Regeneron Pharmaceuticals, Inc.
REGENERON PHARMACEUTICALS INC (Form: 10-Q, Received: 11/04/2015 07:27:22)
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, 2015
 
 
 
 
 
 
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, 2015:
Class of Common Stock
 
Number of Shares
Class A Stock, $.001 par value
 
1,913,776
Common Stock, $.001 par value
 
102,151,256



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,
 
2015
 
2014
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
654,587

 
$
648,719

Marketable securities
241,055

 
251,761

Accounts receivable - trade, net
1,088,207

 
739,379

Accounts receivable from Sanofi
199,117

 
111,510

Accounts receivable from Bayer HealthCare
151,991

 
125,483

Inventories
190,668

 
128,861

Deferred tax assets
60,521

 
46,179

Prepaid expenses and other current assets
89,494

 
79,046

Total current assets
2,675,640

 
2,130,938

 
 
 
 
Marketable securities
681,326

 
460,154

Property, plant, and equipment, at cost, net of accumulated depreciation and amortization
1,475,123

 
974,309

Deferred tax assets
346,243

 
269,237

Other assets
4,583

 
3,034

Total assets
$
5,182,915

 
$
3,837,672

 
 
 
 
LIABILITIES and STOCKHOLDERS' EQUITY
Current liabilities:
 
 
 
Accounts payable and accrued expenses
$
577,428

 
$
483,489

Deferred revenue from Sanofi, current portion
100,908

 
15,927

Deferred revenue - other, current portion
54,148

 
58,098

Other current liabilities
2,506

 
97,146

Total current liabilities
734,990

 
654,660

 
 
 
 
Deferred revenue from Sanofi
599,339

 
62,819

Deferred revenue - other
78,942

 
72,430

Facility lease obligations
364,144

 
310,938

Convertible senior notes
30,723

 
146,773

Other long-term liabilities
77,910

 
39,801

Total liabilities
1,886,048

 
1,287,421

 
 
 
 
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 - 1,914,776 in 2015 and 1,973,368 in 2014
2

 
2

Common Stock, $.001 par value; 320,000,000 shares authorized; shares issued - 105,572,737 in 2015 and 102,475,154 in 2014
106

 
102

Additional paid-in capital
2,880,109

 
2,450,782

Retained earnings
697,706

 
216,644

Accumulated other comprehensive income
7,721

 
52,251

Treasury stock, at cost; 3,437,000 shares in 2015 and 2,017,732 in 2014
(288,777
)
 
(169,530
)
Total stockholders' equity
3,296,867

 
2,550,251

Total liabilities and stockholders' equity
$
5,182,915

 
$
3,837,672

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

3



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,
 
 
2015
 
2014
 
2015
 
2014
Statements of Operations
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
Net product sales
 
$
737,562

 
$
448,844

 
$
1,939,954

 
$
1,229,244

Sanofi collaboration revenue
 
224,735

 
132,925

 
593,201

 
406,028

Bayer HealthCare collaboration revenue
 
157,596

 
135,853

 
415,679

 
358,460

Technology licensing and other revenue
 
17,529

 
8,166

 
56,817

 
23,496

 
 
1,137,422

 
725,788

 
3,005,651

 
2,017,228

 
 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
 
Research and development
 
425,924

 
337,728

 
1,159,367

 
919,608

Selling, general, and administrative
 
209,993

 
144,003

 
543,572

 
343,960

Cost of goods sold
 
67,199

 
33,655

 
170,624

 
91,073

Cost of collaboration and contract manufacturing
 
41,884

 
21,938

 
111,254

 
54,471

 
 
745,000

 
537,324

 
1,984,817

 
1,409,112

 
 
 
 
 
 
 
 
 
Income from operations
 
392,422

 
188,464

 
1,020,834

 
608,116

 
 
 
 
 
 
 
 
 
Other income (expense):
 
 
 
 
 
 
 
 
Investment and other income
 
2,603

 
2,591

 
4,533

 
5,205

Interest expense
 
(1,715
)
 
(9,232
)
 
(10,632
)
 
(31,022
)
Loss on extinguishment of debt
 
(21
)
 

 
(16,927
)
 
(10,787
)
 
 
867

 
(6,641
)
 
(23,026
)
 
(36,604
)
 
 
 
 
 
 
 
 
 
Income before income taxes
 
393,289

 
181,823

 
997,808

 
571,512

 
 
 
 
 
 
 
 
 
Income tax expense
 
(182,891
)
 
(98,448
)
 
(516,746
)
 
(323,481
)
 
 
 
 
 
 
 
 
 
Net income
 
$
210,398

 
$
83,375

 
$
481,062

 
$
248,031

 
 
 
 
 
 
 
 
 
Net income per share - basic
 
$
2.04

 
$
0.83

 
$
4.68

 
$
2.47

Net income per share - diluted
 
$
1.82

 
$
0.73

 
$
4.18

 
$
2.19

 
 
 
 
 
 
 
 
 
Weighted average shares outstanding - basic
 
103,348

 
100,796

 
102,825

 
100,325

Weighted average shares outstanding - diluted
 
115,944

 
117,423

 
115,144

 
113,203

 
 
 
 
 
 
 
 
 
Statements of Comprehensive Income
 
 
 
 
 
 
 
 
Net income
 
$
210,398

 
$
83,375

 
$
481,062

 
$
248,031

Other comprehensive (loss) income:
 
 
 
 
 
 
 
 
Unrealized (loss) gain on marketable securities, net of tax
 
(11,432
)
 
22,632

 
(44,530
)
 
28,083

Comprehensive income
 
$
198,966

 
$
106,007

 
$
436,532

 
$
276,114

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


4



REGENERON PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
 
 
Nine Months Ended
September 30,
 
 
2015
 
2014
Cash flows from operating activities:
 
 
 
 
Net income
 
$
481,062

 
$
248,031

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
51,999

 
38,551

Non-cash compensation expense
 
300,657

 
208,732

Loss on extinguishment of debt
 
16,927

 
10,787

Other non-cash charges and expenses, net
 
33,197

 
28,473

Deferred taxes
 
(65,975
)
 
(34,161
)
Changes in assets and liabilities:
 
 
 
 
(Increase) decrease in Sanofi, Bayer HealthCare, and trade accounts receivable
 
(462,943
)
 
53,642

Increase in inventories
 
(81,459
)
 
(50,917
)
Increase in prepaid expenses and other assets
 
(13,223
)
 
(28,850
)
Increase in deferred revenue
 
624,063

 
3,466

Increase in accounts payable, accrued expenses, and other liabilities
 
164,652

 
76,506

Total adjustments
 
567,895

 
306,229

Net cash provided by operating activities
 
1,048,957

 
554,260

 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
Purchases of marketable securities
 
(550,142
)
 
(478,436
)
Sales or maturities of marketable securities
 
265,995

 
216,478

Capital expenditures
 
(500,154
)
 
(215,464
)
Net cash used in investing activities
 
(784,301
)
 
(477,422
)
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
Proceeds (payments) in connection with facility and capital lease obligations
 
26,405

 
(810
)
Repayments of convertible senior notes
 
(146,007
)
 
(61,125
)
Payments in connection with reduction of outstanding warrants
 
(523,487
)
 
(143,041
)
Proceeds from issuance of Common Stock
 
150,423

 
80,804

Payments in connection with Common Stock tendered for employee tax obligations
 
(71,673
)
 
(175,866
)
Excess tax benefit from stock-based compensation
 
305,551

 
334,146

Net cash (used in) provided by financing activities
 
(258,788
)
 
34,108

 
 
 
 
 
Net increase in cash and cash equivalents
 
5,868

 
110,946

 
 
 
 
 
Cash and cash equivalents at beginning of period
 
648,719

 
535,608

 
 
 
 
 
Cash and cash equivalents at end of period
 
$
654,587

 
$
646,554

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


5



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

1. Interim Financial Statements
The interim Condensed Consolidated Financial Statements of Regeneron Pharmaceuticals, Inc. and its subsidiaries ("Regeneron" 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, 2014 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, 2014.
The previously issued (i) Consolidated Balance Sheet as of December 31, 2014 contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2014, and (ii) Condensed Consolidated Statement of Operations and Comprehensive Income for the three and nine months ended September 30, 2014 and Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 2014 contained in the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2014, have each been revised in this Quarterly Report on Form 10-Q to reflect a correction in the Company's accounting for certain stock option awards. See Note 4.
In addition, the previously issued Consolidated Balance Sheet as of December 31, 2014 in this Quarterly Report on Form 10-Q was previously revised to reflect a correction related to the accounting for costs incurred in connection with commercial bulk drug product manufactured by the Company, but not billed, under the Company's collaboration agreements with Sanofi and Bayer HealthCare, and the related tax impacts. The correcting adjustments resulted in a reduction to both accounts receivable and deferred revenue by $41.0 million , and reduced both income tax assets, net and additional paid-in capital by $14.2 million . The previously issued Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 2014 was also revised in this Quarterly Report on Form 10-Q to reflect a $9.4 million increase in cash flows from operating activities and a corresponding reduction in cash flows from financing activities related to the tax impact of these adjustments. These adjustments had no impact on the Company's previously issued Consolidated Statements of Operations and Comprehensive Income in any reporting period. The Company determined that the error is not material to any previously-issued financial statements.
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 $734.4 million and $445.0 million for the three months ended September 30, 2015 and 2014, respectively, and $1,930.0 million and $1,218.8 million for the nine months ended September 30, 2015 and 2014, respectively. In addition, ARCALYST ® net product sales totaled $3.2 million and $3.8 million for the three months ended September 30, 2015 and 2014, respectively, and $9.9 million and $10.4 million for the nine months ended September 30, 2015 and 2014, respectively.
The Company recorded 65% and 72% for the three months ended September 30, 2015 and 2014, respectively, and 67% and 75% for the nine months ended September 30, 2015 and 2014, respectively, of its total gross product revenue from sales to Besse Medical, a subsidiary of AmerisourceBergen Corporation.

6



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


Revenue from product sales is recorded net of applicable provisions for rebates and chargebacks under governmental programs, distribution-related fees, 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, 2015 and 2014.
 
Rebates &
Chargebacks
 
Distribution-
Related
Fees
 
Other Sales-
Related
Deductions
 
Total
Balance as of December 31, 2014
$
3,083

 
$
21,166

 
$
532

 
$
24,781

Provision related to current period sales
41,290

 
88,049

 
6,024

 
135,363

Credits/payments
(38,011
)
 
(71,007
)
 
(6,052
)
 
(115,070
)
Balance as of September 30, 2015
$
6,362

 
$
38,208

 
$
504

 
$
45,074

 
 
 
 
 
 
 
 
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. 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 previously 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 began recording 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 sales. The impact of the incremental charge in the third quarter of 2014 was $40.6 million , which was included in selling, general, and administrative expenses.
3. Collaboration Agreements
a. Sanofi
Sanofi collaboration revenue, as detailed below, consisted primarily of reimbursement for research and development and commercialization expenses that the Company incurred, partly offset by sharing of losses in connection with commercialization of antibodies, under the companies' Discovery and Preclinical Development Agreement ("Antibody Discovery Agreement") and License and Collaboration Agreement (each as amended), collectively referred to as the "Antibody Collaboration". In addition, in July 2015, the Company and Sanofi entered into a collaboration to discover, develop, and commercialize antibody-based cancer treatments in the field of immuno-oncology (the "IO Collaboration").

7



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


 
 
Three Months Ended
September 30,
Sanofi Collaboration Revenue
 
2015
 
2014
Antibody:
 
 
 
 
Reimbursement of Regeneron research and development expenses
 
$
205,114

 
$
140,497

Reimbursement of Regeneron commercialization-related expenses
 
53,341

 
1,688

Regeneron's share of losses in connection with commercialization of antibodies
 
(74,865
)
 
(12,830
)
Other
 
2,561

 
2,561

Total Antibody
 
186,151

 
131,916

Immuno-oncology:
 
 
 
 
Reimbursement of Regeneron research and development expenses
 
18,584

 

Other
 
20,000

 

Total Immuno-oncology
 
38,584

 

ZALTRAP ® :
 
 
 
 
Regeneron's share of losses in connection with commercialization of ZALTRAP
 

 
(1,008
)
Reimbursement of Regeneron research and development expenses
 

 
1,261

Other
 

 
756

Total ZALTRAP
 

 
1,009

 
 
$
224,735

 
$
132,925



8



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
 
2015
 
2014
Antibody:
 
 
 
 
Reimbursement of Regeneron research and development expenses
 
$
585,450

 
$
405,212

Reimbursement of Regeneron commercialization-related expenses
 
89,145

 
7,062

Regeneron's share of losses in connection with commercialization of antibodies
 
(143,583
)
 
(17,125
)
Other
 
7,683

 
7,683

Total Antibody
 
538,695

 
402,832

Immuno-oncology:
 
 
 
 
Reimbursement of Regeneron research and development expenses
 
18,584

 

Other
 
20,000

 

Total Immuno-oncology
 
38,584

 

ZALTRAP:
 
 
 
 
Regeneron's share of losses in connection with commercialization of ZALTRAP
 

 
(4,912
)
Reimbursement of Regeneron research and development expenses
 
686

 
3,691

Other
 
15,236

 
4,417

Total ZALTRAP
 
15,922

 
3,196

 
 
$
593,201

 
$
406,028

Antibodies
Under the Company's November 2007 Antibody Collaboration with Sanofi, as amended, agreed upon worldwide research and 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, subsequent Phase 3 trial-related costs for that drug candidate ("Shared Phase 3 Trial Costs") are shared 80% by Sanofi and 20% by Regeneron. During the three months ended September 30, 2015 and 2014, the Company recognized as additional research and development expense $25.1 million and $28.4 million , respectively, and during the nine months ended September 30, 2015 and 2014, the Company recognized as additional research and development expense $72.6 million and $81.3 million , respectively, of antibody development expenses that the Company was obligated to reimburse to Sanofi related to Praluent ® and sarilumab. 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 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 used the priority review voucher in connection with the Biologics License Application submission to the FDA for Praluent.
Effective in the second and fourth quarters of 2014, the Company and Sanofi began sharing pre-launch commercialization expenses related to Praluent and sarilumab, respectively, in accordance with the companies’ License and Collaboration Agreement. In July 2015, the FDA approved Praluent for the treatment of adults with heterozygous familial hypercholesterolemia or clinical atherosclerotic cardiovascular disease, who require additional lowering of low-density lipoprotein ("LDL") cholesterol. In the third quarter of 2015, the Company also recorded its share of the Antibody Collaboration's losses in connection with commercialization of Praluent within Sanofi collaboration revenue.
In May 2013, the Company acquired from Sanofi full exclusive rights to antibodies targeting the platelet derived growth factor (PDGF) family of receptors and ligands in ophthalmology. With respect to PDGF antibodies, the Company made two $5.0 million development milestone payments to Sanofi in the first quarter of 2014 and a $10.0 million development milestone payment to

9



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


Sanofi in the second quarter of 2015, each of which was recorded as research and development expense. The Company is also obligated to pay up to $20.0 million in additional potential development milestones as well as royalties on any future sales of PDGF antibodies.
In July 2015, in connection with the Company’s new immuno-oncology collaboration with Sanofi, as described below, the Company’s Antibody Discovery Agreement and License and Collaboration Agreement with Sanofi were each amended. In connection with these amendments, Sanofi's funding of the Company’s antibody discovery activities under the existing Antibody Collaboration have been reduced from up to $160.0 million to up to $145.0 million in 2015, and from up to $160.0 million to up to $130.0 million in both 2016 and 2017, or an aggregate reduction of $75.0 million over this three -year period. In addition, the Company's discovery activities to identify and validate potential drug discovery targets in the field of immuno-oncology and develop fully human monoclonal antibodies against these targets will be funded by Sanofi under the terms of the companies’ new immuno-oncology collaboration.
Immuno-Oncology
The IO Collaboration is governed by an Immuno-oncology Discovery and Development Agreement ("IO Discovery Agreement"), and an Immuno-oncology License and Collaboration Agreement ("IO License and Collaboration Agreement"). In connection with the IO Discovery Agreement, Sanofi made a $265.0 million non-refundable upfront payment to the Company. Pursuant to the IO Discovery Agreement, the Company will spend up to $1,090.0 million ("IO Discovery Budget") to identify and validate potential immuno-oncology targets and develop therapeutic antibodies against such targets through clinical proof-of-concept. Sanofi will reimburse the Company for up to $825.0 million ("IO Discovery Funding") of these costs, subject to certain annual limits, which consists of (i) $750.0 million in new funding and (ii) $75.0 million of funding that would have otherwise been available to Regeneron under the existing Antibody Discovery Agreement, as described above. The term of the IO Discovery Agreement will continue through the later of five years from the effective date of the IO Collaboration or the date the IO Discovery Budget is exhausted, subject to Sanofi’s option to extend it for up to an additional three years for the continued development (and funding) of selected ongoing programs. Pursuant to the IO Discovery Agreement, the Company will be primarily responsible for the design and conduct of all research activities, including target identification and validation, antibody development, preclinical activities, toxicology studies, manufacture of preclinical and clinical supplies, filing of Investigational New Drug ("IND") Applications, and clinical development through proof-of-concept. The Company will reimburse Sanofi for half of the development costs they funded that are attributable to clinical development of antibody product candidates under the IO Discovery Agreement from Regeneron's share of future profits, if any, from commercialized products to the extent they are sufficient for this purpose. However, the Company is not required to apply more than 10% of its share of the profits from IO Collaboration products in any calendar quarter towards reimbursing Sanofi for these development costs. With regard to product candidates for which proof-of-concept is established, Sanofi will have the option to license rights to the product candidate pursuant to the IO License and Collaboration Agreement (as further described below). If Sanofi does not exercise its option to license rights to a product candidate, the Company will retain the exclusive right to develop and commercialize such product candidate and Sanofi will be entitled to receive a royalty on sales.
In connection with the IO License and Collaboration Agreement, Sanofi made a $375.0 million non-refundable upfront payment to the Company. If Sanofi exercises its option to license rights to a product candidate thereunder, it will co-develop the drug candidate with the Company through product approval. Principal control of development of each product candidate that enters development under the IO License and Collaboration Agreement will alternate between the Company and Sanofi on a candidate-by-candidate basis. Sanofi will fund drug candidate development costs up front for the candidates for which it is the principal controlling party and the Company will reimburse half of the total development costs for all such candidates from its share of future profits to the extent they are sufficient for this purpose, subject to the same 10% reimbursement limitation described above. In addition, Sanofi and the Company will share equally, on an ongoing basis, the development costs for the drug candidates for which the Company is the principal controlling party. The party having principal control over the development of a product candidate will also lead the commercialization activities for such product candidate in the United States. For all products commercialized under the IO License and Collaboration Agreement, Sanofi will lead commercialization activities outside of the United States. Each party will have the right to co-promote licensed products in countries where it is not the lead commercialization party. The parties will share equally in any profits from worldwide sales of collaboration products. Regeneron is obligated to use commercially reasonable efforts to supply clinical requirements of each drug candidate under the IO License and Collaboration Agreement until commercial supplies of that IO drug candidate are being manufactured.
Under the terms of the IO License and Collaboration Agreement, the parties will also co-develop the Company’s antibody product candidate targeting the receptor known as Programmed Cell Death protein 1, or PD-1 ("REGN2810"). The parties will

10



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


share equally, on an ongoing basis, development expenses for REGN2810 up to a total of $650.0 million . The Company will have principal control over the development of REGN2810 and will lead commercialization activities in the United States, subject to Sanofi’s right to co-promote, while Sanofi will lead commercialization activities outside of the United States and the parties will equally share profits from worldwide sales. The Company will be entitled to a milestone payment of $375.0 million in the event that sales of all licensed products targeting PD-1 (including REGN2810), together with sales of any other products licensed under the IO License and Collaboration Agreement and sold for use in combination with a licensed product targeting PD-1, equal or exceed $2.0 billion in any consecutive twelve -month period.
With respect to each product candidate that enters development under the IO License and Collaboration Agreement, Sanofi or the Company may, by giving twelve months’ notice, opt-out of further development and/or commercialization of the product, in which event the other party will retain exclusive rights to continue the development and/or commercialization of such product.
At the inception of the IO Collaboration, the Company's significant deliverables consisted of (i) license to certain rights and intellectual property, (ii) providing research and development services, and (iii) manufacturing clinical supplies. The Company concluded that the license did not have standalone value, primarily due to the fact that such rights were not sold separately by the Company, nor could Sanofi receive any benefit from the license without the fulfillment of other ongoing obligations by the Company, including the clinical supply arrangement. Therefore, the deliverables were considered a single unit of accounting. Consequently, the $640.0 million in aggregate upfront payments was initially recorded as deferred revenue, and will be recognized ratably as revenue over the related performance period.
ZALTRAP
In September 2003, the Company entered into a collaboration agreement ("ZALTRAP Collaboration Agreement") with Aventis Pharmaceuticals Inc. (predecessor to Sanofi U.S.) to jointly develop and commercialize ZALTRAP. Under the terms of the ZALTRAP Collaboration Agreement, as amended, Regeneron and Sanofi shared co-promotion rights and profits and losses on sales of ZALTRAP outside of Japan, and the Company was entitled to receive a percentage of sales of ZALTRAP in Japan. 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 ("mCRC") 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.
In February 2015, the Company and Sanofi entered into an amended and restated ZALTRAP agreement ("Amended ZALTRAP Agreement"), with an effective date of July 1, 2014. Under the terms of the Amended ZALTRAP Agreement, Sanofi is solely responsible for the development and commercialization of ZALTRAP for cancer indications worldwide. Sanofi bears the cost of all development and commercialization activities and reimburses Regeneron for its costs for any such activities. Sanofi pays the Company a percentage of aggregate net sales of ZALTRAP during each calendar year, which percentage shall be from 15% to 30% , depending on the aggregate net sales of ZALTRAP in such calendar year. The Company will also be paid for all quantities of ZALTRAP manufactured by it, pursuant to a supply agreement, through the earlier of 2021 or the date Sanofi receives regulatory approval to manufacture ZALTRAP at one of its facilities, or a facility of a third party. In addition, Regeneron no longer has a contingent contractual obligation to reimburse Sanofi for 50% of the development expenses that Sanofi previously funded for the development of ZALTRAP under the ZALTRAP Collaboration Agreement. Unless terminated earlier in accordance with its provisions, the Amended ZALTRAP Agreement will continue to be in effect until such time as neither Sanofi nor its affiliates or sublicensees is developing or commercializing ZALTRAP.
As a result of entering into the Amended ZALTRAP Agreement, in the first quarter of 2015, the Company recognized $14.9 million of collaboration revenue, which was previously recorded as deferred revenue under the ZALTRAP Collaboration Agreement, related to (i) amounts that were previously reimbursed by Sanofi for manufacturing commercial supplies of ZALTRAP since the risk of inventory loss no longer existed, and (ii) the unamortized portion of up-front payments from Sanofi as the Company had no further performance obligations. In addition, during the three and nine months ended September 30, 2015 , the Company recorded $9.0 million and $32.0 million , respectively, in technology licensing and other revenue, primarily related to (i) revenues earned from Sanofi based on a percentage of net sales of ZALTRAP and (ii) revenues earned from Sanofi for manufacturing ZALTRAP commercial supplies.

11



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


b. Bayer HealthCare
The Company and Bayer HealthCare globally collaborate on the development and commercialization of EYLEA outside of the United States. 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
 
2015
 
2014
EYLEA:
 
 
 
 
Regeneron's net profit in connection with commercialization of EYLEA outside the United States
 
$
130,510

 
$
85,351

Sales milestones
 

 
30,000

Cost-sharing of Regeneron EYLEA development expenses
 
1,827

 
4,394

Other
 
21,155

 
12,745

Total EYLEA
 
153,492

 
132,490

PDGFR-beta antibody:
 
 
 
 
Cost-sharing of REGN2176-3 development expenses
 
1,508

 
518

Other
 
2,596

 
2,845

Total PDGFR-beta
 
4,104

 
3,363

 
 
$
157,596

 
$
135,853

 
 
Nine Months Ended
September 30,
Bayer HealthCare Collaboration Revenue
 
2015
 
2014
EYLEA:
 
 
 
 
Regeneron's net profit in connection with commercialization of EYLEA outside the United States
 
$
326,567

 
$
213,291

Sales milestones
 
15,000

 
75,000

Cost-sharing of Regeneron EYLEA development expenses
 
6,948

 
26,235

Other
 
50,685

 
34,490

Total EYLEA
 
399,200

 
349,016

PDGFR-beta antibody:
 
 
 
 
Cost-sharing of REGN2176-3 development expenses
 
8,688

 
1,657

Other
 
7,791

 
7,787

Total PDGFR-beta
 
16,479

 
9,444

 
 
$
415,679

 
$
358,460


12



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


EYLEA outside the United States
In the first quarter of 2015, the Company earned a $15.0 million sales milestone from Bayer HealthCare upon total aggregate net sales of specific commercial supplies of EYLEA outside the United States exceeding $200 million over a twelve -month period. During the nine months ended September 30, 2014, the Company earned 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.
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" 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 profits or losses on sales of EYLEA outside of the United States for the treatment of macular edema following BRVO are also shared (for countries other than Japan). The Company is entitled to receive a tiered percentage of EYLEA net sales in Japan.
PDGFR-beta antibody outside the United States
In January 2014, the Company 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. 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. The $25.5 million upfront payment was initially recorded as deferred revenue, and will be recognized as revenue over the related performance period. Bayer HealthCare is also 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) and a $5.0 million development milestone payment to the Company in the second quarter of 2015 (which was recognized as a substantive milestone).
c. Mitsubishi Tanabe Pharma
In September 2015, the Company and Mitsubishi Tanabe Pharma Corporation ("MTPC") entered into a collaboration agreement (the "MTPC Collaboration Agreement") providing MTPC with development and commercial rights to fasinumab, the Company's nerve growth factor antibody in late-stage clinical development, in Japan, South Korea, Taiwan, Indonesia, Thailand, the Philippines, Malaysia, Singapore, Vietnam, Myanmar, and Sri Lanka (the "MTPC Territories"). In connection with the MTPC Collaboration Agreement, MTPC made a $10.0 million non-refundable upfront payment, and the Company is entitled to receive up to an aggregate of $65.0 million in development milestones achieved by the Company and $150.0 million in other contingent payments, primarily related to development milestones achieved by MTPC.
Under the MTPC Collaboration Agreement, the Company is obligated to manufacture and supply MTPC with clinical and commercial supplies of fasinumab. If fasinumab is commercialized in the MTPC Territories, the Company will supply the product to MTPC at a tiered purchase price, which ranges from 30% to 50% of net sales of the product (subject to adjustment in certain circumstances), and is eligible for additional payments up to an aggregate of $100.0 million upon the achievement of specified annual net sales amounts starting at $200 million . Unless terminated earlier in accordance with its provisions, the MTPC Collaboration Agreement will continue to be in effect until such time as MTPC has ceased developing or commercializing fasinumab in the MTPC Territories.
At the inception of the MTPC Collaboration Agreement, the Company's significant deliverables consisted of (i) exclusive rights to develop and commercialize fasinumab in the MTPC Territories, and (ii) manufacturing clinical and commercial supplies. The Company concluded that the license did not have standalone value, as such right was not sold separately by the Company, nor could MTPC receive any benefit from the license without the manufacturing services to be rendered by the Company. Therefore, the deliverables were considered a single unit of accounting. Consequently, the $10.0 million upfront payment was initially recorded as deferred revenue, and will be recognized ratably as revenue over the related performance period.

13



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


4. Stock-based Compensation
The Company recognizes stock-based compensation expense for grants of stock option awards and restricted stock under the Company's applicable Long-Term Incentive Plan based on the grant-date fair value of those awards. The Company recognized stock-based compensation expense of $102.6 million and $68.1 million for the three months ended September 30, 2015 and 2014, respectively, and $300.7 million and $208.7 million for the nine months ended September 30, 2015 and 2014, respectively.
Revisions of Previously-Issued Financial Statements
During the first quarter of 2015, the Company determined that for certain stock option awards granted to an employee in prior periods, the incorrect requisite service period was utilized in determining the period over which the related compensation expense should have been recorded. Such awards were made as part of the Company's annual employee option grants in December of each applicable year. As a result, compensation expense for the three months and years ended December 31, 2014 and 2013 was understated, and compensation expense for the three months ended March 31, 2014 and 2013, June 30, 2014 and 2013, and September 30, 2014 and 2013 was overstated. These revisions consisted entirely of non-cash adjustments, and therefore had no impact on the Company's previously reported total cash flows from operating activities and total cash flows in its Statements of Cash Flows. The Company evaluated the impact of these items on prior periods, assessing materiality quantitatively and qualitatively, and concluded that the errors were not considered to be material to any previously-issued quarterly or annual financial statements. However, the Company concluded that it would revise the applicable prior period amounts in this filing to reflect the impact of these corrections because the cumulative amount of such corrections is expected to be material to the year ending December 31, 2015. The Company's prior-period financial statements will reflect these revisions for the applicable periods presented in future filings.
The table below presents the impact of these revisions, including the related tax effect, on the Company's previously-filed financial statements.
 
December 31, 2014
 
As Previously Reported
 
Adjustments
 
As Revised
Balance Sheet Data:
 
 
 
 
 
Deferred tax assets (noncurrent)
$
266,869

 
$
22,152

 
$
289,021

Total assets
3,871,827

 
22,152

 
3,893,979

Additional paid-in capital
2,404,118

 
60,890

 
2,465,008

Retained earnings
255,382

 
(38,738
)
 
216,644

Total stockholders' equity
2,542,325

 
22,152

 
2,564,477

Total liabilities and stockholders' equity
3,871,827

 
22,152

 
3,893,979


14



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


 
Three Months Ended
September 30, 2014
 
Nine Months Ended
September 30, 2014
 
As Previously Reported
 
Adjustments
 
As Revised
 
As Previously Reported
 
Adjustments
 
As Revised
Consolidated Statement of Operations Data:
 
 
 
 
 
 
 
 
 
 
 
Selling, general, and administrative
$
149,748

 
$
(5,745
)
 
$
144,003

 
$
361,012

 
$
(17,052
)
 
$
343,960

Total operating expenses
543,069

 
(5,745
)
 
537,324

 
1,426,164

 
(17,052
)
 
1,409,112

Income from operations
182,719

 
5,745

 
188,464

 
591,064

 
17,052

 
608,116

Income before income taxes
176,078

 
5,745

 
181,823

 
554,460

 
17,052

 
571,512

Income tax expense
96,358

 
2,090

 
98,448

 
316,562

 
6,919

 
323,481

Net income
79,720

 
3,655

 
83,375

 
237,898

 
10,133

 
248,031

Net income per share - basic
$
0.79

 
$
0.04

 
$
0.83

 
$
2.37

 
$
0.10

 
$
2.47

Net income per share - diluted
$
0.70

 
$
0.03

 
$
0.73

 
$
2.10

 
$
0.09

 
$
2.19

 
Nine Months Ended
September 30, 2014
 
As Previously Reported
 
Adjustments
 
As Revised
Consolidated Statement of Cash Flows Data:
 
 
 
 
 
Cash flows from operating activities
 
 
 
 
 
  Net income
$
237,898

 
$
10,133

 
$
248,031

  Non-cash compensation expense
225,784

 
(17,052
)
 
208,732

  Deferred taxes
(50,466
)
 
6,919

 
(43,547
)
The table below presents the impact of these revisions, including the related tax effects, on previously filed year-end Consolidated Statements of Operations for the three months and year ended December 31, 2014.
 
Three Months Ended
December 31, 2014
 
Year Ended
December 31, 2014
 
As Previously Reported
 
Adjustments
 
As Revised
 
As Previously Reported
 
Adjustments
 
As Revised
Consolidated Statement of Operations Data:
 
 
 
 
 
 
 
 
 
 
 
Selling, general, and administrative
$
143,743

 
$
31,564

 
$
175,307

 
$
504,755

 
$
14,512

 
$
519,267

Total operating expenses
554,962

 
31,564

 
586,526

 
1,981,126

 
14,512

 
1,995,638

Income from operations
247,367

 
(31,564
)
 
215,803

 
838,431

 
(14,512
)
 
823,919

Income before income taxes
221,287

 
(31,564
)
 
189,723

 
775,747

 
(14,512
)
 
761,235

Income tax expense
111,111

 
(11,483
)
 
99,628

 
427,673

 
(4,564
)
 
423,109

Net income
110,176

 
(20,081
)
 
90,095

 
348,074

 
(9,948
)
 
338,126

Net income per share - basic
$
1.09

 
$
(0.20
)
 
$
0.89

 
$
3.46

 
$
(0.10
)
 
$
3.36

Net income per share - diluted
$
0.96

 
$
(0.18
)
 
$
0.78

 
$
3.07

 
$
(0.09
)
 
$
2.98


15



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


5. 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,
 
 
2015
 
2014
Net income - basic
 
$
210,398

 
$
83,375

Effective of dilutive securities:
 
 
 
 
Convertible senior notes - interest expense related to contractual coupon interest rate and amortization of discount and note issuance costs
 
145

 
2,803

Net income - diluted
 
$
210,543

 
$
86,178

 
 
 
 
 
(Shares in thousands)
 
 
 
 
Weighted average shares - basic
 
103,348

 
100,796

Effect of dilutive securities:
 
 
 
 
Stock options
 
9,632

 
9,377

Restricted stock
 
481

 
430

Convertible senior notes
 
308

 
4,033

Warrants
 
2,175

 
2,787

Dilutive potential shares
 
12,596

 
16,627

Weighted average shares - diluted
 
115,944

 
117,423

 
 
 
 
 
Net income per share - basic
 
$
2.04

 
$
0.83

Net income per share - diluted
 
$
1.82

 
$
0.73


16



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,
 
 
2015
 
2014
Net income - basic and diluted
 
$
481,062

 
$
248,031

 
 
 
 
 
(Shares in thousands)
 
 
 
 
Weighted average shares - basic
 
102,825

 
100,325

Effect of dilutive securities:
 
 
 
 
Stock options
 
9,449

 
9,515

Restricted stock
 
475

 
413

Warrants
 
2,395

 
2,950

Dilutive potential shares
 
12,319

 
12,878

Weighted average shares - diluted
 
115,144

 
113,203

 
 
 
 
 
Net income per share - basic
 
$
4.68

 
$
2.47

Net income per share - diluted
 
$
4.18

 
$
2.19

Shares which have been excluded from diluted per share amounts because their effect would have been antidilutive include the following:
 
 
Three Months Ended September 30,
(Shares in thousands)
 
2015
 
2014
Stock options
 
594

 
1,277

 
 
Nine Months Ended September 30,
(Shares in thousands)
 
2015
 
2014
Stock options
 
3,388

 
3,741

Convertible senior notes
 
1,253

 
4,483


17



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


6. Marketable Securities
Marketable securities as of September 30, 2015 and December 31, 2014 consist of both debt securities issued by investment grade institutions as well as equity securities. The Company also held restricted marketable securities as of December 31, 2014, consisting of the Company's investment in Avalanche Biotechnologies, Inc. common shares, which were subject to customary transfer restrictions until January 2015 under a lock-up agreement with the underwriters of Avalanche's initial public offering.
The following tables summarize the Company's investments in marketable securities:
 
 
Amortized
 
Unrealized
 
Fair
As of September 30, 2015
 
Cost Basis
 
Gains
 
Losses
 
Value
Unrestricted
 
 
 
 
 
 
 
 
Corporate bonds
 
$
812,137

 
$
805

 
$
(988
)
 
$
811,954

U.S. government and government agency obligations
 
54,963

 
155

 
(3
)
 
55,115

Municipal bonds
 
27,741

 
27

 
(3
)
 
27,765

Equity securities
 
17,005

 
10,635

 
(93
)
 
27,547

 
 
$
911,846

 
$
11,622

 
$
(1,087
)
 
$
922,381

 
 
 
 
 
 
 
 
 
As of December 31, 2014
 
 
 
 
 
 
 
 
Unrestricted
 
 
 
 
 
 
 
 
Corporate bonds
 
$
548,832

 
$
136

 
$
(1,462
)
 
$
547,506

U.S. government and government agency obligations
 
28,596

 
3

 
(46
)
 
28,553

Municipal bonds
 
37,044

 
37

 
(43
)
 
37,038

Equity securities
 
2,005

 
5,374

 

 
7,379

 
 
616,477

 
5,550

 
(1,551
)
 
620,476

Restricted
 

 

 

 


Equity securities
 
15,000

 
76,439

 

 
91,439

 
 
$
631,477

 
$
81,989

 
$
(1,551
)
 
$
711,915


The Company classifies its debt security investments based on their contractual maturity dates. The debt securities listed as of September 30, 2015 mature at various dates through August 2020. The fair values of debt security investments by contractual maturity consist of the following:
 
 
September 30, 2015
 
December 31, 2014
Maturities within one year
 
$
241,055

 
$
251,761

Maturities after one year through five years
 
653,779

 
360,208

Maturities after five years through ten years
 

 
1,128

 
 
$
894,834

 
$
613,097


18



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.
 
Less than 12 Months
 
12 Months or Greater
 
Total
As of September 30, 2015
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
Corporate bonds
$
373,513

 
$
(960
)
 
$
27,779

 
$
(28
)
 
$
401,292

 
$
(988
)
U.S. government and government agency obligations
2,809

 
(2
)
 
2,504

 
(1
)
 
5,313

 
(3
)
Municipal bonds
4,658

 
(3
)
 

 

 
4,658

 
(3
)
Equity securities
14,907

 
(93
)
 

 

 
14,907

 
(93
)
 
$
395,887


$
(1,058
)
 
$
30,283

 
$
(29
)
 
$
426,170

 
$
(1,087
)
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
Corporate bonds
$
390,613

 
$
(1,462
)
 

 

 
$
390,613

 
$
(1,462
)
U.S. government and government agency obligations
25,549

 
(46
)
 

 

 
25,549

 
(46
)
Municipal bonds
10,779

 
(43
)
 

 

 
10,779

 
(43
)
 
$
426,941

 
$
(1,551
)
 

 

 
$
426,941

 
$
(1,551
)
For the three and nine months ended September 30, 2015 and 2014, total realized gains and losses on sales of marketable securities were not material.
Changes in the Company's accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2015 and 2014 related to unrealized gains and losses on available-for-sale marketable securities. For the three and nine months ended September 30, 2015 and 2014, 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.

19



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


7. Fair Value Measurements
The Company’s assets that are measured at fair value on a recurring basis consist of the following:
 
 
 
Fair Value Measurements at Reporting Date Using
As of September 30, 2015
Fair Value
 
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
Available-for-sale marketable securities:
 
 
 
 
 
Unrestricted
 
 
 
 
 
Corporate bonds
$
811,954

 

 
$
811,954

U.S. government and government agency obligations
55,115

 

 
55,115

Municipal bonds
27,765

 

 
27,765

Equity securities
27,547

 
$
27,547

 

 
$
922,381

 
$
27,547

 
$
894,834

 
 
 
 
 
 
As of December 31, 2014
 
 
 
 
 
Available-for-sale marketable securities:
 
 
 
 
 
Unrestricted
 
 
 
 
 
Corporate bonds
$
547,506

 

 
$
547,506

U.S. government and government agency obligations
28,553

 

 
28,553

Municipal bonds
37,038

 

 
37,038

Equity securities
7,379

 
$
7,379

 

 
620,476

 
7,379

 
613,097

Restricted
 
 
 
 
 
Equity securities
91,439

 

 
91,439

 
$
711,915

 
$
7,379

 
$
704,536

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 no t record any charges for other-than-temporary impairment of its Level 2 marketable securities during the three and nine months ended September 30, 2015 and 2014.
There were no purchases, sales, 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, 2015 and 2014. During the nine months ended September 30, 2015 , transfers of marketable securities from Level 2 to Level 1 were $91.4 million in connection with the lapse of the transfer restrictions on the Company's investment in Avalanche common shares in January 2015. The Company's policy for recognition of transfers between levels of the fair value hierarchy is to recognize any transfer at the beginning of the fiscal quarter in which the determination to transfer was made. There were no other transfers of marketable securities between Levels 1, 2, or 3 classifications during the three and nine months ended September 30, 2015 , and there were no transfers of marketable securities between Levels 1, 2, or 3 classifications during the three and nine months ended September 30, 2014 .

20



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


As of September 30, 2015 and December 31, 2014, the Company had $33.1 million and $169.4 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 10, an additional portion of the Notes was surrendered for conversion during the first nine months of 2015. The fair value of the outstanding Notes was estimated to be $175.2 million and $819.8 million as of September 30, 2015 and December 31, 2014, respectively, and was determined based on Level 2 inputs, such as market and observable sources.
Additionally, as described in Note 10, pursuant to a November 2014 amendment agreement with a warrant holder, a portion of the Company's warrants were classified as a liability and measured at fair value as of December 31, 2014. The fair value of this liability was estimated to be $87.5 million as of December 31, 2014, and was determined based on Level 2 inputs, such as market and observable sources. During the first quarter of 2015, upon expiration of the November 2014 amendment agreement, the remaining warrants were re-measured at fair value and reclassified back to additional paid-in capital.
8. Inventories
Inventories consist of the following:
 
September 30,
 
December 31,
 
2015
 
2014
Raw materials
$
34,983

 
$
10,923

Work-in-process
110,616

 
73,519

Finished goods
12,513

 
10,768

Deferred costs
32,556

 
33,651

 
$
190,668

 
$
128,861

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, 2015 and 2014, cost of goods sold included inventory write-downs and reserves totaling $1.8 million and $1.6 million , respectively. For the nine months ended September 30, 2015 and 2014, cost of goods sold included inventory write-downs and reserves totaling $9.9 million and $3.5 million , respectively.
9. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following:
 
September 30,
 
December 31,
 
2015
 
2014
Accounts payable
$
106,917

 
$
99,508

Accrued payroll and related costs
120,933

 
92,778

Accrued clinical trial expense
62,569

 
41,555

Accrued sales-related charges, deductions, and royalties
160,941

 
133,085

Other accrued expenses and liabilities
126,068

 
116,563

 
$
577,428

 
$
483,489


21



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


10. Debt
a. Convertible Debt
In the first nine months of 2015, the Company settled conversion obligations for $146.0 million principal amount of the Company's Notes that was previously 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, in the first nine months of 2015, the Company paid $146.0 million in cash and issued 1,419,287 shares of Common Stock. In addition, in the first nine months of 2015, the Company allocated $705.9 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 stockholders' equity, and recognized a $16.9 million loss on the debt extinguishment. As of September 30, 2015, an aggregate principal amount of $33.1 million of the original $400.0 million aggregate principal amount of Notes remained outstanding.
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 first nine months of 2015, the Company also exercised a proportionate amount of its convertible note hedges, for which the Company received 1,419,268 shares of Common Stock, which was approximately equal to the number of shares the Company was required to issue to settle the non-cash portion of the related Note conversions. The Company recorded the cost of the shares received, or $119.2 million , as Treasury Stock during the first nine months of 2015.
In addition to the Note conversions described above, the Company received notifications in the third and fourth quarters of 2015 that an additional $20.5 million aggregate principal amount of the Notes were surrendered for conversion, and settlement is anticipated during the fourth quarter of 2015. The Company has elected to settle the related 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.
In the first nine months of 2014, the Company settled conversion obligations for $61.1 million principal amount of the Notes surrendered for conversion. Upon settlement of the Notes, which occurred during the second quarter of 2014, the Company paid $61.1 million in cash and issued 521,876 shares of Common Stock. In addition, during the second quarter of 2014, the Company 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 stockholders' equity, and recognized a $10.8 million loss on the debt extinguishment. In connection with the Note conversions in the first nine months of 2014, the Company also 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 Company recorded the cost of the shares received, or $43.8 million , as Treasury Stock during the first nine months of 2014.
In November 2014, the Company entered into an amendment agreement with a warrant holder whereby the parties agreed to reduce a portion of the number of warrants held by the warrant holder by up to a maximum of 493,229 . The reduction in the number of warrants was determined based on the number of warrants with respect to which the warrant holder had closed out its hedge position, provided that the warrant holder did not effect any purchases at a price per share exceeding $397.75 per share, during the period starting on November 26, 2014 and ending no later than February 12, 2015. The Company was obligated to settle any payments due under the amendment agreement in February 2015. Given that the amendment agreement contained a conditional obligation that required settlement in cash, and the Company's obligation was indexed to the Company's share price, the Company reclassified the estimated fair value of the 493,229 warrants from additional paid-in capital to a liability in November 2014, with such liability subsequently measured at fair value with changes in fair value recognized in earnings. As a result of the warrant holder closing out a portion of its hedge position prior to December 31, 2014, the Company recorded a $59.8 million accrued liability as of December 31, 2014 in connection with the warrant holder reducing the number of warrants it held. During the first quarter of 2015, the warrant holder closed out additional portions of its hedge position, and, as a result, in February 2015 the Company paid a total of $124.0 million to reduce the number of warrants held by such warrant holder by 416,480 . Upon expiration of the November 2014 amended agreement, in the first quarter of 2015, the remaining warrants were re-measured at fair value, and $23.3 million was reclassified back to additional paid-in capital, consistent with the original classification of the warrants

22



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


under the 2011 issuance. Total losses related to changes in fair value of the warrants during the first quarter of 2015 were not material.
In addition to the warrant transaction described above, during the first nine months of 2015, the Company entered into agreements to reduce the number of warrants held by warrant holders. Pursuant to the agreements, the Company paid an aggregate amount of $399.5 million to the warrant holders during 2015 to reduce the number of shares of Common Stock issuable upon exercise of the warrant by 898,547 in the aggregate. As of September 30, 2015, an aggregate of 2,225,068 warrants (subject to adjustment from time to time as provided in the applicable warrant agreements) remained outstanding.
During the first nine months of 2014, the Company also entered into agreements to reduce the number of warrants held by warrant holders. Pursuant to the agreements, the Company paid an aggregate amount of $143.0 million to the warrant holders during 2014 to reduce the maximum number of shares of Common Stock issuable upon exercise of the warrants by 727,516 in the aggregate.
b. Credit Facility
In March 2015, the Company entered into an agreement with a syndicate of lenders (the "Credit Agreement") which provides for a $750.0 million senior unsecured five -year revolving credit facility (the "Credit Facility"). The Credit Agreement includes an option for the Company to elect to increase the commitments under the Credit Facility and/or to enter into one or more tranches of term loans in the aggregate principal amount of up to $250.0 million subject to the consent of the lenders providing the additional commitments or term loans, as applicable, and certain other conditions. Proceeds of the loans under the Credit Facility may be used to finance working capital needs, and for general corporate or other lawful purposes, of Regeneron and its subsidiaries. The Credit Agreement also provides a $100.0 million sublimit for letters of credit. The Credit Agreement includes an option for the Company to elect to extend the maturity date of the Credit Facility beyond March 2020, subject to the consent of the extending lenders and certain other conditions. Amounts borrowed under the Credit Facility may be prepaid, and the commitments under the Credit Facility may be terminated, at any time without premium or penalty.
Any loans under the Credit Facility have a variable interest rate based on either the London Interbank Offered Rate ("LIBOR") or an alternate base rate, plus an applicable margin that varies with the Company's debt rating and total leverage ratio. The Company had no borrowings outstanding under the Credit Facility as of September 30, 2015.
The Credit Agreement contains financial and operating covenants. Financial covenants include a maximum total leverage ratio and a minimum interest expense coverage ratio. The Company was in compliance with all covenants of the Credit Facility as of September 30, 2015.
11. 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 $182.9 million and $98.4 million for the three months ended September 30, 2015 and 2014, respectively, and $516.7 million and $323.5 million for the nine months ended September 30, 2015 and 2014, respectively. The Company's effective tax rate was 46.5% and 54.1% for the three months ended September 30, 2015 and 2014, respectively, and 51.8% and 56.6% for the nine months ended September 30, 2015 and 2014, respectively. The Company's effective tax rate for the three and nine months ended September 30, 2015 was negatively impacted, compared to the U.S. federal statutory rate, by (i) losses incurred in foreign jurisdictions with rates lower than the U.S. federal statutory rate, (ii) the non-deductible Branded Prescription Drug Fee, and (iii) expiration, at the end of 2014, of the federal tax credit for increased research activities. The negative impact of these items was partly offset by the positive impact of the domestic manufacturing deduction.
The Company's effective tax rate for the three and nine months ended September 30, 2014 was negatively impacted, compared to the U.S. federal statutory rate, 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 by 2.2% for the nine months ended September 30, 2014 .

23



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


The Company also recorded an income tax benefit in its Statement of Comprehensive Income of $6.5 million and $25.4 million for the three and nine months ended September 30, 2015 , respectively, in connection with unrealized losses on available-for-sale marketable securities. The Company 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.
12. Statement of Cash Flows
Supplemental disclosure of non-cash investing and financing activities
Included in accounts payable and accrued expenses as of September 30, 2015 and December 31, 2014 were $84.7 million and $56.2 million , respectively, of accrued capital expenditures. Included in accounts payable and accrued expenses as of September 30, 2014 and December 31, 2013 were $38.6 million and $16.1 million , respectively, of accrued capital expenditures.
Included in accounts payable and accrued expenses as of September 30, 2015 and December 31, 2014 was $0.3 million and $7.5 million , respectively, for the Company's conversion settlement obligation related to the Company's Notes which were surrendered for conversion but not settled as of the end of the respective period. No such amounts were payable as of September 30, 2014 and December 31, 2013.
Included in accounts payable and accrued expenses as of December 31, 2014 was $59.8 million related to the Company's payment obligation for a reduction in the number of warrants based on a warrant holder closing out a portion of its hedge position. Additionally, included within other current liabilities as of December 31, 2014 was $87.5 million in connection with the estimated fair value of the remaining warrant liability. See Note 10. There were no such liabilities recorded in connection with warrants as of September 30, 2015 , September 30, 2014 , and December 31, 2013.
The Company recognized a facility lease obligation of $27.0 million and $92.6 million during the nine months ended September 30, 2015 and 2014, respectively, in connection with capitalizing, on the Company's books, the landlord's costs of constructing new facilities that the Company has leased.
13. 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 and, with respect to certain defendants, also European Patent No. 2,264,163 (collectively, as applicable, the "'287 Patent"), as well as its U.S. Patent No. 8,502,018 (the "'018 Patent"). Each of these patents concerns 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). At this time, the Company is not able to predict the outcome of, or an estimate of gain, if any, related to, these proceedings.

24



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


Proceedings Relating to Praluent (alirocumab) Injection
On October 17, 2014 and October 28, 2014, Amgen Inc. filed complaints against Regeneron, Sanofi, Aventisub LLC (subsequently removed and replaced with Sanofi-Aventis U.S. LLC), and Aventis Pharmaceuticals, Inc. in the United States District Court for the District of Delaware seeking an injunction to prohibit Regeneron and the other defendants from manufacturing, using, offering to sell, or selling within the United States (as well as importing into the United States) Praluent, which Regeneron is jointly developing with Sanofi. On November 11, 2014 and November 17, 2014 Amgen filed complaints against Regeneron, Sanofi, Sanofi-Aventis U.S. LLC, and Aventis Pharmaceuticals, Inc. in the same court seeking the same relief. Amgen asserts U.S. Patent Nos. 8,563,698, 8,829,165, and 8,859,741 in the first complaint, U.S. Patent Nos. 8,871,913 and 8,871,914 in the second complaint, U.S. Patent No. 8,883,983 in the third complaint, and U.S. Patent No. 8,889,834 in the fourth complaint. 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. On December 15, 2014, all of the four proceedings were consolidated into a single case. On September 15, 2015, Amgen filed a motion for leave to file a supplemental and second amended complaint. The complaint alleges, among other things, willful infringement of the asserted patents, which would entitle Amgen to treble damages if the court finds willful infringement. The Company and Sanofi have opposed the motion, and the parties are awaiting the court's decision on the motion. The trial is currently set to begin on March 7, 2016, and a permanent injunction hearing (which would be held if the court finds infringement by the Company and Sanofi) is currently scheduled to begin on March 23, 2016. 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.
Proceedings Relating to Patents Owned by Genentech and City of Hope
On July 27, 2015, the Company and Sanofi-Aventis U.S. LLC filed a complaint in the United States District Court for the Central District of California (Los Angeles division) seeking a declaratory judgment of invalidity, as well as non-infringement by the manufacture, use, sale, offer of sale, or importation of Praluent (alirocumab), of U.S. Patent No. 7,923,221 (the "'221 Patent") jointly owned by Genentech, Inc. ("Genentech") and City of Hope relating to the production of recombinant antibodies in host cells. On the same day, the Company and Sanofi-Aventis U.S. LLC initiated an inter partes review in the United States Patent and Trademark Office seeking a declaration of invalidity of U.S. Patent No. 6,331,415 jointly owned by Genentech and City of Hope relating to the production of recombinant antibodies in host cells. On September 17, 2015, Genentech and City of Hope answered the complaint previously filed by the Company and Sanofi and counterclaimed, alleging that the Company and Sanofi infringe the '221 Patent and seeking, among other types of relief, damages and a permanent injunction. On November 2, 2015, the court set a tentative trial date beginning on September 27, 2016. At this time, the Company is not able to predict the outcome of these proceedings.
14. 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. In July 2015, the FASB decided to delay the effective date of the new standard by one year; as a result, the new standard will be effective for annual and interim reporting periods beginning after December 15, 2017. Early adoption will be permitted, but no earlier than 2017 for calendar year-end entities. 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.

25



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 sarilumab, dupilumab, fasinumab, and REGN2222; 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 Praluent ® (alirocumab) Injection, sarilumab, dupilumab, fasinumab, and REGN2222; ongoing regulatory obligations and oversight impacting our marketed products (such as EYLEA ® (aflibercept) Injection and Praluent), 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, high low-density lipoprotein (LDL) cholesterol, and a rare inflammatory condition and have product candidates in development in other areas of high unmet medical need, including oncology, rheumatoid arthritis (RA), asthma, atopic dermatitis, pain, and infectious diseases.
Our total revenues were $1,137.4 million in the third quarter and $3,005.7 million in the first nine months of 2015, compared to $725.8 million in the third quarter and $2,017.2 million in the first nine months of 2014 . Our net income was $210.4 million , or $1.82 per diluted share, in the third quarter and $481.1 million , or $4.18 per diluted share, in first nine months of 2015 , compared to net income of $83.4 million , or $0.73 per diluted share, in the third quarter and $248.0 million , or $2.19 per diluted share, in the first nine months of 2014 . 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, 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), diabetic macular edema (DME), macular edema following central retinal vein occlusion (CRVO), and macular edema following retinal vein occlusion (RVO), which includes macular edema following branch retinal vein occlusion (BRVO). EYLEA is also available in Japan and the EU for the treatment of myopic choroidal neovascularization (mCNV) and in the United States for the treatment of diabetic retinopathy in patients with DME. Bayer HealthCare has additional regulatory applications for EYLEA for the treatment of wet AMD, macular edema secondary to CRVO and BRVO, DME, and mCNV pending in other countries. We are collaborating with Bayer HealthCare on the global development and commercialization of EYLEA outside the United States.

26


Table of Contents

Praluent (alirocumab) Injection , which is available in the United States for the treatment of adults with heterozygous familial hypercholesterolemia or clinical atherosclerotic cardiovascular disease (ASCVD), who require additional lowering of LDL cholesterol. In September 2015, the European Commission granted marketing authorization of Praluent for the treatment of adult patients with primary hypercholesterolemia (heterozygous familial hypercholesterolemia (HeFH) and non-familial) or mixed dyslipidemia as an adjunct to diet: (a) in combination with a statin, or statin with other lipid-lowering therapies in patients unable to reach their LDL-cholesterol goals with the maximally-tolerated statin, or (b) alone or in combination with other lipid-lowering therapies for patients who are statin intolerant, or for whom a statin is contraindicated. The effect of Praluent on cardiovascular morbidity and mortality has not been determined. We are collaborating with Sanofi on the global development and commercialization of Praluent.
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.
In the first quarter of 2015, we and Sanofi entered into an amended and restated ZALTRAP ® agreement (Amended ZALTRAP Agreement). Under the terms of the Amended ZALTRAP Agreement, Sanofi is solely responsible for the development and commercialization of ZALTRAP (ziv-aflibercept) Injection for Intravenous Infusion for cancer indications worldwide. Sanofi bears the cost of all development and commercialization activities and reimburses Regeneron for its costs for any such activities. Sanofi pays us a percentage of aggregate net sales of ZALTRAP during each calendar year of between 15% to 30%, depending on the aggregate net sales of ZALTRAP in such calendar year. Refer to "Collaboration Agreements - Collaborations with Sanofi - ZALTRAP" below for further details of the Amended ZALTRAP Agreement. ZALTRAP is currently 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.
We have 14 product candidates in clinical development, all of which were discovered in our research laboratories. These consist of a Trap-based clinical program and 13 fully human monoclonal antibody product candidates, as summarized below. Each of the antibodies in the table below was generated using our VelocImmune ® technology.











27


Table of Contents

Trap-based Clinical Programs
EYLEA
In Phase 3 clinical development for the treatment of Neovascular Glaucoma (NVG) (in Japan) in collaboration with Bayer HealthCare. As described below, aflibercept 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).
Antibody-based Clinical Programs in Collaboration with Sanofi
Praluent
Antibody to PCSK9. In Phase 3 clinical development for LDL cholesterol reduction and for the prevention of cardiovascular events. In the third quarter of 2015, the U.S. Food and Drug Administration (FDA) approved Praluent as an adjunct to diet and maximally tolerated statin therapy for the treatment of adults with heterozygous familial hypercholesterolemia or clinical ASCVD, who require additional lowering of LDL cholesterol. In the third quarter of 2015, the European Commission granted marketing authorization for Praluent for the treatment of LDL cholesterol in certain adult patients with hypercholesterolemia. The effect of Praluent on cardiovascular morbidity and mortality has not been determined.
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 in adults (Phase 3), atopic dermatitis in children (Phase 2), asthma (Phase 3), nasal polyps in patients who also have chronic sinusitis (NPwCS) (Phase 2), and eosinophilic esophagitis (EoE) (Phase 2).
REGN2222
Antibody to the Respiratory Syncytial Virus-F (RSV-F) protein. Phase 3 clinical study in RSV initiated in the second quarter of 2015. In the fourth quarter of 2014, Sanofi provided notice to Regeneron that it had elected not to continue co-development of REGN2222 effective December 2015, and will be entitled to receive royalties on any future sales of the product candidate.
REGN2810
Antibody to programmed cell death protein 1 (PD-1). Phase 1 clinical study in advanced malignancies initiated in the first quarter of 2015.
Antibody-based Clinical Program in Collaboration with Bayer HealthCare
REGN2176-3
Combination product comprised of an antibody to PDGFR-beta co-formulated with aflibercept for intravitreal injection for use in ophthalmology. Phase 2 clinical study for the treatment of wet AMD initiated in the second quarter of 2015.
Antibody-based Clinical Program in Collaboration with Mitsubishi Tanabe Pharma
Fasinumab (REGN475) *
Antibody to Nerve Growth Factor (NGF). Phase 2b/3 study in pain due to osteoarthritis initiated in the second quarter of 2015; currently on partial clinical hold by the FDA limiting duration of trials in osteoarthritis to 16 weeks.
Antibody-based Clinical Programs Developing Independently
Evinacumab (REGN1500) *
Antibody to Angptl-3. Phase 2 clinical study for the treatment of dyslipidemia in homozygous familial hypercholesterolemia initiated in the first quarter of 2015. Partial clinical hold that excluded women of childbearing potential was lifted by the FDA in the third quarter of 2015.
REGN1033 *
Antibody to myostatin (GDF8). In Phase 2 clinical development in skeletal muscle disorders. In the second quarter of 2015, Sanofi provided notice to Regeneron that it had elected not to continue co-development of REGN1033.
REGN1908-1909 *
Antibody to Feld1 in Phase 1/Phase 2 clinical development against allergic disease.
REGN1193 *
Antibody to glucagon receptor (GCGR). In Phase 1 clinical development.