
$
250,896

9. Convertible Debt
In the second quarter of 2014, $61.1 million principal amount of the Company's $400.0 million aggregate principal amount of Notes were surrendered for conversion. In accordance with the terms of the Notes, the Company elected to settle these conversion obligations through a combination of cash, in an amount equal to the principal amount of the converted Notes, and shares of the Company's Common Stock in respect of any amounts due in excess thereof. Consequently, upon settlement of the Notes during the second quarter of 2014, the Company (i) paid $61.1 million in cash, (ii) issued 521,876 shares of Common Stock, (iii) recognized a $10.8 million loss on the debt extinguishment, and (iv) allocated $156.7 million of the settlement consideration provided to the Note holders to the reacquisition of the equity component of the Notes, and recognized such amount as a reduction of stockholder's equity.

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REGENERON PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Unless otherwise noted, dollars in thousands, except per share data)


In connection with the initial offering of the Notes in October 2011, the Company entered into convertible note hedge and warrant transactions with multiple counterparties, which were recorded to additional paid-in capital. As a result of the Note conversions described above, in the second quarter of 2014 the Company exercised a proportionate amount of its convertible note hedges, for which the Company received 521,876 shares of Common Stock, which was equivalent to the number of shares the Company was required to issue to settle the non-cash portion of the related Note conversions. The shares received were recorded as Treasury Stock, at cost, in the Company's Balance Sheet and Statement of Stockholders' Equity.
Also during the second quarter of 2014, the Company entered into agreements to reduce the number of warrants held by each of the warrant holders in proportion to the amount of Notes converted. Pursuant to the agreements, the Company paid an aggregate amount of $143.0 million to the warrant holders to reduce the maximum number of shares of Common Stock issuable upon exercise of the warrants from 4,760,840 to 4,033,324 (subject to adjustment from time to time as provided in the applicable warrant agreements). The remaining warrants expire, and will be exercisable, at various dates during 2017.
In October 2014, the Company received notification that an additional $160.8 million principal amount of the Notes were surrendered for conversion, and settlement is anticipated during the fourth quarter of 2014. The Company elected to settle these conversion obligations through a combination of cash and shares (total payment will be based on the average of the volume-weighted-average prices of the Common Stock during the 40 trading-day cash settlement averaging period specified in the indenture governing the Notes). In connection with these Note conversions, the Company exercised a proportionate amount of its convertible note hedges, for which the Company expects to receive shares of Common Stock equivalent to the number of shares the Company will be required to issue to settle the non-cash portion of the related Note conversions.
10. Income Taxes
The Company is subject to U.S. federal, state, and foreign income taxes. The Company recorded an income tax provision in its Statement of Operations of $96.4 million and $84.4 million for the three months ended September 30, 2014 and 2013, respectively, and $316.6 million and $187.7 million for the nine months ended September 30, 2014 and 2013, respectively. The Company's effective tax rate was 54.7% and 37.4% for the three months ended September 30, 2014 and 2013, respectively, and 57.1% and 36.4% for the nine months ended September 30, 2014 and 2013, respectively. The Company's effective tax rate for the three and nine months ended September 30, 2014 was negatively impacted by losses incurred in foreign jurisdictions with rates lower than the federal statutory rate, the incremental charge related to the non-tax deductible Branded Prescription Drug Fee (see Note 2), and expiration at the end of 2013 of the federal tax credit for increased research activities. In addition, the Company's effective tax rate for the nine months ended September 30, 2014 was negatively impacted by New York State tax legislation enacted in the first quarter of 2014. This tax legislation reduced the New York State income tax rate to zero percent for "qualified manufacturers", including Regeneron, effective in 2014; however, it also resulted in the Company reducing its related deferred tax assets as a discrete item in the first quarter of 2014. As a result, this tax legislation caused a net increase in the Company's effective tax rate of 2.2% for the nine months ended September 30, 2014.
The Company's effective tax rate for the nine months ended September 30, 2013 included, as a discrete item in the first quarter of 2013, the favorable impact of the enactment of The American Taxpayer Relief Act in January 2013. The American Taxpayer Relief Act included a provision to extend the income tax credit for increased research activities retroactively to the tax year ended December 31, 2012, as well as for 2013. As a result, the Company's 2012 research tax credit reduced its effective tax rate for the nine months ended September 30, 2013 by 4.3%.
The Company also recorded an income tax provision in its Statement of Comprehensive Income of $13.5 million and $14.9 million for the three and nine months ended September 30, 2014, respectively, in connection with the Company’s unrealized gains on “available-for-sale” marketable securities. For both the three and nine months ended September 30, 2013, no such income tax provision or benefit was required in connection with the Company’s unrealized gains (losses) on “available-for-sale” marketable securities.
Tax years subsequent to 2010 remain open to examination by federal tax authorities. The Company's 2011 federal income tax return is currently under audit by the IRS. During the second quarter of 2014, New York State tax authorities finalized their audit of the Company's 2009, 2010, and 2011 business corporation franchise tax returns with no adjustments.

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REGENERON PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Unless otherwise noted, dollars in thousands, except per share data)


11. Statement of Cash Flows
Supplemental disclosure of non-cash investing and financing activities:
Included in accounts payable and accrued expenses at September 30, 2014 and December 31, 2013 were $38.6 million and $16.1 million, respectively, of accrued capital expenditures primarily in connection with renovation of the Company's new Limerick, Ireland facility and expansion and renovations in its Rensselaer, New York manufacturing facilities. Included in accounts payable and accrued expenses at September 30, 2013 and December 31, 2012 were $18.4 million and $8.6 million, respectively, of accrued capital expenditures.
Pursuant to the application of authoritative guidance issued by the Financial Accounting Standards Board ("FASB") to the Company's lease of office and laboratory facilities in Tarrytown, New York, the Company recognized a facility lease obligation of $92.6 million and $7.7 million during the nine months ended September 30, 2014 and 2013, respectively, in connection with capitalizing, on the Company's books, the landlord's costs of constructing new facilities that the Company has leased. In addition, included in property, plant, and equipment at September 30, 2014 and September 30, 2013 were $4.5 million and $1.0 million of capitalized interest for the nine months ended September 30, 2014 and September 30, 2013, respectively, as the related facilities are currently under construction.
12. Legal Matters
From time to time, the Company is a party to legal proceedings in the course of the Company's business. Costs associated with the Company's involvement in legal proceedings are expensed as incurred.
Proceedings Relating to ‘287 Patent and '018 Patent
The Company is a party to patent infringement litigation involving its European Patent No. 1,360,287 (the "'287 Patent") and its U.S. Patent No. 8,502,018 (the "'018 Patent"), both of which concern genetically altered mice capable of producing chimeric antibodies that are part human and part mouse. Chimeric antibody sequences can be used to produce high-affinity fully human monoclonal antibodies. In these proceedings (the "'287 Patent Infringement Litigation" and "'018 Patent Infringement Litigation," respectively), the Company claims infringement of several claims of the '287 Patent and the '018 Patent (as applicable), and seeks, among other types of relief, an injunction and an account of profits in connection with the defendants' infringing acts, which may include, among other things, the making, use, keeping, sale, or offer for sale of genetically engineered mice (or certain cells from which they are derived) that infringe one or more claims of the '287 Patent and the '018 Patent (as applicable). With respect to the '018 Patent Infringement Litigation against Ablexis, LLC, on October 31, 2014, the Company and Ablexis reached a confidential settlement and filed a joint stipulation dismissing the action with prejudice. As the '287 Patent Infringement Litigation and remaining '018 Patent Infringement Litigation proceedings are at an early stage, at this time the Company is not able to predict the outcome of, or an estimate of gain, if any, related to, these proceedings.
Proceedings Relating to PCSK9 Antibody (Alirocumab)
On October 17, 2014 and October 28, 2014, Amgen Inc. filed lawsuits against Regeneron, Sanofi, Aventisub LLC, and Aventis Pharmaceuticals, Inc. in the United States District Court for the District of Delaware seeking an injunction to prevent Regeneron and the other defendants from making, using, offering to sell, or selling within the United States (as well as importing into the United States) alirocumab, the antibody to PCSK9 for LDL cholesterol reduction Regeneron is jointly developing with Sanofi. In the complaints, Amgen asserts U.S. Patent Nos. 8,563,698, 8,829,165, and 8,859,741 and U.S. Patent Nos. 8,871,913 and 8,871,914, respectively. Amgen also seeks a judgment of patent infringement of the asserted patents, monetary damages (together with interest), costs and expenses of the lawsuits, and attorneys’ fees. This matter has not yet progressed sufficiently through discovery and/or development of important factual information and legal issues to enable the Company to estimate a range of possible loss, if any.


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REGENERON PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Unless otherwise noted, dollars in thousands, except per share data)


13. Recently Issued Accounting Standards
In May 2014, the FASB issued a new standard related to revenue recognition, Revenue from Contracts with Customers, which will replace existing revenue recognition guidance. The new standard requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. To achieve that core principle, an entity must identify the contract(s) with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when (or as) the entity satisfies the performance obligation. The new standard will be effective for annual and interim reporting periods beginning after December 15, 2016, and early adoption is not permitted. The standard allows for two transition methods - retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the standard recognized at the date of initial adoption. The Company has not yet determined its method of transition and is evaluating the impact that this guidance will have on the Company's financial statements.


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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The discussion below contains forward-looking statements that involve risks and uncertainties relating to future events and the future performance of Regeneron Pharmaceuticals, Inc. ("Regeneron," "Company," "we," "us," and "our"), and actual events or results may differ materially from these forward-looking statements. Words such as "anticipate," "expect," "intend," "plan," "believe," "seek," "estimate," variations of such words, and similar expressions are intended to identify such forward-looking statements, although not all forward-looking statements contain these identifying words. These statements concern, and these risks and uncertainties include, among others, the nature, timing, and possible success and therapeutic applications of our products, product candidates, and research and clinical programs now underway or planned, including without limitation Regeneron's human genetics initiative; unforeseen safety issues resulting from the administration of products and product candidates in patients, including serious complications or side effects in connection with the use of our product candidates in clinical trials; the likelihood and timing of possible regulatory approval and commercial launch of our late-stage product candidates and new indications for marketed products, including without limitation EYLEA®, sarilumab, alirocumab, and dupilumab; ongoing regulatory obligations and oversight impacting our research and clinical programs and business, including those relating to patient privacy; determinations by regulatory and administrative governmental authorities which may delay or restrict our ability to continue to develop or commercialize our products and product candidates; competing drugs and product candidates that may be superior to our products and product candidates; uncertainty of market acceptance and commercial success of our products and product candidates; our ability to manufacture and manage supply chains for multiple products and product candidates; coverage and reimbursement determinations by third-party payers, including Medicare and Medicaid; unanticipated expenses; the costs of developing, producing, and selling products; our ability to meet any of our sales or other financial projections or guidance, including without limitation capital expenditures and income tax obligations, and changes to the assumptions underlying those projections or guidance; the potential for any license or collaboration agreement, including our agreements with Sanofi and Bayer HealthCare LLC, to be cancelled or terminated without any further product success; and risks associated with intellectual property of other parties and pending or future litigation relating thereto. These statements are made based on management's current beliefs and judgment, and the reader is cautioned not to rely on any such statements. In evaluating such statements, shareholders and potential investors should specifically consider the various factors identified under Part II, Item 1A. “Risk Factors,” which could cause actual events and results to differ materially from those indicated by such forward-looking statements. We do not undertake any obligation to update publicly any forward-looking statement, whether as a result of new information, future events, or otherwise.
Overview
Regeneron Pharmaceuticals, Inc. is a fully integrated biopharmaceutical company that discovers, invents, develops, manufactures, and commercializes medicines for the treatment of serious medical conditions. We commercialize medicines for eye diseases, colorectal cancer, and a rare inflammatory condition and have product candidates in development in other areas of high unmet medical need, including hypercholesterolemia, oncology, rheumatoid arthritis (RA), asthma, and atopic dermatitis.
Our total revenues were $725.8 million in the third quarter and $2,017.2 million in the first nine months of 2014, compared to $597.0 million in the third quarter and $1,494.3 million in the first nine months of 2013. Our net income was $79.7 million, or $0.70 per diluted share, in the third quarter and $237.9 million, or $2.10 per diluted share, in the first nine months of 2014, compared to net income of $141.3 million, or $1.25 per diluted share, in the third quarter and $327.6 million, or $2.95 per diluted share, in the first nine months of 2013. Refer to the "Results of Operations" section below for further details of our financial results.
We currently have three marketed products:
•
EYLEA (aflibercept) Injection, known in the scientific literature as VEGF Trap-Eye, which is available in the United States, European Union (EU), Japan, and certain other countries outside the United States for the treatment of neovascular age-related macular degeneration (wet AMD) and macular edema following central retinal vein occlusion (CRVO). In July 2014, the U.S. Food and Drug Administration (FDA) approved EYLEA for the treatment of diabetic macular edema (DME), and in August 2014, the European Commission approved EYLEA for the treatment of visual impairment due to DME. In September 2014, the Japanese Ministry of Health, Labour and Welfare (MHLW) approved EYLEA for myopic choroidal neovascularization (mCNV). In October 2014, the FDA approved EYLEA for the treatment of macular edema following retinal vein occlusion (RVO), which includes macular edema following branch retinal vein occlusion (BRVO). We are collaborating with Bayer HealthCare on the global development and commercialization of EYLEA outside the United States. Regulatory applications have been submitted for EYLEA in Japan, and certain markets within Asia Pacific and Latin America for the treatment of DME, and in Europe and Japan for the treatment of macular edema following BRVO.

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•
ZALTRAP® (ziv-aflibercept) Injection for Intravenous Infusion, known in the scientific literature as VEGF Trap, which is available in the United States, EU, and certain other countries for treatment, in combination with 5-fluorouracil, leucovorin, irinotecan (FOLFIRI), of patients with metastatic colorectal cancer (mCRC) that is resistant to or has progressed following an oxaliplatin-containing regimen. Regulatory applications for marketing authorization of ZALTRAP for the treatment of previously treated mCRC patients in other countries have also been submitted and are currently under review by the respective regulatory agencies. We and Sanofi globally collaborate on the development and commercialization of ZALTRAP.
•
ARCALYST® (rilonacept) Injection for Subcutaneous Use, which is available in the United States for the treatment of Cryopyrin-Associated Periodic Syndromes (CAPS), including Familial Cold Auto-inflammatory Syndrome (FCAS) and Muckle-Wells Syndrome (MWS), in adults and children 12 years and older.
We have 18 product candidates in clinical development, all of which were discovered in our research laboratories. These consist of two Trap-based clinical programs and 16 fully human monoclonal antibody product candidates, as summarized below. Each of the antibodies in the table below was generated using our VelocImmune® technology.

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Trap-based Clinical Programs
EYLEA
In Phase 3 clinical development for the treatment of wet AMD (Asia) and DME in collaboration with Bayer HealthCare. As described below, EYLEA is also being studied in combination with (i) an antibody to Platelet Derived Growth Factor Receptor Beta (PDGFR-beta), and (ii) an antibody to angiopoietin-2 (Ang2).
ZALTRAP
In Phase 3 clinical development in metastatic colorectal cancer in the Asia-Pacific region (in collaboration with Sanofi).
Antibody-based Clinical Programs in Collaboration with Sanofi
Alirocumab (REGN727)
Antibody to Proprotein Convertase Subtilisin/Kexin type 9 (PCSK9). In Phase 3 clinical development for low-density lipoprotein (LDL) cholesterol reduction and for the prevention of cardiovascular events.
Sarilumab (REGN88)
Antibody to the interleukin-6 receptor (IL-6R). In clinical development in rheumatoid arthritis (Phase 3) and non-infectious uveitis (Phase 2).
Dupilumab (REGN668)
Antibody to the interleukin-4 receptor (IL-4R) alpha subunit. In clinical development in atopic dermatitis (Phase 3), asthma (Phase 2b), and chronic sinusitis with nasal polyps (CSwNP) (Phase 2).
REGN1033
Antibody to myostatin (GDF8). In Phase 2 clinical development in skeletal muscle disorders.
Nesvacumab (REGN910)
Antibody to Ang2, a novel angiogenesis target. In Phase 1 clinical development in oncology. Currently on partial clinical hold by the FDA for systemic use in oncology.
REGN2222
Antibody against respiratory syncytial virus (RSV). Phase 1 clinical study initiated in the second quarter of 2014.
Antibody-based Clinical Programs in Collaboration with Bayer HealthCare
REGN2176-3
Combination product comprised of an antibody to PDGFR-beta co-formulated with EYLEA for use in ophthalmology, via intravitreal administration. Phase 1 clinical study for the treatment of wet AMD initiated in the first quarter of 2014.
Antibody-based Clinical Programs Developing Independently
REGN1908-1909*
Antibody combination in Phase 1/Phase 2 clinical development against allergic disease.
REGN1400
Antibody to ErbB3. In Phase 1 clinical development in oncology.
REGN1154*
Antibody against an undisclosed target. Phase 1 clinical study in Australia completed.
REGN1500*
Antibody to Angptl-3 in Phase 1 clinical development. Studies are ongoing under a partial clinical hold by the FDA that excludes women of childbearing potential.
REGN1193*
Antibody in Phase 1 clinical development against an undisclosed target.
Enoticumab (REGN421)*
Antibody to Delta-like ligand-4 (Dll4), a novel angiogenesis target. In Phase 1 clinical development in oncology (advanced malignancies).
REGN1979
Bispecific antibody against both CD20 and CD3 for use in oncology. Phase 1 clinical study initiated in the third quarter of 2014.
REGN910-3**
Combination product comprised of an antibody to Ang2 co-formulated with EYLEA for use in ophthalmology, via intravitreal administration. Phase 1 clinical study initiated in the fourth quarter of 2014.
Fasinumab (REGN475)*
Antibody to Nerve Growth Factor (NGF). In development for the treatment of pain; currently on partial clinical hold by the FDA.

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* Sanofi did not opt-in to or elected not to continue to co-develop the product candidate and we have sole global rights. Under the terms of our agreement, Sanofi is entitled to receive a mid-single digit royalty on any future sales of the product candidate.
** We acquired from Sanofi full exclusive rights to antibodies targeting the Ang2 receptor and ligand in ophthalmology, which were previously included in our antibody collaboration with Sanofi. Under the terms of our agreement, Sanofi is entitled to receive a potential development milestone and royalties on any future sales of the product candidate.
Development of REGN2009, which was an antibody in Phase 1 clinical development against an undisclosed target, was discontinued in the second quarter of 2014.
Our core business strategy is to maintain a strong foundation in basic scientific research and discovery-enabling technologies, and to combine that foundation with our clinical development, manufacturing, and commercial capabilities. We are executing our long-term objective to build a successful, integrated, multi-product biopharmaceutical company that provides patients and medical professionals with innovative options for preventing and treating human diseases.
We believe that our ability to develop product candidates is enhanced by the application of our VelociSuite® technology platforms. Our discovery platforms are designed to identify specific proteins of therapeutic interest for a particular disease or cell type and validate these targets through high-throughput production of genetically modified mice using our VelociGene® technology to understand the role of these proteins in normal physiology, as well as in models of disease. Our human monoclonal antibody technology (VelocImmune) and cell line expression technologies (VelociMab®) may then be utilized to discover and produce new product candidates directed against the disease target. Our antibody product candidates currently in clinical trials were developed using VelocImmune. We continue to invest in the development of enabling technologies to assist in our efforts to identify, develop, manufacture, and commercialize new product candidates.
In early 2014, we launched a new human genetics initiative via a wholly owned subsidiary, Regeneron Genetics Center LLC (RGC). RGC performs sequencing and genotyping to generate de-identified genomic data. The objective of RGC is to expand the use of human genetics for discovering and validating genetic factors that cause or influence a range of diseases where there are major unmet medical needs, with the prospect of improving the drug discovery and development process. RGC is undertaking both large population-based efforts as well as family-based approaches.
Marketed Products
EYLEA (aflibercept) Injection
Net product sales of EYLEA in the United States were $445.0 million in the third quarter and $1,218.8 million in the first nine months of 2014, compared to $363.1 million in the third quarter and $1,006.8 million in the first nine months of 2013. Bayer HealthCare records revenue from sales of EYLEA outside the United States, which were $277.0 million in the third quarter and $741.9 million in the first nine months of 2014, compared to $124.8 million in the third quarter and $288.3 million in the first nine months of 2013.
We commenced sales of EYLEA for the treatment of wet AMD in November 2011, for the treatment of macular edema following CRVO in September 2012, and for the treatment of DME in July 2014, following receipt of regulatory approval in the United States. In addition, in October 2014, the FDA approved EYLEA for the treatment of macular edema following RVO, which includes macular edema following BRVO. Bayer HealthCare commenced sales of EYLEA for the treatment of wet AMD in the fourth quarter of 201