Regeneron Pharmaceuticals, Inc.
REGENERON PHARMACEUTICALS INC (Form: 10-Q, Received: 05/03/2018 16:07:23)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
 
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended  March 31, 2018
 
 
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 incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
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
ý
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
ý
No
  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
ý
 
Accelerated filer
¨
 
Non-accelerated filer
¨
 
Smaller reporting company
¨
 
Emerging growth company
¨
 
 
 
 
 
 
 
 
(Do not check if a smaller reporting company)
 
 
 
 
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
¨
 
 
 
 
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
¨
No
ý


The number of shares outstanding of each of the registrant’s classes of common stock as of April 12, 2018:
Class of Common Stock
 
Number of Shares
Class A Stock, $.001 par value
 
1,911,354
Common Stock, $.001 par value
 
105,949,824




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

 
 
 
 
Page Numbers
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 













"ARCALYST ® ", "EYLEA ® ", "ZALTRAP ® ", " VelocImmune ® ", " VelociGene ® ", " VelociMouse ® ", " VelociMab ® ", " VelociSuite ® ", and "Regeneron Genetics Center ® " 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.



Table of Contents


PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

REGENERON PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands, except share data)
 
March 31,
 
December 31,
 
2018
 
2017
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
1,019,491

 
$
812,733

Marketable securities
605,461

 
596,847

Accounts receivable - trade, net
1,531,936

 
1,538,642

Accounts receivable from Sanofi
168,855

 
193,684

Accounts receivable from Bayer
243,141

 
242,014

Inventories
820,397

 
726,138

Prepaid expenses and other current assets
155,451

 
224,972

Total current assets
4,544,732

 
4,335,030

 
 
 
 
Marketable securities
1,821,985

 
1,486,494

Property, plant, and equipment, net
2,394,727

 
2,358,605

Deferred tax assets
532,268

 
506,291

Other noncurrent assets
78,984

 
77,866

Total assets
$
9,372,696

 
$
8,764,286

 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
 
 
 
Accounts payable
$
207,611

 
$
178,183

Accrued expenses and other current liabilities
666,216

 
637,162

Deferred revenue from Sanofi
231,447

 
177,746

Deferred revenue - other
160,466

 
142,392

Total current liabilities
1,265,740

 
1,135,483

 
 
 
 
Capital and facility lease obligations
704,645

 
703,453

Deferred revenue from Sanofi
406,778

 
379,936

Deferred revenue - other
257,967

 
249,263

Other noncurrent liabilities
169,922

 
152,073

Total liabilities
2,805,052

 
2,620,208

 
 
 
 
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 - 1,911,354 in 2018 and 2017
2

 
2

Common Stock, $.001 par value; 320,000,000 shares authorized; shares issued - 109,703,771 in 2018 and 109,477,222 in 2017
110

 
110

Additional paid-in capital
3,611,599

 
3,512,833

Retained earnings
3,287,767

 
2,946,733

Accumulated other comprehensive (loss) income
(15,594
)
 
640

Treasury Stock, at cost; 3,763,868 shares in 2018 and 2017
(316,240
)
 
(316,240
)
Total stockholders' equity
6,567,644

 
6,144,078

Total liabilities and stockholders' equity
$
9,372,696

 
$
8,764,286

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

2




REGENERON PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited)
(In thousands, except per share data)
 
 
Three Months Ended
March 31,
 
 
2018
 
2017
Statements of Operations
 
 
 
 
Revenues:
 
 
 
 
Net product sales
 
$
987,909

 
$
858,245

Sanofi collaboration revenue
 
189,490

 
210,367

Bayer collaboration revenue
 
247,928

 
193,939

Other revenue
 
86,158

 
56,440

 
 
1,511,485

 
1,318,991

 
 
 
 
 
Expenses:
 
 
 
 
Research and development
 
498,586

 
507,435

Selling, general, and administrative
 
330,770

 
296,846

Cost of goods sold
 
69,243

 
61,253

Cost of collaboration and contract manufacturing
 
45,655

 
22,915

 
 
944,254

 
888,449

 
 
 
 
 
Income from operations
 
567,231

 
430,542

 
 
 
 
 
Other income (expense):
 
 
 
 
Other income, net
 
24,606

 
9,248

Interest expense
 
(6,439
)
 
(7,501
)
 
 
18,167

 
1,747

 
 
 
 
 
Income before income taxes
 
585,398

 
432,289

 
 
 
 
 
Income tax expense
 
(107,418
)
 
(183,358
)
 
 
 
 
 
Net income
 
$
477,980

 
$
248,931

 
 
 
 
 
Net income per share - basic
 
$
4.44

 
$
2.36

Net income per share - diluted
 
$
4.16

 
$
2.16

 
 
 
 
 
Weighted average shares outstanding - basic
 
107,648

 
105,572

Weighted average shares outstanding - diluted
 
114,906

 
115,106

 
 
 
 
 
Statements of Comprehensive Income
 
 
 
 
Net income
 
$
477,980

 
$
248,931

Other comprehensive income (loss), net of tax:
 
 
 
 
Unrealized (loss) gain on marketable securities
 
(11,080
)
 
6,956

Unrealized gain on cash flow hedges
 
1,439

 

Comprehensive income
 
$
468,339

 
$
255,887

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


3



REGENERON PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
 
 
Three Months Ended
March 31,
 
 
2018
 
2017
Cash flows from operating activities:
 
 
 
 
Net income
 
$
477,980

 
$
248,931

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
36,358

 
38,115

Non-cash compensation expense
 
82,422

 
133,789

Other non-cash items, net
 
(4,193
)
 
3,956

Deferred taxes
 
(6,366
)
 
(40,988
)
Changes in assets and liabilities:
 
 
 
 
Decrease (increase) in Sanofi, Bayer, and trade accounts receivable
 
30,408

 
(137,928
)
Increase in inventories
 
(88,760
)
 
(69,744
)
Decrease (increase) in prepaid expenses and other assets
 
68,836

 
(20,325
)
(Decrease) increase in deferred revenue
 
(54,596
)
 
12,400

Increase in accounts payable, accrued expenses, and other liabilities
 
76,654

 
187,695

Total adjustments
 
140,763

 
106,970

Net cash provided by operating activities
 
618,743

 
355,901

 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
Purchases of marketable and other securities
 
(601,313
)
 
(208,694
)
Sales or maturities of marketable securities
 
255,276

 
119,012

Capital expenditures
 
(79,375
)
 
(50,461
)
Net cash used in investing activities
 
(425,412
)
 
(140,143
)
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
Proceeds in connection with capital and facility lease obligations
 

 
57,000

Payments in connection with capital and facility lease obligations
 

 
(12,861
)
Proceeds from issuance of Common Stock
 
13,427

 
16,673

Net cash provided by financing activities
 
13,427

 
60,812

 
 
 
 
 
Net increase in cash, cash equivalents, and restricted cash
 
206,758

 
276,570

 
 
 
 
 
Cash, cash equivalents, and restricted cash at beginning of period
 
825,233

 
547,703

 
 
 
 
 
Cash, cash equivalents, and restricted cash at end of period
 
$
1,031,991

 
$
824,273

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


4



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," "Company," "we," "us," and "our") 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 period are not necessarily indicative of the results for the full year. The December 31, 2017 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, 2017 .
Certain reclassifications have been made to prior period amounts to conform with the current period's presentation.
We adopted Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers , as of January 1, 2018. The Company adopted the standard using the modified retrospective method, and thus recognized a cumulative-effect adjustment to reduce Retained earnings and increase Deferred revenue on January 1, 2018 by $143.4 million , net of tax. Prior period amounts have not been adjusted in connection with the adoption of this standard.
The new standard did not have an impact on the recognition of revenue from product sales (see Note 2). However, the new standard has resulted in certain changes to the timing of revenue recognition related to our collaboration agreements (see Note 3). As a result of adopting ASC 606, non-refundable upfront payments, which were previously recognized ratably over the performance period, and substantive development milestones, which were previously recognized in the period when the milestone was achieved, will be recognized over the remaining performance period based on the Company's progress towards satisfying its identified performance obligation.
The following tables summarize the impacts of adopting ASC 606 on the Company's condensed consolidated financial statements for the three months ended March 31, 2018 as compared with the guidance that was in effect before the change.
 
 
March 31, 2018
Balance Sheet Data
 
As Reported
 
Adjustments
 
Balance Without Adoption of ASC 606
Deferred tax assets
 
$
532,268

 
$
(18,206
)
 
$
514,062

Total assets
 
$
9,372,696

 
$
(18,206
)
 
$
9,354,490

Accrued expenses and other current liabilities
 
$
666,216

 
$
(1,513
)
 
$
664,703

Deferred revenue from Sanofi (current)
 
$
231,447

 
$
(33,632
)
 
$
197,815

Deferred revenue - other (current)
 
$
160,466

 
$
(69,241
)
 
$
91,225

Total current liabilities
 
$
1,265,740

 
$
(104,386
)
 
$
1,161,354

Deferred revenue from Sanofi (noncurrent)
 
$
406,778

 
$
(51,604
)
 
$
355,174

Deferred revenue - other (noncurrent)
 
$
257,967

 
$
18,277

 
$
276,244

Total liabilities
 
$
2,805,052

 
$
(137,713
)
 
$
2,667,339

Retained earnings
 
$
3,287,767

 
$
119,507

 
$
3,407,274

Total stockholders' equity
 
$
6,567,644

 
$
119,507

 
$
6,687,151

Total liabilities and stockholders' equity
 
$
9,372,696

 
$
(18,206
)
 
$
9,354,490



5




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


 
 
Three Months Ended March 31, 2018
Consolidated Statement of Operations Data
 
As Reported
 
Adjustments
 
Balance Without Adoption of ASC 606
Sanofi collaboration revenue
 
$
189,490

 
$
(8,407
)
 
$
181,083

Other revenue
 
$
86,158

 
$
(17,310
)
 
$
68,848

Total revenues
 
$
1,511,485

 
$
(25,717
)
 
$
1,485,768

Income from operations
 
$
567,231

 
$
(25,717
)
 
$
541,514

Income before income taxes
 
$
585,398

 
$
(25,717
)
 
$
559,681

Income tax expense
 
$
(107,418
)
 
$
1,789

 
$
(105,629
)
Net income
 
$
477,980

 
$
(23,928
)
 
$
454,052

The Company also adopted Accounting Standards Update ("ASU") 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, as of January 1, 2018 . The amendments require companies to measure equity investments at fair value with changes in fair value recognized in net income. We have elected the measurement alternative for equity investments we hold that do not have readily determinable fair values. Therefore, we will measure such investments at cost minus impairment, if any, and adjust for observable price changes in orderly transactions for identical or similar investments of the same issuer. Upon adoption, the Company recognized a cumulative-effect adjustment, related to unrealized gains on equity securities, to reduce Accumulated other comprehensive income and increase Retained earnings on January 1, 2018 by $6.6 million . See Note 5 and Note 6.
2. Product Sales
Net product sales consist of the following:
 
 
Three Months Ended
March 31,
Net Product Sales in the United States
 
2018
 
2017
EYLEA ®
 
$
984,049

 
$
854,387

ARCALYST ®
 
3,860

 
3,858

 
 
$
987,909

 
$
858,245

The Company had product sales to certain customers that accounted for more than 10% of total gross product revenue for the three months ended March 31, 2018 and 2017 . Sales to each of these customers as a percentage of the Company's total gross product revenue are as follows:
 
 
Three Months Ended
March 31,
 
 
2018
 
2017
Besse Medical, a subsidiary of AmerisourceBergen Corporation
 
55
%
 
53
%
McKesson Corporation
 
40
%
 
27
%
Curascript SD Specialty Distribution, a subsidiary of Express Scripts
 
**

 
19
%
** For the three months ended March 31, 2018, sales to Curascript SD Specialty Distribution represented less than 10% of total gross product revenue.

Revenue from product sales is recognized at a point in time when our customer is deemed to have obtained control of the product, which generally occurs upon receipt by our distributors and specialty pharmacies. The Company's written contracts with its customers stipulate product is shipped freight on board destination (FOB destination).

6




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


The amount of revenue we recognize varies due to rebates and chargebacks provided under governmental and other programs, distribution-related fees, and other sales-related deductions. We estimate the amount of variable consideration that we will be entitled to, in order to determine the transaction price, based upon contracts with customers and government agencies, statutorily-defined discounts applicable to government-funded programs, historical experience, estimated payer mix, and other relevant factors.
The following table summarizes the provisions, and credits/payments, for these sales-related deductions during the three months ended March 31, 2018 and 2017 .
 
Rebates &
Chargebacks
 
Distribution-
Related
Fees
 
Other Sales-
Related
Deductions
 
Total
Balance as of December 31, 2017
$
29,840

 
$
34,142

 
$
21,320

 
$
85,302

Provisions
48,495

 
51,716

 
11,170

 
111,381

Credits/payments
(30,674
)
 
(42,025
)
 
(14,665
)
 
(87,364
)
Balance as of March 31, 2018
$
47,661

 
$
43,833

 
$
17,825

 
$
109,319

 
 
 
 
 
 
 
 
Balance as of December 31, 2016
$
12,712

 
$
29,465

 
$
3,674

 
$
45,851

Provisions
38,908

 
41,175

 
9,520

 
89,603

Credits/payments
(28,502
)
 
(42,287
)
 
(8,632
)
 
(79,421
)
Balance as of March 31, 2017
$
23,118

 
$
28,353

 
$
4,562

 
$
56,033

Accruals for chargebacks are recorded as a direct reduction to accounts receivable and accruals for rebates and distribution-related fees are recorded within accrued liabilities.
3. Collaboration Agreements
We have entered into various agreements related to our activities to research, develop, manufacture, and commercialize product candidates and utilize our technology platforms. The Company earns collaboration revenue in connection with collaboration agreements to utilize our technology platforms and develop and/or commercialize product candidates. As described in Note 1, during the first quarter of 2018, we adopted ASC 606. Under the terms of the new standard, revenue is measured as the amount of consideration we expect to be entitled to in exchange for transferring promised goods or providing services to a customer, and is recognized when (or as) we satisfy performance obligations under the terms of a contract. Depending on the terms of the arrangement, we may defer the recognition of all or a portion of the consideration received because the performance obligations are satisfied over time.
Our collaboration agreements may require us to deliver various rights, services, and/or goods across the entire life cycle of a product or product candidate. In agreements involving multiple goods or services promised to be transferred to customer, we must assess, at the inception of the contract, whether each promise represents a separate performance obligation ( i.e. , is "distinct"), or whether such promises should be combined as a single performance obligation.
The terms of these agreements typically include consideration to be provided to the Company in the form of non-refundable up-front payments, development milestones, payments for development activities, as well as payments for commercialization activities, sales milestones, and sharing of profits or losses arising from the commercialization of products.
At the inception of the contract, the transaction price reflects the amount of consideration we expect to be entitled to in exchange for transferring promised goods or services to our customer. We review our estimate of the transaction price each period, and make revisions to such estimates as necessary. In arrangements where we satisfy performance obligation(s) during the development phase over time, we recognize collaboration revenue over time typically using an input method on the basis of our research and development costs incurred relative to the total expected cost which determines the extent of our progress toward completion.
Under the Company's collaboration agreements, product sales and cost of sales for products which are currently approved are recorded by the Company's collaborators as they are deemed to be the principal in the transaction. The Company shares in any profits or losses arising from the commercialization of such products, and records its share of the variable consideration, representing

7




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


net product sales less cost of goods sold and shared commercialization and other expenses, as collaboration revenue in the period in which such underlying sales occur and costs are incurred by the collaborator.
In arrangements where the collaborator records product sales, the Company may be obligated to use commercially reasonable efforts to supply commercial bulk product to its collaborators, and may be reimbursed for its manufacturing costs as commercial product is shipped to its collaborators; however, recognition of such cost reimbursements as collaboration revenue is deferred until the product is sold by the Company's collaborators to third-party customers. In addition, we may also be reimbursed for a portion of costs incurred for other commercial-related activities, which are recorded as collaboration revenue in the period in which such costs are incurred.
a. Sanofi
The collaboration revenue we earned from Sanofi is detailed below:
 
 
Three Months Ended
March 31,
Sanofi Collaboration Revenue
 
2018
 
2017
Antibody:
 
 
 
 
Reimbursement of Regeneron research and development expenses
 
$
60,394

 
$
155,245

Reimbursement of Regeneron commercialization-related expenses
 
85,424

 
73,559

Regeneron's share of losses in connection with commercialization of antibodies
 
(74,874
)
 
(108,402
)
Other
 
17,330

 
11,286

Total Antibody
 
88,274

 
131,688

Immuno-oncology:
 
 
 
 
Reimbursement of Regeneron research and development expenses
 
73,824

 
58,679

Reimbursement of Regeneron commercialization-related expenses
 
1,210

 

Other
 
26,182

 
20,000

Total Immuno-oncology
 
101,216

 
78,679

 
 
$
189,490

 
$
210,367

Antibodies
In November 2007, the Company entered into a global, strategic collaboration with Sanofi to discover, develop, and commercialize fully human monoclonal antibodies (the "Antibody Collaboration") . The Antibody Collaboration was governed by the companies' Discovery and Preclinical Development Agreement ("Antibody Discovery Agreement") and a License and Collaboration Agreement (each as amended). Pursuant to the Antibody Discovery Agreement, Sanofi agreed to fund up to $130.0 million of the Company's research activities in 2017. The Company's Antibody Discovery Agreement with Sanofi ended on December 31, 2017 without any extension and, therefore, funding from Sanofi under the Antibody Discovery Agreement ceased after 2017. Under the License and Collaboration Agreement, agreed-upon worldwide development expenses incurred by both companies 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. Consequently, during the three months ended March 31, 2018 and 2017, the Company recognized as research and development expense $13.9 million and $25.0 million , respectively, its share of antibody development expenses that Sanofi incurred related to Praluent ® (alirocumab), Kevzara ® (sarilumab), and Dupixent ® (dupilumab).
Effective January 7, 2018, the Company and Sanofi entered into a letter agreement (the "Letter Agreement") in connection with, among other matters, the allocation of additional funds to certain activities relating to the development of dupilumab and REGN3500 and non-approval trials of dupilumab (collectively, the "Dupilumab/REGN3500 Eligible Investments"). Refer to the " Immuno-Oncology " section below for further details regarding the Letter Agreement.

8




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


In March 2017, the U.S. Food and Drug Administration ("FDA") approved Dupixent for the treatment of adult patients with moderate-to-severe atopic dermatitis, and in September 2017, the European Commission granted marketing authorization for Dupixent for use in adults with moderate-to-severe atopic dermatitis who are candidates for systemic therapy. In May 2017, the FDA approved Kevzara for the treatment of adult patients with moderately to severely active rheumatoid arthritis, and in June 2017, the European Commission granted marketing authorization for Kevzara for the treatment of rheumatoid arthritis in adult patients.
Sanofi leads commercialization activities for products developed under the Antibody Collaboration, subject to the Company's right to co-promote such products. In addition to profit and loss sharing, the Company is entitled to receive up to $250.0 million in sales milestone payments, with milestone payments commencing only if and after aggregate annual sales outside the United States exceed $1.0 billion on a rolling twelve -month basis. The amount of variable consideration related to such share of profits and losses and sales milestones is deemed to be constrained as of March 31, 2018, and therefore has not been included in the transaction price.
The Company's significant promised goods and services consist of providing research and development services, including the manufacturing of clinical supplies, and providing commercial-related services, including the manufacturing of commercial supplies. As it relates to the Antibody Collaboration, "Reimbursement of Regeneron commercialization-related expenses" in the table above represents reimbursement of internal and external costs in connection with commercializing Praluent, Kevzara, and Dupixent. As we recognize Sanofi antibody collaboration revenue in an amount equal to the amount we have the right to invoice and such amount corresponds directly with the value to Sanofi of our performance to date, we do not disclose the value of the transaction price allocated to our remaining unsatisfied performance obligations.
The following table summarizes accounts receivable and deferred revenue information in connection with the Company's Antibody Collaboration with Sanofi:
 
 
March 31,
 
December 31,
 
 
2018
 
2017
Accounts receivable, net
 
$
94,022

 
$
121,001

Deferred revenue
 
$
132,991

 
$
117,682

Significant changes in deferred revenue balances are as follows:
 
Three Months Ended March 31, 2018
Increase due to shipments of commercial supplies to Sanofi
$
37,036

Revenue recognized that was included in deferred revenue at the beginning of the period
$
(21,727
)
Immuno-Oncology
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"). 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 up-front payment to the Company. 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 our budget for IO Discovery activities, which has been agreed to with Sanofi, 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.
In connection with the IO License and Collaboration Agreement, Sanofi made a $375.0 million non-refundable up-front payment to the Company. Under the terms of the IO License and Collaboration Agreement, the parties are co-developing the Company's antibody product candidate (cemiplimab) targeting the receptor known as programmed cell death protein 1 (PD-1). The parties share equally, on an ongoing basis, development expenses for cemiplimab up to a total of $1.640 billion , an increase of $990.0 million over the budget set forth in the original IO License and Collaboration Agreement. The cemiplimab development budget

9




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


has been increased pursuant to the Letter Agreement. Pursuant to the Letter Agreement, the Company has agreed to allow Sanofi to satisfy in whole or in part its funding obligations with respect to cemiplimab development and Dupilumab/REGN3500 Eligible Investments by selling up to an aggregate of 1,400,000 shares of the Company's Common Stock directly or indirectly owned by Sanofi through September 30, 2020. If Sanofi desires to sell shares of the Company's Common Stock during the term of the Letter Agreement to satisfy a portion or all of its funding obligations for the cemiplimab development and/or Dupilumab/REGN3500 Eligible Investments, the Company may elect to purchase, in whole or in part, such shares from Sanofi. If the Company does not elect to purchase such shares, Sanofi may sell the applicable number of shares (subject to certain daily and quarterly limits) in one or more open-market transactions.
The Company has principal control over the development of cemiplimab 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 global sales of certain licensed products targeting PD-1 (including cemiplimab), together with sales of any other products licensed under the IO License and Collaboration Agreement and sold for use in combination with any of such licensed products targeting PD-1, equal or exceed $2.0 billion in any consecutive twelve -month period. The amount of variable consideration related to such milestone is deemed to be constrained as of March 31, 2018, and therefore has not been included in the transaction price.
At the inception of the IO Collaboration, the Company's significant promised goods and services consisted of a license to certain rights and intellectual property and providing research and development services, including the manufacturing of clinical supplies. The Company concluded that the license was not distinct, primarily as a result of (i) Sanofi being unable to benefit from the license on its own or together with other resources that are readily available as the license provides access to Regeneron's complex and specialized know-how and (ii) the research and development services, including manufacturing in support of such services, were expected to significantly modify the initial license. Therefore the promised goods and services were considered a single performance obligation. Consequently, the $640.0 million in aggregate up-front payments made by Sanofi during 2015 in connection with the execution of the IO Collaboration has been recorded as deferred revenue and has been included in the transaction price at the inception of the contract. "Other" Sanofi immuno-oncology revenue in the Sanofi Collaboration Revenue table above primarily includes recognition of deferred revenue from $640.0 million of up-front payments.
As it relates to the IO Collaboration, "Reimbursement of Regeneron commercialization-related expenses" in the table above represents reimbursement of costs in connection with the commercialization of cemiplimab outside of the United States.
The following table summarizes accounts receivable and deferred revenue information in connection with the Company's IO Collaboration with Sanofi:
 
 
March 31,
 
December 31,
 
 
2018
 
2017
Accounts receivable, net
 
$
70,887

 
$
59,274

Deferred revenue
 
$
505,235

 
$
440,000

Significant changes in deferred revenue balances are as follows:
 
Three Months Ended March 31, 2018
Increase as a result of cumulative-effect adjustment arising from the adoption of ASC 606
$
93,643

Revenue recognized that was included in deferred revenue at the beginning of the period
$
(28,408
)
The aggregate amount of the transaction price under the IO Collaboration allocated to the Company's performance obligation that was unsatisfied (or partially unsatisfied) as of March 31, 2018 was $1,656.0 million . This amount is expected to be recognized as revenue over the remaining period the Company is obligated to satisfy its performance obligation in connection with performing development activities.

10




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


b. Bayer
EYLEA outside the United States
Revenue earned in connection with our EYLEA collaboration with Bayer is detailed below:
 
 
Three Months Ended
March 31,
Bayer EYLEA Collaboration Revenue
 
2018
 
2017
EYLEA:
 
 
 
 
Regeneron's net profit in connection with commercialization of EYLEA outside the United States
 
$
232,068

 
$
174,876

Reimbursement of Regeneron EYLEA development expenses
 
3,457

 
2,451

Other
 
11,863

 
10,603

Total EYLEA
 
$
247,388

 
$
187,930

Under the terms of the license and collaboration agreement with Bayer for the global development and commercialization outside the United States of EYLEA, Bayer markets EYLEA outside the United States, where, for countries other than Japan, the companies share equally in profits and losses from sales of EYLEA. In Japan, the Company is entitled to receive a tiered percentage of between 33.5% and 40.0% of EYLEA net sales. In addition, the Company and Bayer share the funding of agreed-upon EYLEA development costs.
The following table summarizes accounts receivable and deferred revenue information in connection with the Company's EYLEA collaboration with Bayer:
 
 
March 31,
 
December 31,
 
 
2018
 
2017
Accounts receivable, net
 
$
243,141

 
$
241,153

Deferred revenue
 
$
70,378

 
$
68,734

Significant changes in deferred revenue balances are as follows:
 
Three Months Ended March 31, 2018
Increase due to shipments of commercial supplies to Bayer
$
11,436

Revenue recognized that was included in deferred revenue at the beginning of the period
$
(9,792
)
Ang2 antibody and PDGFR-beta antibody outside the United States
In 2016, the Company entered into an agreement with Bayer governing the joint development and commercialization outside the United States of nesvacumab, an antibody product candidate to angiopoietin-2 (Ang2), including REGN910-3 (Ang2 in combination with aflibercept), for the treatment of ocular diseases or disorders. In connection with the agreement, Bayer made a non-refundable up-front payment and paid a portion of our global development costs and development costs exclusively for the territory outside the United States. In the fourth quarter of 2017, the Company reported that results from two Phase 2 studies of REGN910-3 did not provide sufficient differentiation to warrant Phase 3 development. Therefore, during the fourth quarter of 2017, the Company accelerated and recognized the remaining amount of deferred revenue from the $50.0 million up-front payment (which was initially recorded as deferred revenue) received from Bayer as the Company deemed its performance obligation to be satisfied.

11




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


In 2014, the Company entered into a license and collaboration agreement with Bayer governing the joint development and commercialization outside the United States of an antibody product candidate to Platelet Derived Growth Factor Receptor Beta (PDGFR-beta), including REGN2176-3, a combination product candidate comprised of an antibody to PDGFR-beta co-formulated with aflibercept. Effective in the first quarter of 2017, the Company discontinued clinical development of REGN2176-3, and on July 31, 2017, the Company and Bayer agreed to terminate this collaboration agreement.
c. Teva
In September 2016, the Company and Teva entered into a collaboration agreement (the "Teva Collaboration Agreement") to develop and commercialize fasinumab globally, excluding certain Asian countries that are subject to our collaboration agreement with Mitsubishi Tanabe Pharma Corporation. In connection with the Teva Collaboration Agreement, Teva made a $250.0 million non-refundable up-front payment in September 2016. The Company leads global development activities, and the parties share development costs equally, on an ongoing basis, under a global development plan. The Company is also responsible for the manufacture and supply of fasinumab globally.
In 2017, the Company earned, and recognized as substantive milestones, development milestones of $25.0 million and $35.0 million , respectively, from Teva upon initiation of two Phase 3 trials. In addition, the Company is entitled to receive up to an aggregate of $400.0 million in development milestones and up to an aggregate of $1,890.0 million in contingent payments upon achievement of specified annual net sales amounts. The amount of variable consideration related to such milestones is deemed to be constrained as of March 31, 2018, and therefore has not been included in the transaction price.
At the inception of the Teva Collaboration Agreement, the Company's significant promised goods and services consisted of a license to certain rights and intellectual property and providing research and development services, including the manufacturing of clinical supplies. The Company concluded that the license was not distinct, primarily as a result of (i) Teva being unable to benefit from the license on its own or together with other resources that are readily available as the license providing access to Regeneron's complex and specialized know-how and (ii) the research and development services, including manufacturing in support of such services, were expected to significantly modify the initial license. Therefore the promised goods and services were considered a single performance obligation. Consequently, the $250.0 million up-front payment and development milestones received from Teva, as described above, have been recorded as deferred revenue and have been included in the transaction price.
The Company recognized $58.6 million and $33.1 million of revenue for the three months ended March 31, 2018 and 2017, respectively, in connection with the Teva Collaboration Agreement.
The following tables summarize accounts receivable and deferred revenue information in connection with the Teva Collaboration Agreement:
 
 
March 31,
 
December 31,
 
 
2018
 
2017
Accounts receivable, net (recorded within Prepaid expenses and other current assets)
 
$
40,625

 
$
71,297

Deferred revenue
 
$
227,714

 
$
197,357

Significant changes in deferred revenue balances are as follows:
 
Three Months Ended March 31, 2018
Increase as a result of cumulative-effect adjustment arising from the adoption of ASC 606
$
48,216

Revenue recognized that was included in deferred revenue at the beginning of the period
$
(18,917
)
The aggregate amount of the transaction price under the Teva Collaboration Agreement allocated to the Company's performance obligation that was unsatisfied (or partially unsatisfied) as of March 31, 2018 was $686.0 million . This amount is expected to be recognized as revenue over the remaining period the Company is obligated to satisfy its performance obligation in connection with performing development activities.

12




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


In April 2018, an independent Data Monitoring Committee monitoring the ongoing safety and efficacy of our fasinumab clinical trials recommended that the higher dose-regimens be discontinued based on the risk benefit assessment and that the program may continue with the lower dose-regimens of fasinumab. The trials are being modified accordingly, which may ultimately impact the transaction price allocated to the remaining performance obligation.
4. Net Income Per Share
The Company's basic net income per share amounts have been computed by dividing net income by the weighted average number of shares of Common Stock and Class A Stock outstanding. Net income per share is presented on a combined basis, inclusive of Common Stock and Class A Stock outstanding, as each class of stock has equivalent economic rights. Diluted net income per share includes the potential dilutive effect of other securities as if such securities were converted or exercised during the period, when the effect is dilutive. The calculations of basic and diluted net income per share are as follows:
 
 
Three Months Ended
March 31,
 
 
2018
 
2017
Net income - basic and diluted
 
$
477,980

 
$
248,931

 
 
 
 
 
(Shares in thousands)
 
 
 
 
Weighted average shares - basic
 
107,648

 
105,572

Effect of dilutive securities:
 
 
 
 
Stock options
 
7,244

 
9,050

Restricted stock
 
14

 
484

Dilutive potential shares
 
7,258

 
9,534

Weighted average shares - diluted
 
114,906

 
115,106

 
 
 
 
 
Net income per share - basic
 
$
4.44

 
$
2.36

Net income per share - diluted
 
$
4.16

 
$
2.16

Shares which have been excluded from diluted per share amounts because their effect would have been antidilutive include the following:
 
 
Three Months Ended
March 31,
(Shares in thousands)
 
2018
 
2017
Stock options
 
14,878

 
11,535

Restricted stock
 
57

 
18


13




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


5. Marketable Securities
Marketable securities as of March 31, 2018 and December 31, 2017 consist of both available-for-sale debt securities of investment grade issuers (see below and Note 6) as well as equity securities of publicly traded companies (see Note 6).
The following tables summarize the Company's investments in available-for-sale debt securities:
 
 
Amortized
 
Unrealized
 
Fair
As of March 31, 2018
 
Cost Basis
 
Gains
 
Losses
 
Value
Available-for-sale debt securities:
 
 
 
 
 
 
 
 
Corporate bonds
 
$
2,126,820

 
$
1,948

 
$
(18,159
)
 
$
2,110,609

U.S. government and government agency obligations
 
156,281

 
30

 
(1,611
)
 
154,700

Municipal bonds
 
2,591

 

 
(11
)
 
2,580

Commercial paper
 
70,385

 

 

 
70,385

Certificates of deposit
 
20,097

 

 

 
20,097

 
 
$
2,376,174

 
$
1,978

 
$
(19,781
)
 
$
2,358,371

 
 
 
 
 
 
 
 
 
As of December 31, 2017
 
 
 
 
 
 
 
 
Available-for-sale debt securities:
 
 
 
 
 
 
 
 
Corporate bonds
 
$
1,717,976

 
$
2,176

 
$
(7,672
)
 
$
1,712,480

U.S. government and government agency obligations
 
186,699

 
34

 
(1,241
)
 
185,492

Municipal bonds
 
4,600

 

 
(13
)
 
4,587

Commercial paper
 
106,973

 

 

 
106,973

Certificates of deposit
 
11,024

 

 

 
11,024

 
 
$
2,027,272

 
$
2,210

 
$
(8,926
)
 
$
2,020,556

The Company classifies its investments in debt securities based on their contractual maturity dates. The debt securities listed as of March 31, 2018 mature at various dates through March 2023. The fair values of debt security investments by contractual maturity consist of the following:
 
 
March 31, 2018
 
December 31, 2017
Maturities within one year
 
$
605,461

 
$
593,783

Maturities after one year through five years
 
1,752,910

 
1,426,773

 
 
$
2,358,371

 
$
2,020,556


14




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 debt 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 March 31, 2018
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
Corporate bonds
$
1,343,778

 
$
(13,950
)
 
$
234,258

 
$
(4,209
)
 
$
1,578,036

 
$
(18,159
)
U.S. government and government agency obligations
70,872

 
(623
)
 
76,793

 
(988
)
 
147,665

 
(1,611
)
Municipal bonds
2,579

 
(11
)
 

 

 
2,579

 
(11
)
 
$
1,417,229

 
$
(14,584
)
 
$
311,051

 
$
(5,197
)
 
$
1,728,280

 
$
(19,781
)
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
Corporate bonds
$
930,970

 
$
(4,924
)
 
$
256,750

 
$
(2,748
)
 
$
1,187,720

 
$
(7,672
)
U.S. government and government agency obligations
110,532

 
(409
)
 
67,921

 
(832
)
 
178,453

 
(1,241
)
Municipal bonds
2,582

 
(10
)
 
2,005

 
(3
)
 
4,587

 
(13
)
 
$
1,044,084

 
$
(5,343
)
 
$
326,676

 
$
(3,583
)
 
$
1,370,760

 
$
(8,926
)
There were no realized losses on sales of marketable securities, and realized gains were not material, for the three months ended March 31, 2018 and 2017 .
With respect to marketable securities, for the three months ended March 31, 2018 and 2017 , amounts reclassified from Accumulated other comprehensive (loss) income into Other income, net were related to realized gains on sales. The Company adopted ASU 2016-01 (see Note 1) during the first quarter of 2018; as a result, there was $9.4 million of unrealized gains on equity securities recognized during the three months ended March 31, 2018 that was recorded in Other income, net. For the three months ended March 31, 2017, there was $5.4 million of unrealized gains and losses on equity securities that was recorded in Other comprehensive income (loss).

15




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


6. Fair Value Measurements
The Company's assets that are measured at fair value on a recurring basis consist of the following:
 
 
 
Fair Value Measurements at Reporting Date Using
As of March 31, 2018
Fair Value
 
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
Available-for-sale debt securities:
 
 
 
 
 
Corporate bonds
$
2,110,609

 

 
$
2,110,609

U.S. government and government agency obligations
154,700

 

 
154,700

Municipal bonds
2,580

 

 
2,580

Commercial paper
70,385

 

 
70,385

Certificates of deposit
20,097

 

 
20,097

Equity securities
69,075

 
$
69,075

 

 
$
2,427,446

 
$
69,075

 
$
2,358,371

 
 
 
 
 
 
As of December 31, 2017
 
 
 
 
 
Available-for-sale debt securities:
 
 
 
 
 
Corporate bonds
$
1,712,480

 

 
$
1,712,480

U.S. government and government agency obligations
185,492

 

 
185,492

Municipal bonds
4,587

 

 
4,587

Commercial paper
106,973

 

 
106,973

Certificates of deposit
11,024

 

 
11,024

Equity securities
62,785

 
$
62,785

 

 
$
2,083,341

 
$
62,785

 
$
2,020,556

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 months ended March 31, 2018 and 2017 . There were no transfers of marketable securities between Levels 1 or 2 classifications during the three months ended March 31, 2018 and 2017 .
The fair value of interest rate swap and interest rate cap contracts, which were recorded within Other noncurrent assets, was not material as of March 31, 2018 and December 31, 2017 (see Note 8). The fair value of these contracts was determined based on Level 2 inputs, using significant inputs that are observable either directly or indirectly, including London Interbank Offered Rate ("LIBOR") and interest rate swap rates.
As of March 31, 2018, the Company had $37.5 million in equity investments that do not have a readily determinable fair value. These investments are recorded at cost within Other noncurrent assets.

16




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


7. Inventories
Inventories consist of the following:
 
March 31,
 
December 31,
 
2018
 
2017
Raw materials
$
201,429

 
$
190,045

Work-in-process
374,505

 
302,042

Finished goods
22,848

 
21,791

Deferred costs
221,615

 
212,260

 
$
820,397

 
$
726,138

Deferred costs represent the costs of product manufactured and shipped to the Company's collaborators for which recognition of revenue has been deferred.
8. Derivative Instruments and Hedging Activities
The Company is exposed to market fluctuations in interest rates, including those in connection with its March 2017 lease of laboratory and office facilities in Tarrytown, New York. Commencing in the second quarter of 2017, the Company entered into interest rate swap and interest rate cap agreements to manage a portion of such interest rate risk; no new agreements of this nature were entered into during the first quarter of 2018. All of the Company's derivative instruments are utilized for risk management purposes, and are not used for trading or speculative purposes.
The Company's derivative instruments are designated as cash flow hedges for accounting purposes. Since the specific terms of the derivative instruments match those of the item being hedged, the derivative instruments are deemed to be highly effective in offsetting the changes in cash flows of the hedged item. As such, changes in the fair value of these derivatives are recorded in accumulated other comprehensive income (loss) until the underlying transaction affects earnings, and are then reclassified to earnings in the same account as the hedged transaction. The Company would record any gain or loss related to the ineffectiveness directly to earnings.
The Company assesses, both at inception and on an ongoing basis, whether derivatives used continue to be highly effective in offsetting changes in cash flows of the hedged items. The Company does not exclude any portion of the cash flow hedge contracts from the assessment of hedge effectiveness. If and when a derivative is no longer expected to be highly effective, hedge accounting is discontinued.
The following table summarizes the notional amounts of the Company's outstanding interest rate swap and cap agreements:
 
March 31,
 
December 31,
 
2018
 
2017
Interest rate swap contracts
$
75,000

 
$
75,000

Interest rate cap contracts
$
75,000

 
$
75,000

As it relates to cash flow hedges, for the three months ended March 31, 2018 , amounts of gains and losses recognized in Other comprehensive income (loss), and amounts reclassified from Accumulated other comprehensive (loss) income into Interest expense were not material. As of March 31, 2018 , the amounts expected to be reclassified out of Accumulated other comprehensive income into Interest expense over the next 12 months are not expected to be material. For the three months ended March 31, 2018 , there were no gains or losses recorded related to the ineffective portion of the derivative instruments.

17




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


9. 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 $107.4 million and $183.4 million for the three months ended March 31, 2018 and 2017 , respectively. The Company's effective tax rate was 18.3% and 42.4% for the three months ended March 31, 2018 and 2017 , respectively. On December 22, 2017, the bill known as the "Tax Cuts and Jobs Act" (the "Act") was signed into law. The Act, which became effective with respect to most of its provisions as of January 1, 2018, significantly revised U.S. corporate income tax laws by, among other things, reducing the U.S. federal corporate income tax rate from 35% to 21%, changing the taxation of foreign earnings (including taxation of certain global intangible low-taxed income ("GILTI")), allowing for a foreign-derived intangible income deduction and immediate expensing for qualified assets, repealing the deduction for domestic manufacturing, and imposing further limitations on the deductibility of executive compensation. As a result of the Act being signed into law, we recognized a provisional charge of $326.2 million in the fourth quarter of 2017 related to the re-measurement of the Company's U.S. net deferred tax assets at the lower enacted corporate tax rates; such amount was not adjusted in the first quarter of 2018. The provisional charge recorded in the fourth quarter of 2017 is an estimate, and the measurement of deferred tax assets is subject to further analysis, such as developing interpretations and clarifications of the provisions of the Act, which could result in changes to this estimate during 2018. In addition, we have not yet elected an accounting method regarding whether to record deferred tax assets and liabilities for expected amounts of GILTI inclusions or whether to treat such amounts as a period cost.
The Company's effective tax rate for the three months ended March 31, 2018 was positively impacted, compared to the U.S. federal statutory rate, primarily by the foreign-derived intangible income deduction and the federal tax credit for research activities. The Company's effective tax rate for the three months ended March 31, 2017 was negatively impacted, compared to the U.S. federal statutory rate, by losses incurred in foreign jurisdictions with rates lower than the U.S. federal statutory rate and the non-tax deductible Branded Prescription Drug Fee, partly offset by the tax benefit associated with stock-based compensation, the domestic manufacturing deduction, and the federal tax credit for research activities.
The income tax provision recorded in the Statement of Comprehensive Income for the three months ended March 31, 2018 was not material, and there was no such income tax benefit or provision recorded for the three months ended March 31, 2017.
10. Statement of Cash Flows
The Company adopted ASU 2016-18, Statement of Cash Flows - Restricted Cash , during the first quarter of 2018, and the standard has been retrospectively applied to all periods presented. The following provides a reconciliation of cash, cash equivalents, and restricted cash reported within the Condensed Consolidated Balance Sheet to the total of the same such amounts shown in the Condensed Consolidated Statement of Cash Flows:
 
 
March 31,
 
March 31,
 
 
2018
 
2017
Cash and cash equivalents
 
$
1,019,491

 
$
811,773

Restricted cash included in Other noncurrent assets
 
12,500

 
12,500

Total cash, cash equivalents, and restricted cash shown in the Condensed Consolidated Statement of Cash Flows
 
$
1,031,991

 
$
824,273

Restricted cash consists of amounts held by financial institutions pursuant to contractual arrangements.
Supplemental disclosure of non-cash investing and financing activities
Included in accounts payable, accrued expenses, and other liabilities as of March 31, 2018 and December 31, 2017 were $40.2 million and $41.8 million , respectively, of accrued capital expenditures. Included in accounts payable, accrued expenses, and other liabilities as of March 31, 2017 and December 31, 2016 were $32.3 million and $28.2 million , respectively, of accrued capital expenditures.
The Company recognized an additional capital lease obligation of $201.2 million in connection with the Company's lease of additional premises at its Tarrytown, New York facility during the three months ended March 31, 2017 . No such amount was recognized during the three months ended March 31, 2018 .

18




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


11. 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. The outcome of any such proceedings, regardless of the merits, is inherently uncertain. If the Company were unable to prevail in any such proceedings, its consolidated financial position, results of operations, and future cash flows may be materially impacted.
Proceedings Relating to '287 Patent, '163 Patent, and '018 Patent
The Company is a party to patent infringement litigation initiated by the Company involving its European Patent No. 1,360,287 (the "'287 Patent"), its European Patent No. 2,264,163 (the "'163 Patent"), and its U.S. Patent No. 8,502,018 (the "'018 Patent"). Each of these patents concerns genetically engineered 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 Company claims infringement of several claims of the '287 Patent, the '163 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, the '163 Patent, and the '018 Patent (as applicable).
On September 25, 2013, the Company commenced patent infringement litigation against Kymab Ltd in the English High Court of Justice, Chancery Division, Patents Court, in London, asserting the '287 Patent and '163 Patent. A trial to adjudicate the claims of infringement and counterclaims of invalidity of the '287 Patent and the '163 Patent was held from November 16, 2015 through December 8, 2015. On February 1, 2016, the court issued a final judgment, finding that the asserted claims of the '287 and '163 Patents are novel, not obvious, and infringed by Kymab's genetically engineered mice. However, the court invalidated the '287 and '163 Patents on the ground of insufficiency. The hearing for the Company's appeal and Kymab's cross-appeal was held on October 17–20, 2017. On March 28, 2018, the Court of Appeal (Civil Division of England and Wales) reversed the English High Court's decision and held that the '287 Patent and '163 Patent are both valid and infringed by Kymab. Pending issuance of the final order, the Court of Appeal has granted a pro tem injunction against Kymab, which prevents Kymab from disposing of or removing from England and Wales any infringing mice, cells, antibodies, or antibody-producing cells without the Company's consent (subject to certain exceptions).
On March 11, 2014, the Company commenced '287 Patent infringement litigation and '018 Patent infringement litigation against Merus N.V., a company based in Utrecht, The Netherlands, in the District Court of The Hague (currently stayed by agreement of the parties) and the United States District Court for the Southern District of New York, respectively. On November 21, 2014, the United States District Court for the Southern District of New York issued its Opinion and Order on Claim Construction in the '018 Patent infringement litigation, in which it held the '018 Patent invalid and not infringed. On November 2, 2015, the United States District Court for the Southern District of New York issued an opinion and order finding that the '018 Patent was procured by inequitable conduct, thus rendering it unenforceable. On July 27, 2017, the United States Court of Appeals for the Federal Circuit (the "Federal Circuit") affirmed the District Court's decision regarding inequitable conduct without deciding the issues of validity and infringement. On September 12, 2017, the Company filed a petition for panel rehearing and/or rehearing en banc in the Federal Circuit. On December 26, 2017, the Federal Circuit issued an order denying the Company's petition for panel rehearing and rehearing en banc .
On July 8 and July 13, 2016, notices of opposition against the '163 Patent were filed in the European Patent Office (the "EPO") by Merus N.V. and Kymab and Novo Nordisk A/S, respectively. The notices assert, as applicable, lack of novelty, lack of inventive step, and insufficiency. The Company's response to the oppositions was filed on December 30, 2016. Following an oral hearing before the Opposition Division of the EPO on February 5–7, 2018, the Opposition Division upheld the '163 Patent without amendments. Kymab filed a notice of appeal of the Opposition Division's decision on February 9, 2018.
With respect to the '018 Patent infringement litigation against Merus N.V., on March 26, 2018, the United States District Court for the Southern District of New York granted Merus's motion for attorneys' fees and costs; if the Company is ultimately required to pay such fees and costs (the amount of which has not yet been determined by the court), such payment is not expected to have a material impact on the Company's financial statements.
Other than as noted in the preceding sentence, the Company is not at this time able to predict the outcome of, or estimate possible gain or a range of possible loss, if any, related to, the '287 Patent, '163 Patent, and '018 Patent proceedings.

19




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
As described in greater detail below, the Company is currently a party to patent infringement actions initiated by Amgen Inc. against the Company and Sanofi (and/or the Company's and Sanofi's respective affiliated entities) in a number of jurisdictions relating to Praluent, which the Company is jointly developing and commercializing with Sanofi.
In the United States, Amgen has asserted a number of U.S. patents, which were subsequently narrowed to U.S. Patent Nos. 8,829,165 (the "'165 Patent") and 8,859,741 (the "'741 Patent"), and seeks a permanent injunction to prevent the Company and the Sanofi defendants from commercial manufacturing, using, offering to sell, or selling within the United States (as well as importing into the United States) (collectively, "Commercializing") Praluent. 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. A jury trial in this litigation was held in the United States District Court for the District of Delaware (the "District Court") from March 8 to March 16, 2016. During the course of the trial, the District Court ruled as a matter of law in favor of Amgen that the asserted patent claims were not obvious, and in favor of the Company and the Sanofi defendants that there was no willful infringement of the asserted patent claims by the Company or the Sanofi defendants. On March 16, 2016, the jury returned a verdict in favor of Amgen, finding that the asserted claims of the '165 and '741 Patents were not invalid based on either a lack of written description or a lack of enablement. On January 3, 2017, the District Court issued a final opinion and judgment, denying the Company and the Sanofi defendants' motions for new trial and judgment as a matter of law. The District Court also denied as moot Amgen's motion to strike the Company and the Sanofi defendants' request to obtain a judgment as a matter of law, which allowed the Federal Circuit to address the Company and the Sanofi defendants' patent invalidity arguments on appeal. On January 12, 2017, the Company and the Sanofi defendants filed a notice of appeal with the Federal Circuit. On April 19, 2017, the District Court granted Amgen's motion to amend the judgment on an accounting of supplemental damages and enhancement of such damages if deemed appropriate, but deferred the order until after the Federal Circuit issued a decision on the appeal. Oral argument on the appeal was held on June 6, 2017. On October 5, 2017, the Federal Circuit reversed in part the District Court's decision, remanded for a new trial on the issues of written description and enablement, and, as discussed below, vacated the District Court's permanent injunction. In addition, it affirmed the District Court's ruling that Amgen's patents were not obvious. The Federal Circuit further concluded the Company and the Sanofi defendants were not entitled to judgment as a matter of law on the issues of written description and enablement on this record. On February 23, 2018, the Federal Circuit denied Amgen's petition for rehearing en banc , and on March 2, 2018 the Federal Circuit issued a mandate to transfer jurisdiction of the case back to the District Court. A new jury trial has been scheduled to begin on February 19, 2019.
On January 5, 2017, the District Court granted a permanent injunction prohibiting Regeneron and the Sanofi defendants from Commercializing Praluent in the United States but subsequently delayed its imposition until February 21, 2017. The Federal Circuit stayed the injunction pending appeal on February 8, 2017 and vacated it on October 5, 2017.
On July 25, 2016, Amgen filed a lawsuit against Regeneron, Sanofi-Aventis Groupe S.A., Sanofi-Synthelabo Limited, Aventis Pharma Limited, Sanofi Winthrop Industrie S.A., and Sanofi-Aventis Deutschland GmbH in the English High Court of Justice, Chancery Division, Patents Court, in London, seeking a declaration of infringement of Amgen's European Patent No. 2,215,124 (the "'124 Patent"), which pertains to PCSK9 monoclonal antibodies, by Praluent. The lawsuit also seeks a permanent injunction, damages, an accounting of profits, and costs and interest. On February 8, 2017, the court temporarily stayed this litigation on terms mutually agreed by the parties.
Also on July 25, 2016, Amgen filed a lawsuit for infringement of the '124 Patent against Regeneron, Sanofi-Aventis Groupe S.A., Sanofi Winthrop Industrie S.A., and Sanofi-Aventis Deutschland GmbH in the Regional Court of Düsseldorf, Germany (the "Düsseldorf Regional Court"), seeking a permanent injunction, an accounting of marketing activities, a recall of Praluent and its removal from distribution channels, and damages. On November 14, 2017, the Düsseldorf Regional Court issued a decision staying the infringement proceedings until a decision of the Opposition Division of the EPO concerning the pending opposition filed by the Company, Sanofi, and several other opponents against the '124 Patent (as discussed below). Following Amgen's request to reopen the proceedings in light of the issuance of the Preliminary Opinion (as defined below), the Düsseldorf Regional Court has scheduled an oral hearing for September 11, 2018.
On September 26, 2016, Amgen filed a lawsuit for infringement of the '124 Patent in the Tribunal de grande instance in Paris, France against Regeneron, Sanofi-Aventis Groupe S.A., Sanofi Winthrop Industrie, and Sanofi Chimie (subsequently added as a defendant). Amgen is seeking the prohibition of allegedly infringing activities with a €10,000 penalty per drug unit of Praluent produced in violation of the court order sought by Amgen; an appointment of an expert for the assessment of damages; disclosure of technical (including supply-chain) and accounting information to the expert and the court; provisional damages of €10.0 million (which would be awarded on an interim basis pending final determination); reimbursement of costs; publication of the ruling in

20




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


three newspapers; and provisional enforcement of the decision to be issued, which would ensure enforcement of the decision (including any provisional damages) pending appeal. Amgen is not seeking a preliminary injunction in this proceeding at this time. On April 10, 2017, the Company and the Sanofi parties filed briefs seeking invalidation of certain of the claims of the '124 Patent, and Amgen filed a response on July 28, 2017. Oral hearing on this infringement lawsuit is currently scheduled for June 29, 2018.
The '124 Patent is also subject to opposition proceedings in the EPO seeking to invalidate certain of its claims, which were initiated by Sanofi on February 24, 2016 and, separately, by the Company, Sanofi, and several other opponents on November 24, 2016. On December 13, 2017, the Opposition Division of the EPO issued a preliminary, non-binding opinion (the "Preliminary Opinion") regarding the validity of the '124 Patent, indicating that it currently considers the claims of a new request filed by Amgen in response to the opposition to satisfy the requirements for patentability. The Preliminary Opinion was accompanied by a summons to oral hearing to be held on November 28–30, 2018.
On May 19, 2017, Amgen filed a lawsuit for infringement of Amgen's Japanese Patent Nos. 5,906,333 (the "'333 Patent") and 5,705,288 (the "'288 Patent") in the Tokyo District Court Civil Division against Sanofi K.K. Amgen's complaint alleges that manufacturing, selling or otherwise transferring, and offering to sell or otherwise transfer Praluent (alirocumab) in Japan (as well as importing Praluent (alirocumab) into Japan) infringe the '333 and '288 Patents. The complaint further seeks a permanent injunction, disposal of product, and court costs. The Company has not been named as a defendant in this litigation.
At this time, the Company is not able to predict the outcome of, or estimate a range of possible loss, if any, related to these proceedings.
Proceedings Relating to Dupixent (dupilumab) Injection
On March 20, 2017, the Company, Sanofi-Aventis U.S. LLC, and Genzyme Corporation filed a lawsuit against Amgen and Immunex Corporation, a wholly owned subsidiary of Amgen, in the United States District Court for the District of Massachusetts seeking a declaratory judgment that the Company's and the other plaintiffs' Commercializing of Dupixent does not directly or indirectly infringe U.S. Patent No. 8,679,487 (the "'487 Patent") owned by Immunex Corporation relating to antibodies that bind the human interleukin-4 receptor. On May 1, 2017, the Company and the other plaintiffs filed a notice of voluntary dismissal of this action without prejudice.
On March 23, 2017, the Company, Sanofi-Aventis U.S. LLC, and Genzyme Corporation initiated an inter partes review ("IPR") in the United States Patent and Trademark Office ("USPTO") seeking a declaration of invalidity of the '487 Patent. On July 28 and 31, 2017, the same parties filed two additional IPR petitions in the USPTO seeking declarations of invalidity of the '487 Patent based on different grounds (the "Additional IPR Petitions"). On October 4, 2017, the Patent Trial and Appeal Board ("PTAB") of the USPTO issued a decision on the first IPR petition and declined to institute an IPR proceeding to review the validity of the '487 Patent. On February 15, 2018, the PTAB issued two decisions instituting the Company's and Sanofi's Additional IPR Petitions on all claims of the '487 Patent for which review had been requested.
On April 5, 2017, Immunex Corporation filed a lawsuit against the Company, Sanofi, Sanofi-Aventis U.S. LLC, Genzyme Corporation, and Aventisub LLC in the United States District Court for the Central District of California seeking a judgment of patent infringement of the '487 Patent and a declaratory judgment of infringement of the '487 Patent, in each case by the Company's and the other defendants' Commercializing of Dupixent; monetary damages (together with interest); an order of willful infringement of the '487 Patent, which would allow the court in its discretion to award damages up to three times the amount assessed; costs and expenses of the lawsuit; and attorneys' fees. Immunex is not seeking an injunction in this proceeding at this time. On June 21, 2017, the court denied a motion to dismiss Immunex's complaint previously filed by the Company and the Sanofi parties. On June 28, 2017, the Company and the Sanofi parties filed an answer to Immunex's complaint and counterclaims against Immunex and Amgen (which was amended on October 31, 2017 to, among other things, add an inequitable conduct allegation), and Immunex and Amgen filed an answer to the counterclaims on July 28, 2017. A combined hearing on the construction of certain disputed claim terms of the '487 Patent and summary judgment on the issue of indefiniteness of the '487 Patent claims was scheduled for April 27, 2018, but was later cancelled by the court. The issues of claim construction and summary judgment, among others, are still pending with the court. A jury trial has been scheduled to start on March 19, 2019.
At this time, the Company is not able to predict the outcome of, or estimate a range of possible loss, if any, related to these proceedings.

21




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


Proceedings Relating to EYLEA (aflibercept) Injection and ZALTRAP ® (ziv-aflibercept) Injection for Intravenous Infusion
On March 19, 2018, Novartis Vaccines and Diagnostics, Inc., Novartis Pharma AG, and Grifols Worldwide Operations Limited (collectively, the "Novartis Parties") filed a lawsuit against the Company in the United States District Court for the Southern District of New York, seeking a judgment of patent infringement of U.S. Patent No. 5,688,688 (the "'688 Patent") by the Company's manufacture of aflibercept (the active ingredient used in both EYLEA and ZALTRAP); monetary damages (together with interest) for a limited period prior to the '688 Patent expiration; an order of willful infringement of the '688 Patent, which would allow the court in its discretion to award damages up to three times the amount assessed; costs and expenses of the lawsuit; and attorneys' fees. The '688 Patent expired on November 18, 2014. The Novartis Parties are not seeking an injunction in these proceedings. At this time, the Company is not able to predict the outcome of, or estimate a range of possible loss, if any, related to these proceedings.
Proceedings Relating to Shareholder Derivative Claims
On December 30, 2015, an alleged shareholder filed a shareholder derivative complaint in the New York Supreme Court, naming the then current and certain former non-employee members of the Company's board of directors, the Chairman of the board of directors, the Company's Chief Executive Officer, and the Company's Chief Scientific Officer as defendants and Regeneron as a nominal defendant. The complaint asserts that the individual defendants breached their fiduciary duties and were unjustly enriched when they approved and/or received allegedly excessive compensation in 2013 and 2014. The complaint seeks damages in favor of the Company for the alleged breaches of fiduciary duties and unjust enrichment; changes to Regeneron's corporate governance and internal procedures; invalidation of the Regeneron Pharmaceuticals, Inc. 2014 Long-Term Incentive Plan with respect to the individual defendants' compensation and a shareholder vote regarding the individual defendants' equity compensation; equitable relief, including an equitable accounting with disgorgement; and award of the costs of the action, including attorneys' fees. On June 28, 2017, the court dismissed the plaintiff's claims with respect to certain compensation awarded in 2013 but denied the defendants' motion to dismiss the other claims set forth in the complaint. On November 8, 2017, another alleged shareholder filed a second shareholder derivative complaint in the New York Supreme Court, naming the then current and certain former non-employee members of the Company's board of directors, the Chairman of the board of directors, the Company's Chief Executive Officer, the Company's Chief Scientific Officer, and Regeneron as defendants. The complaint asserts that the individual defendants breached their fiduciary duties and were unjustly enriched when they approved and/or received allegedly excessive compensation in 2014, 2015, and 2016. The complaint seeks damages in favor of Regeneron for the alleged breaches of fiduciary duties and unjust enrichment; changes to Regeneron's corporate governance and internal procedures; invalidation of Regeneron's 2014 Long-Term Incentive Plan with respect to the individual defendants' compensation and the imposition of meaningful limits on the amount of equity payable to the individual defendants; a shareholder vote regarding the individual defendants' equity compensation; equitable relief, including an equitable accounting with disgorgement; and award of the costs of the action, including attorneys' fees. On December 4, 2017, the plaintiff in the second action moved to consolidate both actions, to be appointed lead plaintiff, and to have its counsel be appointed lead counsel in the proposed consolidated action. The court heard oral argument on March 7, 2018 and denied the motion. The parties in both the first derivative action and the second derivative action have agreed to a schedule for document discovery and the filing of defendants' appeal of the court's June 28, 2017 decision, as well as a stay of all non-document discovery pending a decision on defendants' appeal. On March 19, 2018, the defendants appealed the court's June 28, 2017 decision to the Appellate Division of the Supreme Court, First Judicial Department. On April 19, 2018, the Appellate Division granted the second plaintiff's motion to intervene in this appeal. Pursuant to the Company's By-Laws and the New York Business Corporation Law, expenses in connection with the foregoing are being advanced by the Company for the individual defendants.
On or about December 15, 2015, the Company received a shareholder litigation demand upon the Company's board of directors made by a purported Regeneron shareholder. On or about November 3, 2017, the Company received a second shareholder litigation demand upon the Company's board of directors made by another purported Regeneron shareholder, which was substantially similar to the December 15, 2015 shareholder litigation demand. The demands asserted that the then current and certain former non-employee members of the board of directors and the Chairman of the board of directors excessively compensated themselves in 2013 and 2014. The demands requested that the board of directors investigate and bring legal action against these directors for breach of fiduciary duty, unjust enrichment, and corporate waste, and implement internal controls and systems designed to prohibit and prevent similar actions in the future. On December 20, 2017, the parties to the shareholder derivative action filed on December 30, 2015 entered into a stipulation with the second demanding shareholder.  The stipulation provides that the purported shareholder will intervene as a plaintiff in the action, and that the purported shareholder's litigation demand will be withdrawn and deemed null and void. The stipulation was approved by the court on January 18, 2018. The first shareholder litigation demand has also since been withdrawn.

22




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


At this time, the Company is not able to predict the outcome of, or estimate a range of possible loss, if any, relating to these matters.
Department of Justice Investigation
In January 2017, the Company received a subpoena from the U.S. Attorney's Office for the District of Massachusetts requesting documents relating to its support of 501(c)(3) organizations that provide financial assistance to patients; documents concerning its provision of financial assistance to patients with respect to products sold or developed by Regeneron (including EYLEA, Praluent, ARCALYST, and ZALTRAP); and certain other related documents and communications. The Company is cooperating with this investigation. The Company cannot predict the outcome or duration of this investigation or any other legal proceedings or any enforcement actions or other remedies that may be imposed on the Company arising out of this investigation. 
12. Recently Issued Accounting Standards
In February 2016, the FASB issued ASU 2016-02, Leases . The new standard requires a lessee to recognize on its balance sheet (for both finance and operating leases) a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. The amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. We plan to adopt this standard in the first quarter of 2019 and are evaluating the impact that this guidance will have on our financial statements, including related disclosures. The new standard will result in the Company recording additional assets and corresponding liabilities related to operating leases; however, we do not expect the standard to have a material impact to our Consolidated Balance Sheets. The ultimate impact that the new standard will have will depend on the total amount of the Company's lease commitments as of the adoption date. We are in process of implementing a new lease accounting software system, and expect the implementation of the new standard to have a significant impact on our internal controls and processes.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties relating to future events and the future performance of Regeneron Pharmaceuticals, Inc. (where applicable, together with its subsidiaries, "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 EYLEA ® (aflibercept) Injection, Dupixent ® (dupilumab) Injection, Praluent ® (alirocumab) Injection, Kevzara ® (sarilumab) Injection, cemiplimab, fasinumab, and evinacumab; the likelihood and timing of achieving any of our anticipated clinical development milestones; unforeseen safety issues resulting from the administration of products and product candidates in patients, including serious complications or side effects in connection with the use of our product candidates in clinical trials; the likelihood and timing of possible regulatory approval and commercial launch of our late-stage product candidates and new indications for marketed products, including without limitation EYLEA, Dupixent, Praluent, Kevzara, cemiplimab, fasinumab, and evinacumab; the extent to which the results from the research and development programs conducted by us or our collaborators may be replicated in other studies and lead to therapeutic applications; ongoing regulatory obligations and oversight impacting our marketed products (such as EYLEA, Dupixent, Praluent, and Kevzara), 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; the ability of our collaborators, suppliers, or other third parties to perform filling, finishing, packaging, labeling, distribution, and other steps related to our 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 financial projections or guidance, including without limitation capital expenditures, and changes to the assumptions underlying those projections or guidance; the potential for any license or collaboration agreement, including our agreements with Sanofi, Bayer, and Teva Pharmaceutical Industries Ltd. (or their respective affiliated companies, as applicable), to be cancelled or terminated without any further product success;

23


Table of Contents


and risks associated with intellectual property of other parties and pending or future litigation relating thereto, including without limitation the patent litigation proceedings relating to Dupixent and Praluent described further in Note 11 to our Condensed Consolidated Financial Statements included in this report. 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 biotechnology company that discovers, invents, develops, manufactures, and commercializes medicines for the treatment of serious diseases. Our commercialized medicines and product candidates in development are designed to help patients with eye disease, allergic and inflammatory diseases, heart disease, pain, cancer, and infectious and other serious medical conditions.
Our total revenues were $1,511.5 million in the first quarter of 2018 , compared to $1,319.0 million in the first quarter of 2017 . Our net income was $478.0 million , or $4.16 per diluted share, in the first quarter of 2018 , compared to net income of $248.9 million , or $2.16 per diluted share, in the first quarter of 2017 . Refer to the "Results of Operations" section below for further details of our financial results, including amounts incurred related to research and development activities.

24


Table of Contents


We currently have six products that have received marketing approval:
Product
 
 
Disease Area (1)
 
 
Territory
EYLEA (aflibercept) Injection (2)
 
Ÿ
Neovascular age-related macular degeneration (wet AMD)
 
Ÿ
United States, European Union (EU), Japan, and certain other countries outside the United States
 
Ÿ
Diabetic macular edema (DME)
 
Ÿ
United States, EU, Japan, China, and certain other countries outside the United States
 
Ÿ
Macular edema following retinal vein occlusion (RVO), which includes macular edema following central retinal vein occlusion (CRVO) and macular edema following branch retinal vein occlusion (BRVO)
 
Ÿ
United States, EU, Japan, and certain other countries outside the United States
 
Ÿ
Myopic choroidal neovascularization (mCNV)
 
Ÿ
EU, Japan, and certain other countries outside the United States
 
Ÿ
Diabetic retinopathy in patients with DME
 
Ÿ
United States
Dupixent (dupilumab) Injection (3)
 
Ÿ
Atopic dermatitis (in adults)
 
Ÿ
United States, EU, Japan, and certain other countries outside the United States
Praluent (alirocumab) Injection (3)
 
Ÿ
Heterozygous familial hypercholesterolemia (HeFH) or clinical atherosclerotic cardiovascular disease (ASCVD) (in adults) (4)
 
Ÿ
United States, EU, Japan, and certain other countries outside the United States
Kevzara (sarilumab) Solution for Subcutaneous Injection (3)
 
Ÿ
Rheumatoid arthritis (RA) (in adults)
 
Ÿ
United States, EU, Japan, and certain other countries outside the United States
ARCALYST ®  (rilonacept) Injection for Subcutaneous Use
 
Ÿ
Cryopyrin-Associated Periodic Syndromes (CAPS), including Familial Cold Auto-inflammatory Syndrome (FCAS) and Muckle-Wells Syndrome (MWS)
 
Ÿ
United States
ZALTRAP ® (ziv-aflibercept) Injection for Intravenous Infusion (5)
 
Ÿ
Metastatic colorectal cancer (mCRC)
 
Ÿ
United States, EU, and certain other countries outside the United States
 
(1)  Refer to label information in each territory for specific indication.
(2)  In collaboration with Bayer (outside the United States).
(3)  In collaboration with Sanofi.
(4)  In 2017, the U.S. Food and Drug Administration (FDA) also approved the supplemental Biologics License Application (sBLA) for a once-monthly (every four weeks), 300 mg dose of Praluent.
(5) Pursuant to a 2015 amended and restated ZALTRAP agreement, Sanofi is solely responsible for the development and commercialization of ZALTRAP, and Sanofi pays us a percentage of aggregate net sales of ZALTRAP.










25


Table of Contents


Marketed Products
Net Product Sales of Regeneron-Discovered Products (1)
 
Three Months Ended
March 31,
(In millions)
 
2018
 
2017
EYLEA in the United States
 
$
984.0

 
$
854.4

ARCALYST
 
3.9

 
3.8

Net product sales recorded by Regeneron
 
$
987.9

 
$
858.2

 
 
 
 
 
EYLEA outside of the United States (1)
 
$
624.0

 
$
483.9

EYLEA global
 
$
1,608.0

 
$
1,338.3

 
 
 
 
 
Global net product sales recorded by Sanofi (1) :
 
 
 
 
Praluent
 
$
59.9

 
$
35.9

Dupixent
 
131.4

 

Kevzara
 
12.4

 

ZALTRAP
 
26.3

 
17.4

Net product sales recorded by Sanofi
 
$
230.0

 
$
53.3

 
 
 
 
 
(1)  Bayer records net product sales of EYLEA outside the United States and Sanofi records global net product sales of Praluent, Dupixent, Kevzara, and ZALTRAP. Refer to "Overview" above and "Collaboration Agreements" below for further details.
Marketed Products - Recent Developments
In May 2018, the Company and Sanofi announced they will lower the net price of Praluent in exchange for straightforward, more affordable patient access from Express Scripts. Praluent will become the exclusive PCSK9 inhibitor therapy on the Express Scripts national formulary. The agreement takes effect on July 1, 2018 for commercial patients covered by the Express Scripts National Preferred Formulary.
Programs in Clinical Development
All 17 of our product candidates in clinical development were discovered in our research laboratories and are summarized below. We used our VelocImmune ® technology to generate each of the antibodies in the table below. There are numerous uncertainties associated with drug development, including uncertainties related to safety and efficacy data from each phase of drug development (including any post-approval studies), uncertainties related to the enrollment and performance of clinical trials, changes in regulatory requirements, and changes in the competitive landscape affecting a product candidate. Refer to Part II, Item 1A, "Risk Factors" for a description of these and other risks and uncertainties that may affect our clinical programs.










26




Phase 1
 
Phase 2
 
Phase 3
Cemiplimab (REGN2810) (a)
 
Dupilumab (a)
 
EYLEA
Antibody to programmed cell death protein 1 (PD-1) (h)
 
Antibody to the interleukin-4 receptor (IL-4R) alpha subunit
 
Ÿ
Non-proliferative diabetic retinopathy (NPDR) in patients without DME
Ÿ
Solid tumors and advanced hematologic malignancies
 
Ÿ
Eosinophilic esophagitis (EoE) (c)
 
Dupilumab (a)
REGN3767 (a)
 
REGN3500 (a)
 
Ÿ
Atopic dermatitis in adolescents and pediatrics (6–17 years of age)
Antibody to Lymphocyte Activation Gene 3 (LAG-3) protein
 
Antibody to interleukin-33 (IL-33). Studied as monotherapy and in combination with dupilumab.
 
Ÿ
Atopic dermatitis in pediatrics (6 months–5 years of age) (Phase 2/3)
Ÿ
Advanced malignancies (administered alone or in combination with cemiplimab)
 
Ÿ
Asthma
 
Ÿ
Asthma in adults and adolescents
 
 
Sarilumab (a)
 
Ÿ
Asthma in pediatrics (6–11 years of age)
REGN1979
 
Antibody to the interleukin-6 receptor (IL-6R)
 
Ÿ
Nasal polyps
Bispecific antibody against CD20 and CD3
 
Ÿ
Polyarticular-course juvenile idiopathic arthritis (pcJIA)
 
Alirocumab (a)
Ÿ
Certain B-cell malignancies (monotherapy and in combination cemiplimab) (c)
 
Cemiplimab (a)
 
Antibody to PCSK9
 
 
Ÿ
Metastatic or locally advanced and unresectable cutaneous squamous cell carcinoma (CSCC) (pivotal study) (d)
 
Ÿ
LDL cholesterol reduction and prevention of cardiovascular events
REGN3470-3471-3479 (g)
 
 
 
Ÿ
Homozygous familial hypercholesterolemia (HoFH) (c)
Multi-antibody therapy to Ebola virus
 
Ÿ
Basal cell carcinoma (BCC) (potentially pivotal study)
 
Cemiplimab (a)
Ÿ
Ebola virus infection (c)
 
Evinacumab (REGN1500) (f)
 
Ÿ
First-line treatment for non-small cell lung cancer (NSCLC)
REGN3048-3051 (g)
 
Antibody to angiopoietin-like protein 3 (ANGPTL3)
 
Ÿ
Cervical cancer
Multi-antibody therapy to Middle East Respiratory Syndrome (MERS) virus
 
Ÿ
Refractory hypercholesterolemia (both HeFH and non-FH)
 
Fasinumab (REGN475) (b)(f)
Ÿ
MERS virus infection
 
REGN2477 (f)
 
Ÿ
Osteoarthritis of knee and hip (e)
REGN1908-1909 (f)
 
Ÿ
Fibrodysplasia ossificans progressiva (FOP) (c)(e)
 
Ÿ
Chronic low back pain in patients with concomitant osteoarthritis of the knee and hip
Multi-antibody therapy to Feld1
 
 
 
 
 
Ÿ
Allergic disease
 
 
 
 
Evinacumab (f)
Trevogrumab (REGN1033) (f)
 
 
 
 
Ÿ
HoFH (c)(d)
Antibody to myostatin (GDF8)
 
 
 
 
 
 
Ÿ
Muscle wasting diseases (in combination with REGN2477)
 
 
 
 
 
 
REGN2477 (f)
 
 
 
 
 
 
Antibody to Activin A
 
 
 
 
 
 
Ÿ
Muscle-wasting diseases (in combination with trevogrumab)
 
 
 
 
 
 
REGN3918 (f)
 
 
 
 
 
 
Antibody to complement 5 (C5)
 
 
 
 
 
 
Ÿ
Paroxysmal nocturnal hemoglobinuria (PNH)
 
 
 
 
 
 
REGN4461
 
 
 
 
 
 
Agonist antibody to leptin receptor (LEPR)
 
 
 
 
 
 
Ÿ
Lipodystrophy and obesity
 
 
 
 
 
 

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(a) In collaboration with Sanofi
(b) In collaboration with Teva and Mitsubishi Tanabe Pharma
(c)  FDA granted orphan drug designation
(d) FDA granted Breakthrough Therapy designation
(e)  FDA granted Fast Track designation
(f)  Sanofi did not opt-in to or elected not to continue to co-develop the product candidate. Under the terms of our agreement, Sanofi is entitled to receive royalties on any future global sales of the product candidate.
(g)  Sanofi did not opt-in to the product candidate. Under the terms of our agreement, Sanofi is entitled to receive royalties on any future sales of the product candidate. We and the Biomedical Advanced Research Development Authority (BARDA) of the U.S. Department of Health and Human Services (HHS) are parties to agreements whereby HHS provides certain funding to support research, development, and manufacturing of these antibodies.
(h)  Studied as monotherapy and in combination with other antibodies and treatments
Our core business strategy is to maintain a strong foundation in basic scientific research and discovery-enabling technologies, and to build on that foundation with our clinical development, manufacturing, and commercial capabilities. Our objective is to continue to be an integrated, multi-product biopharmaceutical company that provides patients and medical professionals with important options for preventing and treating human diseases.
We believe that our ability to develop product candidates is enhanced by the application of our VelociSuite ® technology platforms. Our discovery platforms are designed to identify specific proteins of therapeutic interest for a particular disease or cell type and validate these targets through high-throughput production of genetically modified mice using our VelociGene ® technology to understand the role of these proteins in normal physiology, as well as in models of disease. Our human antibody technology ( VelocImmune ) and cell line expression technologies ( VelociMab ® ) may then be utilized to discover and produce new product candidates directed against the disease target. Our antibody product candidates currently in clinical trials were developed using VelocImmune . We continue to invest in the development of enabling technologies to assist in our efforts to identify, develop, manufacture, and commercialize new product candidates.
General
Developing and commercializing new medicines entails significant risk and expense. Before significant revenues from the commercialization of our antibody candidates or new indications for our marketed products can be realized, we (or our collaborators) must overcome a number of hurdles which include successfully completing research and development and obtaining regulatory approval from the FDA and regulatory authorities in other countries. In addition, the biotechnology and pharmaceutical industries are rapidly evolving and highly competitive, and new developments may render our products and technologies uncompetitive or obsolete.
Our ability to continue to generate profits and to generate positive cash flow from operations over the next several years depends significantly on our continued success in commercializing EYLEA. We expect to continue to incur substantial expenses related to our research and development activities, a significant portion of which we expect to be reimbursed by our collaborators. Also, our research and development activities outside our collaborations, the costs of which are not reimbursed, are expected to expand and require additional resources. We also expect to incur substantial costs related to the commercialization of EYLEA, Dupixent, Praluent, and Kevzara, as well as preparation for potential commercialization of cemiplimab and other indications of dupilumab. Our financial results may fluctuate from quarter to quarter and will depend on, among other factors, the net sales of our marketed products, the scope and progress of our research and development efforts, the timing of certain expenses, the continuation of our collaborations, in particular with Sanofi and Bayer, including our share of collaboration profits or losses from sales of commercialized products and the amount of reimbursement of our research and development expenses that we receive from collaborators, and the amount of income tax expense we incur, which is partly dependent on the profits or losses we earn in each of the countries in which we operate. We cannot predict whether or when new products or new indications for marketed products will receive regulatory approval or, if any such approval is received, whether we will be able to successfully commercialize such product(s) and whether or when they may become profitable.





28




The planning, execution, and results of our clinical programs are significant factors that can affect our operating and financial results. In our clinical programs, key events in 2018 to date were, and plans for the next twelve months are, as follows:   
Trap-based Clinical Program:
 
 
 
 
 
 
2018 Events to Date
 
2018–2019 Plans (next 12 months)
EYLEA
Ÿ
Chinese State Food and Drug Administration (CFDA) approved EYLEA for DME
Ÿ
FDA decision on sBLA for every 12-week dosing interval in wet AMD (target action date of August 11, 2018)
Ÿ
Reported positive top-line results from Phase 3 PANORAMA study for the treatment of NPDR in patients without DME (see "Clinical Programs - Recent Developments" below)
Ÿ
Submit sBLA for pre-filled syringe
 
Ÿ
Regulatory agency decision on wet AMD in China
Ÿ
Submitted sBLA for "vial-only" presentation
Ÿ
Submit sBLA for the treatment of NPDR in patients without DME
Antibody-based Clinical Programs:
 
 
 
 
 
2018 Events to Date
 
2018–2019 Plans (next 12 months)
Dupixent (dupilumab; IL-4R Antibody)
Ÿ
Ministry of Health, Labor and Welfare (MHLW) in Japan approved Dupixent for the treatment of atopic dermatitis in adults not adequately controlled with existing therapies
Ÿ
Submit for additional regulatory approvals in atopic dermatitis and asthma outside the United States
 
Ÿ
Initiated Phase 2/3 study in pediatric patients (6 months–5 years of age) with severe atopic dermatitis
Ÿ
Report data from Phase 3 study in adolescent patients (12–17 years of age) with atopic dermatitis and submit sBLA and Marketing Authorization Application (MAA) for expanded indication
 
Ÿ
sBLA for asthma in adult and adolescent patients (12 years of age and older) filed with FDA
Ÿ
FDA decision on sBLA for asthma in adult and adolescent patients (target action date of October 20, 2018)
 
Ÿ
Regulatory application for asthma accepted for review by the European Medicines Agency (EMA) and Pharmaceuticals and Medical Devices Agency (PMDA) in Japan
Ÿ
Regulatory agency decisions on atopic dermatitis and asthma applications outside the United States
 
 
 
Ÿ
Report data from Phase 3 studies in nasal polyps
 
 
 
Ÿ
Initiate Phase 3 study in eosinophilic esophagitis
 
 
 
Ÿ
Initiate Phase 2 study in peanut allergy
 
 
 
Ÿ
Initiate Phase 2 study as an adjunct to immunotherapy for grass allergy
 
 
 
Ÿ
Initiate Phase 3 program in chronic obstructive pulmonary disease (COPD)
 
 
 
Ÿ
Initiate clinical program in co-morbid allergic conditions
Praluent (alirocumab; PCSK9 Antibody)
Ÿ
Reported positive results from ODYSSEY OUTCOMES study (see "Clinical Programs - Recent Developments" below)
Ÿ
Submit for regulatory approval for cardiovascular risk reduction in the United States and EU and for first-line treatment of hyperlipidemia in the United States
 
 
 
Ÿ
FDA decision on sBLA for use with apheresis (target action date of August 24, 2018)
 
 
 
Ÿ
Initiate Phase 3 pediatric studies in HoFH and HeFH

29




 
Antibody-based Clinical Programs (continued):
 
 
 
     
2018 Events to Date
 
2018–2019 Plans (next 12 months)
Kevzara (sarilumab; IL-6R Antibody)
Ÿ
FDA approved single-dose pre-filled pen presentation
Ÿ
Submit for additional regulatory approvals outside of the United States
 
 
 
Ÿ
Continue patient enrollment in Phase 2 study in pcJIA
 
 
 
Ÿ
Initiate Phase 3 study in giant cell arteritis
 
 
 
Ÿ
Initiate Phase 3 study in polymyalgia rheumatica
Cemiplimab (REGN2810; PD-1 Antibody)
Ÿ
FDA accepted for priority review BLA for advanced CSCC
Ÿ
FDA decision on BLA for advanced CSCC (target action date of October 28, 2018)
 
Ÿ
EMA accepted for review MAA for advanced CSCC
Ÿ
Regulatory agency decision for advanced CSCC in the EU
 
 
 
Ÿ
Initiate additional studies in non-small cell lung cancer and various other indications
 
 
 
Ÿ
Continue patient enrollment in various studies
Fasinumab (NGF Antibody)
Ÿ
Completed patient enrollment in the efficacy sub-study of the Phase 3 long-term safety study in osteoarthritis
Ÿ
Report data from first Phase 3 efficacy study in osteoarthritis
 
Ÿ
Independent Data Monitoring Committee (DMC) recommended higher dose-regimens be discontinued
Ÿ
Modify dosing-regimen in clinical trials based on recommendations of the DMC
Evinacumab (ANGPTL3 Antibody)
Ÿ
Initiated Phase 3 study in HoFH
Ÿ
Initiate Phase 2 study in severe hypertriglyceridemia
Trevogrumab (GDF8 Antibody)
 
 
Ÿ
Complete Phase 1 combination study with REGN2477 and report results
 
 
 
Ÿ
Initiate Phase 2 program
REGN1908-1909 (Feld1 Antibody)
 
 
Ÿ
Continue early stage development
REGN1979 (CD20 and CD3 Antibody)
Ÿ
FDA granted orphan drug designation in Follicular Lymphoma (FL)
Ÿ
Continue evaluation in non-Hodgkin lymphomas
 
 
 
Ÿ
Initiate Phase 2 studies in FL and diffuse large B-cell lymphoma
REGN3470-3471-3479 (Multi-antibody therapy to Ebola virus)
 
 
Ÿ
Initiate pivotal healthy volunteer safety study
REGN3048-3051 (Multiple-antibody therapy to MERS)
Ÿ
Initiated Phase 1 study in healthy volunteers
 
 
REGN2477 (Activin A Antibody)
Ÿ
Initiated Phase 2 study in patients with FOP
 
 
REGN3500 (IL-33 Antibody)
Ÿ
Initiated Phase 2 study in asthma
Ÿ
Initiate Phase 2 studies in COPD and atopic dermatitis
REGN3767 (LAG-3 Antibody)
 
 
Ÿ