Regeneron Pharmaceuticals, Inc.
REGENERON PHARMACEUTICALS INC (Form: 10-Q, Received: 08/02/2018 16:17:08)

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  June 30, 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 July 20, 2018:
Class of Common Stock
 
Number of Shares
Class A Stock, $.001 par value
 
1,911,354
Common Stock, $.001 par value
 
106,144,994




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

 
 
 
 
Page Numbers
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 













"ARCALYST ® ", "EYLEA ® ", "Regeneron ® ", "Regeneron Genetics Center ® ", " VelociGene ® ", " VelociMab ® ", " VelocImmune ® ", " VelociMouse ® ", " VelociSuite ® ", and "ZALTRAP ® " 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)
 
June 30,
 
December 31,
 
2018
 
2017
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
917,876

 
$
812,733

Marketable securities
765,642

 
596,847

Accounts receivable - trade, net
1,534,324

 
1,538,642

Accounts receivable from Sanofi
243,238

 
193,684

Accounts receivable from Bayer
261,685

 
242,014

Inventories
928,553

 
726,138

Prepaid expenses and other current assets
163,599

 
224,972

Total current assets
4,814,917

 
4,335,030

 
 
 
 
Marketable securities
2,044,703

 
1,486,494

Property, plant, and equipment, net
2,461,614

 
2,358,605

Deferred tax assets
545,077

 
506,291

Other noncurrent assets
85,669

 
77,866

Total assets
$
9,951,980

 
$
8,764,286

 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
 
 
 
Accounts payable
$
171,906

 
$
178,183

Accrued expenses and other current liabilities
670,709

 
637,162

Deferred revenue from Sanofi
308,179

 
177,746

Deferred revenue - other
180,396

 
142,392

Total current liabilities
1,331,190

 
1,135,483

 
 
 
 
Capital and facility lease obligations
705,903

 
703,453

Deferred revenue from Sanofi
339,040

 
379,936

Deferred revenue - other
199,401

 
249,263

Other noncurrent liabilities
190,020

 
152,073

Total liabilities
2,765,554

 
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 - 109,929,629 in 2018 and 109,477,222 in 2017
110

 
110

Additional paid-in capital
3,712,599

 
3,512,833

Retained earnings
3,839,179

 
2,946,733

Accumulated other comprehensive (loss) income
(11,612
)
 
640

Treasury Stock, at cost; 3,885,469 shares in 2018 and 3,763,868 shares in 2017
(353,852
)
 
(316,240
)
Total stockholders' equity
7,186,426

 
6,144,078

Total liabilities and stockholders' equity
$
9,951,980

 
$
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
June 30,
 
Six Months Ended
June 30,
 
 
2018
 
2017
 
2018
 
2017
Statements of Operations
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
Net product sales
 
$
996,382

 
$
924,133

 
$
1,984,291

 
$
1,782,378

Sanofi collaboration revenue
 
237,753

 
222,128

 
427,243

 
432,495

Bayer collaboration revenue
 
262,863

 
210,355

 
510,791

 
404,294

Other revenue
 
111,024

 
113,500

 
197,182

 
169,940

 
 
1,608,022

 
1,470,116

 
3,119,507

 
2,789,107

 
 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
 
Research and development
 
529,289

 
509,975

 
1,027,875

 
1,017,410

Selling, general, and administrative
 
364,884

 
306,908

 
695,654

 
603,754

Cost of goods sold
 
35,950

 
42,133

 
105,193

 
103,386

Cost of collaboration and contract manufacturing
 
55,711

 
60,788

 
101,366

 
83,703

 
 
985,834

 
919,804

 
1,930,088

 
1,808,253

 
 
 
 
 
 
 
 
 
Income from operations
 
622,188

 
550,312

 
1,189,419

 
980,854

 
 
 
 
 
 
 
 
 
Other income (expense):
 
 
 
 
 
 
 
 
Other income (expense), net
 
40,804

 
(19,061
)
 
65,410

 
(9,813
)
Interest expense
 
(6,918
)
 
(5,401
)
 
(13,357
)
 
(12,902
)
 
 
33,886

 
(24,462
)
 
52,053

 
(22,715
)
 
 
 
 
 
 
 
 
 
Income before income taxes
 
656,074

 
525,850

 
1,241,472

 
958,139

 
 
 
 
 
 
 
 
 
Income tax expense
 
(104,662
)
 
(138,106
)
 
(212,080
)
 
(321,464
)
 
 
 
 
 
 
 
 
 
Net income
 
$
551,412

 
$
387,744

 
$
1,029,392

 
$
636,675

 
 
 
 
 
 
 
 
 
Net income per share - basic
 
$
5.12

 
$
3.66

 
$
9.56

 
$
6.02

Net income per share - diluted
 
$
4.82

 
$
3.34

 
$
8.97

 
$
5.51

 
 
 
 
 
 
 
 
 
Weighted average shares outstanding - basic
 
107,800

 
106,034

 
107,724

 
105,804

Weighted average shares outstanding - diluted
 
114,477

 
116,137

 
114,697

 
115,607

 
 
 
 
 
 
 
 
 
Statements of Comprehensive Income
 
 
 
 
 
 
 
 
Net income
 
$
551,412

 
$
387,744

 
$
1,029,392

 
$
636,675

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
Unrealized gain (loss) on marketable securities
 
3,374

 
8,204

 
(7,706
)
 
15,160

Unrealized gain on cash flow hedges
 
608

 
28

 
2,047

 
28

Comprehensive income
 
$
555,394

 
$
395,976

 
$
1,023,733

 
$
651,863

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


3



REGENERON PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
 
 
Six Months Ended
June 30,
 
 
2018
 
2017
Cash flows from operating activities:
 
 
 
 
Net income
 
$
1,029,392

 
$
636,675

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
70,000

 
73,241

Non-cash compensation expense
 
189,217

 
255,047

Other non-cash items, net
 
(54,980
)
 
37,631

Deferred taxes
 
(15,487
)
 
(57,737
)
Changes in assets and liabilities:
 
 
 
 
Increase in Sanofi, Bayer, and trade accounts receivable
 
(64,907
)
 
(232,927
)
Increase in inventories
 
(182,100
)
 
(151,544
)
Decrease (increase) in prepaid expenses and other assets
 
59,432

 
(77,168
)
Decrease in deferred revenue
 
(84,238
)
 
(10,655
)
Increase (decrease) in accounts payable, accrued expenses, and other liabilities
 
66,979

 
(147,232
)
Total adjustments
 
(16,084
)
 
(311,344
)
Net cash provided by operating activities
 
1,013,308

 
325,331

 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
Purchases of marketable and other securities
 
(1,181,205
)
 
(477,408
)
Sales or maturities of marketable securities
 
462,212

 
272,166

Capital expenditures
 
(191,392
)
 
(105,310
)
Net cash used in investing activities
 
(910,385
)
 
(310,552
)
 
 
 
 
 
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
 

 
(19,925
)
Proceeds from issuance of Common Stock
 
34,073

 
188,693

Payments in connection with Common Stock tendered for employee tax obligations
 
(31,853
)
 
(31,437
)
Net cash provided by financing activities
 
2,220

 
194,331

 
 
 
 
 
Net increase in cash, cash equivalents, and restricted cash
 
105,143

 
209,110

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

 
547,703

 
 
 
 
 
Cash, cash equivalents, and restricted cash at end of period
 
$
930,376

 
$
756,813

 
 
 
 
 
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 as of and for the three and six months ended June 30, 2018 compared with the guidance that was in effect before the change.
 
 
June 30, 2018
Balance Sheet Data
 
As Reported
 
Adjustments
 
Balance Without Adoption of ASC 606
Deferred tax assets
 
$
545,077

 
$
(16,293
)
 
$
528,784

Total assets
 
$
9,951,980

 
$
(16,293
)
 
$
9,935,687

Accrued expenses and other current liabilities
 
$
670,709

 
$
(1,513
)
 
$
669,196

Deferred revenue from Sanofi (current)
 
$
308,179

 
$
(82,983
)
 
$
225,196

Deferred revenue - other (current)
 
$
180,396

 
$
(49,819
)
 
$
130,577

Total current liabilities
 
$
1,331,190

 
$
(134,315
)
 
$
1,196,875

Deferred revenue from Sanofi (noncurrent)
 
$
339,040

 
$
6,671

 
$
345,711

Deferred revenue - other (noncurrent)
 
$
199,401

 
$
28,734

 
$
228,135

Total liabilities
 
$
2,765,554

 
$
(98,910
)
 
$
2,666,644

Retained earnings
 
$
3,839,179

 
$
82,617

 
$
3,921,796

Total stockholders' equity
 
$
7,186,426

 
$
82,617

 
$
7,269,043

Total liabilities and stockholders' equity
 
$
9,951,980

 
$
(16,293
)
 
$
9,935,687



5




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


 
 
Three Months Ended
June 30, 2018
 
Six Months Ended
June 30, 2018
Consolidated Statement of Operations Data
 
As Reported
 
Adjustments
 
Balance Without Adoption of ASC 606
 
As Reported
 
Adjustments
 
Balance Without Adoption of ASC 606
Sanofi collaboration revenue
 
$
237,753

 
$
(8,924
)
 
$
228,829

 
$
427,243

 
$
(17,331
)
 
$
409,912

Other revenue
 
$
111,024

 
$
(29,879
)
 
$
81,145

 
$
197,182

 
$
(47,189
)
 
$
149,993

Total revenues
 
$
1,608,022

 
$
(38,803
)
 
$
1,569,219

 
$
3,119,507

 
$
(64,520
)
 
$
3,054,987

Income from operations
 
$
622,188

 
$
(38,803
)
 
$
583,385

 
$
1,189,419

 
$
(64,520
)
 
$
1,124,899

Income before income taxes
 
$
656,074

 
$
(38,803
)
 
$
617,271

 
$
1,241,472

 
$
(64,520
)
 
$
1,176,952

Income tax expense
 
$
(104,662
)
 
$
1,914

 
$
(102,748
)
 
$
(212,080
)
 
$
3,702

 
$
(208,378
)
Net income
 
$
551,412

 
$
(36,889
)
 
$
514,523

 
$
1,029,392

 
$
(60,818
)
 
$
968,574

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
June 30,
 
Six Months Ended
June 30,
Net Product Sales in the United States
 
2018
 
2017
 
2018
 
2017
EYLEA ®
 
$
991,998

 
$
919,466

 
$
1,976,047

 
$
1,773,853

ARCALYST ®
 
4,384

 
4,667

 
8,244

 
8,525

 
 
$
996,382

 
$
924,133

 
$
1,984,291

 
$
1,782,378

The Company had product sales to certain customers that accounted for more than 10% of total gross product revenue for each of the three and six months ended June 30, 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
June 30,
 
Six Months Ended
June 30,
 
 
2018
 
2017
 
2018
 
2017
Besse Medical, a subsidiary of AmerisourceBergen Corporation
 
56
%
 
50
%
 
55
%
 
51
%
McKesson Corporation
 
35
%
 
29
%
 
37
%
 
28
%
Curascript SD Specialty Distribution, a subsidiary of Express Scripts
 
**

 
20
%
 
**

 
20
%
** Sales to Curascript SD Specialty Distribution represented less than 10% of total gross product revenue during the period.
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, chargebacks, and discounts 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 six months ended June 30, 2018 and 2017 .
 
Rebates, Chargebacks, and Discounts
 
Distribution-
Related
Fees
 
Other Sales-
Related
Deductions
 
Total
Balance as of December 31, 2017
$
29,840

 
$
34,142

 
$
21,320

 
$
85,302

Provisions
97,698

 
102,133

 
19,892

 
219,723

Credits/payments
(91,108
)
 
(98,532
)
 
(24,431
)
 
(214,071
)
Balance as of June 30, 2018
$
36,430

 
$
37,743

 
$
16,781

 
$
90,954

 
 
 
 
 
 
 
 
Balance as of December 31, 2016
$
12,712

 
$
29,465

 
$
3,674

 
$
45,851

Provisions
78,250

 
90,077

 
20,531

 
188,858

Credits/payments
(67,850
)
 
(90,519
)
 
(21,312
)
 
(179,681
)
Balance as of June 30, 2017
$
23,112

 
$
29,023

 
$
2,893

 
$
55,028

Accruals for chargebacks and discounts are recorded as a direct reduction to accounts receivable. Accruals for rebates, distribution-related fees, and other sales-related deductions 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 a 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
June 30,
 
Six Months Ended
June 30,
Sanofi Collaboration Revenue
 
2018
 
2017
 
2018
 
2017
Antibody:
 
 
 
 
 
 
 
 
Reimbursement of Regeneron research and development expenses
 
$
64,482

 
$
137,272

 
$
124,876

 
$
292,517

Reimbursement of Regeneron commercialization-related expenses
 
103,666

 
87,104

 
189,090

 
160,663

Regeneron's share of losses in connection with commercialization of antibodies
 
(68,797
)
 
(122,281
)
 
(143,671
)
 
(230,683
)
Other
 
31,654

 
31,204

 
48,984

 
42,490

Total Antibody
 
131,005

 
133,299

 
219,279

 
264,987

Immuno-oncology:
 
 
 
 
 
 
 
 
Reimbursement of Regeneron research and development expenses
 
77,054

 
68,080

 
150,878

 
126,759

Reimbursement of Regeneron commercialization-related expenses
 
2,061

 
749

 
3,271

 
749

Other
 
27,633

 
20,000

 
53,815

 
40,000

Total Immuno-oncology
 
106,748

 
88,829

 
207,964

 
167,508

 
 
$
237,753

 
$
222,128

 
$
427,243

 
$
432,495

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 June 30, 2018 and 2017, the Company recognized as research and development expense $9.9 million and $20.6 million , respectively, and during the six months ended June 30, 2018 and 2017, the Company recognized as research and development expense $23.8 million and $45.6 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 dupilumab and REGN3500 (collectively,

8




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


the "Dupilumab/REGN3500 Eligible Investments"). Refer to the " Immuno-Oncology " section below for further details regarding the Letter Agreement.
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 June 30, 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:
 
 
June 30,
 
December 31,
 
 
2018
 
2017
Accounts receivable, net
 
$
160,954

 
$
121,001

Deferred revenue
 
$
170,906

 
$
117,682

Significant changes in deferred revenue balances are as follows:
 
 
Six Months Ended
June 30, 2018
Increase due to shipments of commercial supplies to Sanofi
 
$
108,359

Revenue recognized that was included in deferred revenue at the beginning of the period
 
$
(55,135
)
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

9




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


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. Pursuant to the Letter Agreement, the cemiplimab development budget has been increased and 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 our Common Stock directly or indirectly owned by Sanofi through September 30, 2020. If Sanofi desires to sell shares of our 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, we may elect to purchase, in whole or in part, such shares from Sanofi. If we do 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. During the second quarter of 2018, Sanofi elected to sell, and we elected to purchase (by issuing a credit towards the amount owed by Sanofi), 121,601 shares of the Company's Common Stock to satisfy Sanofi's funding obligation related to cemiplimab development costs incurred during the first quarter of 2018. Consequently, we recorded the cost of the shares received, or $37.6 million , as Treasury Stock during the three months ended June 30, 2018.
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 June 30, 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 the $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 by Sanofi 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:
 
 
June 30,
 
December 31,
 
 
2018
 
2017
Accounts receivable, net
 
$
76,522

 
$
59,274

Deferred revenue
 
$
476,312

 
$
440,000


10




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


Significant changes in deferred revenue balances are as follows:
 
 
Six Months Ended
June 30, 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
 
$
(57,331
)
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 June 30, 2018 was $1,550.1 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.
b. Bayer
EYLEA outside the United States
Revenue earned in connection with our Bayer EYLEA collaboration is detailed below:
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
Bayer EYLEA Collaboration Revenue
 
2018
 
2017
 
2018
 
2017
Regeneron's net profit in connection with commercialization of EYLEA outside the United States
 
$
246,302

 
$
190,883

 
$
478,370

 
$
365,759

Reimbursement of Regeneron EYLEA development expenses
 
3,678

 
2,329

 
7,135

 
4,780

Other
 
12,694

 
10,593

 
24,557

 
21,196

 
 
$
262,674

 
$
203,805

 
$
510,062

 
$
391,735

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:
 
 
June 30,
 
December 31,
 
 
2018
 
2017
Accounts receivable, net
 
$
261,646

 
$
241,153

Deferred revenue
 
$
73,750

 
$
68,734


11




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


Significant changes in deferred revenue balances are as follows:
 
 
Six Months Ended
June 30, 2018
Increase due to shipments of commercial supplies to Bayer
 
$
24,666

Revenue recognized that was included in deferred revenue at the beginning of the period
 
$
(19,650
)
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.
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.
During the second and fourth quarters of 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 June 30, 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 $68.8 million and $67.7 million of revenue for the three months ended June 30, 2018 and 2017, respectively, and $127.4 million and $100.8 million of revenue for the six months ended June 30, 2018 and 2017, respectively, in connection with the Teva Collaboration Agreement.

12




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


The following tables summarize accounts receivable and deferred revenue information in connection with the Teva Collaboration Agreement:
 
 
June 30,
 
December 31,
 
 
2018
 
2017
Accounts receivable, net (recorded within Prepaid expenses and other current assets)
 
$
35,504

 
$
71,297

Deferred revenue
 
$
194,564

 
$
197,357

Significant changes in deferred revenue balances are as follows:
 
 
Six Months Ended
June 30, 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
 
$
(52,826
)
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 June 30, 2018 was $525.3 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.
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
June 30,
 
Six Months Ended
June 30,
 
 
2018
 
2017
 
2018
 
2017
Net income - basic and diluted
 
$
551,412

 
$
387,744

 
$
1,029,392

 
$
636,675

 
 
 
 
 
 
 
 
 
(Shares in thousands)
 
 
 
 
 
 
 
 
Weighted average shares - basic
 
107,800

 
106,034

 
107,724

 
105,804

Effect of dilutive securities:
 
 
 
 
 
 
 
 
Stock options
 
6,664

 
9,602

 
6,959

 
9,310

Restricted stock
 
13

 
501

 
14

 
493

Dilutive potential shares
 
6,677

 
10,103

 
6,973

 
9,803

Weighted average shares - diluted
 
114,477

 
116,137

 
114,697

 
115,607

 
 
 
 
 
 
 
 
 
Net income per share - basic
 
$
5.12

 
$
3.66

 
$
9.56

 
$
6.02

Net income per share - diluted
 
$
4.82

 
$
3.34

 
$
8.97

 
$
5.51


13




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


Shares which have been excluded from diluted per share amounts because their effect would have been antidilutive include the following:
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(Shares in thousands)
 
2018
 
2017
 
2018
 
2017
Stock options
 
14,865

 
7,959

 
14,872

 
11,055

Restricted stock
 
60

 

 
57

 
16

5. Marketable Securities
Marketable securities as of June 30, 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 June 30, 2018
 
Cost Basis
 
Gains
 
Losses
 
Value
Available-for-sale debt securities:
 
 
 
 
 
 
 
 
Corporate bonds
 
$
2,497,276

 
$
2,282

 
$
(18,987
)
 
$
2,480,571

U.S. government and government agency obligations
 
126,395

 
30

 
(1,589
)
 
124,836

Municipal bonds
 
2,572

 

 
(8
)
 
2,564

Commercial paper
 
76,013

 

 

 
76,013

Certificates of deposit
 
40,773

 

 

 
40,773

 
 
$
2,743,029

 
$
2,312

 
$
(20,584
)
 
$
2,724,757

 
 
 
 
 
 
 
 
 
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 available-for-sale debt securities based on their contractual maturity dates. The available-for-sale debt securities listed as of June 30, 2018 mature at various dates through March 2023. The fair values of available-for-sale debt security investments by contractual maturity consist of the following:
 
 
June 30,
2018
 
December 31,
2017
Maturities within one year
 
$
765,642

 
$
593,783

Maturities after one year through five years
 
1,959,115

 
1,426,773

 
 
$
2,724,757

 
$
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 available-for-sale 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 June 30, 2018
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
Corporate bonds
$
1,588,876

 
$
(15,052
)
 
$
218,109

 
$
(3,935
)
 
$
1,806,985

 
$
(18,987
)
U.S. government and government agency obligations
45,936

 
(656
)
 
71,864

 
(933
)
 
117,800

 
(1,589
)
Municipal bonds
2,061

 
(8
)
 

 

 
2,061

 
(8
)
 
$
1,636,873

 
$
(15,716
)
 
$
289,973

 
$
(4,868
)
 
$
1,926,846

 
$
(20,584
)
 
 
 
 
 
 
 
 
 
 
 
 
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 and six months ended June 30, 2018 and 2017 .
With respect to marketable securities, for the three and six months ended June 30, 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 were $16.5 million and $25.9 million of net unrealized gains on equity securities recognized in Other income, net for the three and six months ended June 30, 2018, respectively. For the three and six months ended June 30, 2017, there were $5.8 million and $11.2 million , respectively, of net unrealized gains on equity securities that were 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 June 30, 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
$
2,480,571

 

 
$
2,480,571

U.S. government and government agency obligations
124,836

 

 
124,836

Municipal bonds
2,564

 

 
2,564

Commercial paper
76,013

 

 
76,013

Certificates of deposit
40,773

 

 
40,773

Equity securities
85,588

 
$
85,588

 

 
$
2,810,345

 
$
85,588

 
$
2,724,757

 
 
 
 
 
 
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 and six months ended June 30, 2018 and 2017 . There were no transfers of marketable securities between Levels 1 or 2 classifications during the three and six months ended June 30, 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 June 30, 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 June 30, 2018 and December 31, 2017, the Company had $45.5 million and $37.5 million , respectively, 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:
 
June 30,
 
December 31,
 
2018
 
2017
Raw materials
$
205,463

 
$
190,045

Work-in-process
400,834

 
302,042

Finished goods
26,571

 
21,791

Deferred costs
295,685

 
212,260

 
$
928,553

 
$
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 six months ended June 30, 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 would be discontinued.
The following table summarizes the notional amounts of the Company's outstanding interest rate swap and cap agreements:
 
June 30,
 
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 and six months ended June 30, 2018 and 2017, 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 June 30, 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 and six months ended June 30, 2018 and 2017, 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 $104.7 million and $138.1 million for the three months ended June 30, 2018 and 2017, respectively, and $212.1 million and $321.5 million for the six months ended June 30, 2018 and 2017 , respectively. The Company's effective tax rate was 16.0% and 26.3% for the three months ended June 30, 2018 and 2017, respectively, and 17.1% and 33.6% for the six months ended June 30, 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 during the six months ended June 30, 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 and six months ended June 30, 2018 was positively impacted, compared to the U.S. federal statutory rate, primarily by the tax benefit associated with stock-based compensation, income earned in foreign jurisdictions with tax rates lower than the U.S. federal statutory rate, the foreign-derived intangible income deduction, and the federal tax credit for research activities. The Company's effective tax rate for the three and six months ended June 30, 2017 was positively impacted, compared to the U.S. federal statutory rate, by the tax benefit associated with stock-based compensation, the domestic manufacturing deduction, and the federal tax credit for research activities, partly offset 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.
Income tax provisions recorded in the Statement of Comprehensive Income for the three and six months ended June 30, 2018 and 2017 were not material.
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:
 
 
June 30,
 
June 30,
 
 
2018
 
2017
Cash and cash equivalents
 
$
917,876

 
$
744,313

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
 
$
930,376

 
$
756,813

Restricted cash consists of amounts held by financial institutions pursuant to contractual arrangements.

18




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


Supplemental disclosure of non-cash investing and financing activities
Included in accounts payable, accrued expenses, and other liabilities as of June 30, 2018 and December 31, 2017 were $38.4 million and $41.8 million , respectively, of accrued capital expenditures. Included in accounts payable, accrued expenses, and other liabilities as of June 30, 2017 and December 31, 2016 were $30.9 million and $28.2 million , respectively, of accrued capital expenditures.
As described in Note 3, during the six months ended June 30, 2018, we purchased (by issuing a credit towards the amount owed by Sanofi) 121,601 shares of our Common Stock from Sanofi, and recorded the cost of the shares received, or $37.6 million , as Treasury Stock.
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 six months ended June 30, 2017 .
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. On June 5, 2018, the Court of Appeal issued a final order, which enjoins Kymab from infringing the '287 Patent and '163 Patent (subject to certain exceptions) and requires Kymab to destroy or deliver to a third party all products and antibodies and cells engineered to produce antibodies which infringe the '287 Patent and '163 Patent (subject to certain exceptions). The provisions of the final order are stayed pending final determination of Kymab's application for permission to appeal to the Supreme Court of the United Kingdom and, if permission is granted, Kymab's appeal. The Company has also been awarded a portion of the legal fees incurred by it in connection with the proceedings in the English High Court of Justice and the Court of Appeal described above.
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; and, on December 26, 2017, the Federal Circuit denied the Company's petition for panel rehearing and rehearing en banc . On May 25, 2018, the Company filed a petition for a writ of certiorari with the United States Supreme Court.

19




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


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, Merus, and Novo Nordisk each filed a notice of appeal of the Opposition Division's decision on February 9, 2018, May 25, 2018, and June 26, 2018, respectively.
With respect to the '018 Patent infringement litigation against Merus N.V., on June 25, 2018, the United States District Court for the Southern District of New York granted Merus's motion for attorneys' fees and costs in the amount of $10.5 million , plus pre- and post-judgment interest. On July 25, 2018, the Company filed a notice of appeal with the Federal Circuit. If the Company is ultimately required to pay such amounts, this payment is not expected to have a material impact on the Company's financial statements.
Other than as noted above, 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.
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. On July 23, 2018, Amgen filed a petition for a writ of certiorari with the United States Supreme Court. A new jury trial is currently 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,

20




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


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 July 12, 2018, Sanofi-Aventis Deutschland GmbH, Sanofi-Aventis Groupe S.A., and Sanofi Winthrop Industrie S.A. filed an action in the Federal Patents Court (the "FPC") in Munich, Germany, seeking a compulsory license from Amgen based on the '124 Patent for the continued commercializing of Praluent in Germany. This compulsory license action included a request for a provisional compulsory license. The FPC has issued a summons for oral hearing scheduled for September 6, 2018 in the provisional compulsory license proceedings.
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 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 February 12, 2019.
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

21




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


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. Oral hearing on the Additional IPR Petitions has been scheduled for November 14, 2018.
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 held on July 12, 2018. 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 July 23, 2019.
On September 30, 2016, Sanofi initiated a revocation proceeding in the United Kingdom to invalidate the U.K. counterpart of European Patent No. 2,292,665 (the "'665 Patent"), another patent owned by Immunex relating to antibodies that bind the human interleukin-4 receptor. At the joint request of the parties to the revocation proceeding, the U.K. Patents Court ordered on January 30, 2017 that the revocation action be stayed pending the final determination of the currently pending EPO opposition proceedings initiated by the Company and Sanofi in relation to the '665 Patent. The oral hearing before the EPO on the oppositions occurred on November 20, 2017, at which the claims of the '665 Patent were found invalid and the patent was revoked. A final written decision of revocation of the '665 Patent was issued by the EPO on January 4, 2018. Immunex filed a notice of appeal of the EPO's decision on January 31, 2018. On September 20, 2017 and September 21, 2017, respectively, the Company and Sanofi initiated opposition proceedings in the EPO against Immunex's European Patent No. 2,990,420 (the "'420 Patent"), a divisional patent of the '665 Patent ( i.e. , a patent that shares the same priority date, disclosure, and patent term of the parent '665 Patent but contains claims to a different invention). An oral hearing before the EPO on the '420 Patent opposition proceedings has been scheduled for January 24–25, 2019. The original patent term of the Immunex patents is set to expire in 2021.
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 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.

22




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


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. On July 26, 2018, the parties to the second shareholder derivative action filed with the court a stipulation of compromise and settlement. The settlement is subject to court approval. Under the terms of the stipulation, final approval of the settlement would release the claims asserted in the original suit as well. The court has scheduled a hearing for August 8, 2018 to determine whether to preliminarily approve the settlement and schedule a final approval hearing. 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.
While the Company is unable at this time to predict the ultimate outcome of these proceedings, any possible loss related to these proceedings is not expected to have a material impact on the Company's financial statements.

23




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


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; 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 EYLEA, 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

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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 $1,608.0 million in the second quarter and $3,119.5 million in the first half of 2018 , compared to $1,470.1 million in the second quarter and $2,789.1 million in the first half of 2017 . Our net income was $551.4 million , or $4.82 per diluted share, in the second quarter and $1,029.4 million , or $8.97 per diluted share, in the first half of 2018 , compared to net income of $387.7 million , or $3.34 per diluted share, in the second quarter and $636.7 million , or $5.51 per diluted share, in the first half 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.

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We currently have six products that have received marketing approval:
Product
 
Disease Area (1)
 
Territory
 
 
U.S.
 
EU
 
Japan
 
Certain other countries outside the U.S.
EYLEA (aflibercept) Injection (2)
Ÿ
Neovascular age-related macular degeneration (wet AMD)
 
a
 
a
 
a
 
a
Ÿ
Diabetic macular edema (DME)
 
a
 
a
 
a
 
a
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)
 
a
 
a
 
a
 
a
Ÿ
Myopic choroidal neovascularization (mCNV)
 
 
 
a
 
a
 
a
Ÿ
Diabetic retinopathy in patients with DME
 
a
 
 
 
 
 
 
Dupixent (dupilumab) Injection (3)
Ÿ
Atopic dermatitis (in adults)
 
a
 
a
 
a
 
a
Praluent (alirocumab) Injection (3)
Ÿ
Heterozygous familial hypercholesterolemia (HeFH) or clinical atherosclerotic cardiovascular disease (ASCVD) (in adults)
 
a
 
a
 
a
 
a
Kevzara (sarilumab) Solution for Subcutaneous Injection (3)
Ÿ
Rheumatoid arthritis (RA) (in adults)
 
a
 
a
 
a
 
a
ARCALYST ®  (rilonacept) Injection for Subcutaneous Use
Ÿ
Cryopyrin-Associated Periodic Syndromes (CAPS), including Familial Cold Auto-inflammatory Syndrome (FCAS) and Muckle-Wells Syndrome (MWS)
 
a
 
 
 
 
 
 
ZALTRAP ® (ziv-aflibercept) Injection for Intravenous Infusion (4)
Ÿ
Metastatic colorectal cancer (mCRC)
 
a
 
a
 
 
 
a
 
 
 
 
 
 
 
(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) 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.










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Marketed Products