UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Form 10-K/A
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended December 31, 2003 | ||
OR | ||
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TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from to |
Commission File Number 0-19034
REGENERON PHARMACEUTICALS, INC.
(914) 347-7000
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
(Address of principal executive
offices)
10591-6707
(Zip code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock par value $.001 per share
Preferred Share Purchase Rights expiring October 18, 2006
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 þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K/A or any amendment to this Form 10-K/A. o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes þ No o
The aggregate market value of voting stock held by non-affiliates of the registrant as of June 30, 2003, was $546,128,000.
Indicate the number of shares outstanding of each
of Registrants classes of common stock as of
February 29, 2004:
Class of Common Stock
Number of Shares
2,365,873
53,197,081
DOCUMENTS INCORPORATED BY REFERENCE:
The Registrants definitive proxy statement filed in connection with solicitation of proxies for its 2004 Annual Meeting of Shareholders is incorporated by reference into Part III of this Form 10-K/A. Exhibit index is located on pages 40 to 42 of this filing.
EXPLANATORY NOTE:
This Amendment No. 2 on Form 10-K/A (Amendment No. 2) to the Annual Report on Form 10-K of Regeneron Pharmaceuticals, Inc. for the fiscal year ended December 31, 2003, as previously amended by Amendment No. 1 on Form 10-K/A (Amendment No. 1) filed on March 19, 2004, is being filed to (i) include the audited financial statements of Amgen-Regeneron Partners, an entity which is 50% owned by Regeneron, as of and for the year ended December 31, 2001 and the accompanying audit report of Ernst & Young LLP, independent auditors and (ii) include as Exhibit 23.2 a consent of Ernst & Young LLP. In addition, the audit report of PricewaterhouseCoopers LLP, an independent registered public accounting firm, on page F-2 has been updated to include new descriptive language required under standards adopted by the Public Company Accounting Oversight Board since Amendment No. 1 was filed. In all other respects, the text of this Amendment No. 2, including the financial statements filed as part of this report, remains unchanged from Amendment No. 1.
PART I
Item 1. | Business |
This Annual Report on Form 10-K contains
forward-looking statements that involve risks and uncertainties
relating to the future financial performance of Regeneron
Pharmaceuticals, Inc. and actual events or results may differ
materially. These statements concern, among other things, the
possible success and therapeutic applications of our product
candidates and research programs, the timing and nature of the
clinical and research programs now underway or planned, and the
future sources and uses of capital and our financial needs.
These statements are made by us based on managements
current beliefs and judgment. In evaluating such statements,
stockholders and potential investors should specifically
consider the various factors identified under the caption
Risk Factors which could cause actual 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, except as required
by law.
General
Regeneron Pharmaceuticals, Inc. is a biopharmaceutical company that discovers, develops, and intends to commercialize pharmaceutical products for the treatment of serious medical conditions. Our clinical and preclinical pipeline includes product candidates for the treatment of cancer, diseases of the eye, rheumatoid arthritis and other inflammatory conditions, allergies, asthma, obesity, and other diseases and disorders. Developing and commercializing new medicines entails significant risk and expense. Since inception we have not generated any sales or profits from the commercialization of any of our product candidates.
Our core business strategy is to combine our strong foundation in basic scientific research and discovery-enabling technology with our manufacturing and clinical development capabilities to build a successful, integrated biopharmaceutical company. Our efforts have yielded a diverse and growing pipeline of product candidates that have the potential to address a variety of unmet medical needs. We believe that our ability to develop product candidates is enhanced by the application of our technology platforms. These platforms are designed to discover specific genes of therapeutic interest for a particular disease or cell type and validate targets through high-throughput production of mammalian models. We continue to invest in the development of enabling technologies to assist in our efforts to identify, develop, and commercialize new product candidates.
Below is a summary of our clinical programs.
| VEGF TRAP: Protein-based product candidate designed to bind Vascular Endothelial Growth Factor (called VEGF, also known as Vascular Permeability Factor or VPF) and its relative, Placental Growth Factor (called PLGF), and prevent their interaction with cell surface receptors. VEGF (and to a less validated degree PLGF) is required for the growth of blood vessels that are needed for tumors to grow and is a potent regulator of vascular permeability and leakage. In 2001, we initiated a dose-escalation Phase I clinical trial designed to assess the safety and tolerability of the VEGF Trap in subjects with advanced solid tumor malignancies. This trial continues to test increasing doses of VEGF Trap delivered by subcutaneous injection as per the protocol and is expected to be completed in the first half of 2004. A second phase, expected to begin in the first half of 2004, will test higher doses of the VEGF Trap delivered intravenously. We are also evaluating the VEGF Trap for the potential treatment of certain eye diseases and in March 2004, announced the initiation of a Phase I study of the VEGF Trap in patients with the neovascular or wet form of age-related macular degeneration. | |
In September 2003, we entered into a collaboration agreement with Aventis Pharmaceuticals Inc. to jointly develop and commercialize the VEGF Trap in multiple oncology, ophthalmology, and possibly other indications throughout the world with the exception of Japan, where product rights remain with us. Aventis made a non- refundable up-front payment of $80.0 million and purchased 2,799,552 newly issued unregistered shares of our Common Stock for $45.0 million. Under the collaboration agreement, we and Aventis will share co-promotion rights and profits on sales, if any, of the VEGF Trap. Aventis |
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has agreed to make a $25.0 million payment to us upon achievement of an early-stage clinical milestone. We may also receive up to $360.0 million in additional milestone payments upon receipt of specified marketing approvals for up to eight VEGF Trap indications in Europe or the United States. Regeneron has agreed to continue to manufacture clinical supplies of the VEGF Trap at our plant in Rensselaer, New York. Aventis has agreed to be responsible for providing commercial scale manufacturing capacity for the VEGF Trap. | ||
Under the collaboration agreement, agreed upon development expenses incurred by both companies during the term of the agreement will be funded by Aventis. If the collaboration becomes profitable, we will reimburse Aventis for 50% of the VEGF Trap development expenses in accordance with a formula based on the amount of development expenses and our share of the collaboration profits, or at a faster rate at our option. In 2004, we and Aventis plan to invest approximately $100 million to support the development of the VEGF Trap. The broad based development program will include multiple Phase I studies to evaluate the VEGF Trap in combination with other therapies in various cancer indications, Phase II single-agent studies of the VEGF Trap in separate cancer indications, and multiple Phase I studies of the VEGF Trap in certain eye diseases. | ||
| INTERLEUKIN-1 TRAP (IL-1 Trap): Protein-based product candidate designed to bind the interleukin-1 (called IL-1) cytokine and prevent its interaction with cell surface receptors. IL-1 is thought to play an important role in rheumatoid arthritis and other inflammatory diseases. In October 2003, we announced that the IL-1 Trap demonstrated evidence of clinical activity and safety in patients with rheumatoid arthritis (RA) in a Phase II dose-ranging study in approximately 200 patients. Patients treated with the highest dose, 100 milligrams of the IL-1 Trap, exhibited non-statistically significant improvements in the proportion of American College of Rheumatology (ACR) 20 responses versus placebo, the primary endpoint of the trial. Patients treated with the IL-1 Trap also exhibited improvements in secondary endpoints of the trial. The IL-1 Trap was generally well tolerated and was not associated with any drug-related serious adverse events. | |
On February 27, 2004, Regeneron announced plans to initiate a Phase IIb study of the IL-1 Trap in patients with rheumatoid arthritis in the second half of 2004. The Phase IIb study will be conducted in a larger patient population, testing higher doses and for a longer period of time than in the previous Phase II trial. In addition, we intend to conduct studies of the IL-1 Trap in a variety of other inflammatory diseases where interleukin-1 is believed to play a critical role. We are currently working on new product formulations that would allow delivery of higher doses of IL-1 Trap either through subcutaneous or intravenous administration and plan to conduct patient tolerability studies in the first half of 2004. | ||
Since March 2003, we have been collaborating with Novartis Pharma AG on the development of the IL-1 Trap. On February 27, 2004, we announced that Novartis had provided notice of its intention not to proceed with the joint development of the IL-1 Trap. Under the terms of the collaboration agreement, Novartis remains obligated to fund agreed upon pre-Phase III IL-1 Trap development expenses during the nine-month notice period before its voluntary termination becomes effective. Novartis and we retain rights under the collaboration agreement to elect to collaborate on the development and commercialization of other IL-1 antagonists being developed independently by the other party that are in earlier stages of development than the IL-1 Trap. | ||
| INTERLEUKIN-4/ INTERLEUKIN-13 TRAP (IL-4/13 Trap): Protein-based product candidate designed to bind both the interleukin-4 and interleukin-13 (called IL-4 and IL-13) cytokines and prevent their interaction with cell surface receptors. IL-4 and IL-13 are thought to play a major role in diseases such as asthma, allergic disorders, and other inflammatory diseases. In October 2002, we initiated a Phase I trial for the IL-4/13 Trap in adult subjects with mild to moderate asthma. This placebo-controlled, double-blind, dose escalation study is designed to assess the safety and tolerability of the IL-4/13 Trap. The trial is expected to be completed in the first quarter of 2004 and we anticipate presenting the results at a scientific conference in the second quarter of 2004. We are also evaluating the potential use of the IL-4/13 Trap in other therapeutic indications. |
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| AXOKINE®: Protein-based product candidate designed to act on the brain region regulating appetite and energy expenditure. AXOKINE is being developed for the treatment of obesity. In March 2003, we reported data from the 12-month treatment period of our initial Phase III pivotal trial of AXOKINE. The double-blind treatment period in this study is being followed by a twelve-month open-label extension phase, during which all study subjects receive AXOKINE. The extension phase is expected to be completed in the first quarter of 2004. We are currently conducting research on improving the formulation and delivery of AXOKINE and evaluating its commercial potential. We do not expect to initiate any Phase III clinical trials of AXOKINE in 2004. |
Our Areas of Focus
Anti-Angiogenesis/Angiogenesis in Cancer and Other Settings: VEGF Trap and the Angiopoietins |
Research. A plentiful blood supply is required to nourish every tissue and organ of the body. Diseases such as diabetes and atherosclerosis wreak their havoc, in part, by destroying blood vessels (arteries, veins, and capillaries) and compromising blood flow. Decreases in blood flow (known as ischemia) can result in non-healing skin ulcers and gangrene, painful limbs that cannot tolerate exercise, loss of vision, and heart attacks. In other cases, disease processes can damage blood vessels by breaking down vessel walls, resulting in defective and leaky vessels. Leaking vessels can lead to swelling and edema, as occurs in brain tumors following ischemic stroke, in diabetic retinopathy, and in arthritis and other inflammatory diseases. Finally, some disease processes, such as tumor growth, depend on the induction of new blood vessels.
In many clinical settings, positively or negatively regulating blood vessel growth could have important therapeutic benefits, as could the repair of damaged and leaky vessels. Thus, building new vessels, by a process known as angiogenesis, can improve circulation to ischemic limbs and the heart, aid in healing skin ulcers or other chronic wounds, and in establishing tissue grafts. Reciprocally, blocking tumor-induced angiogenesis can blunt tumor growth. In addition, repairing leaky vessels can reverse swelling and edema.
Vascular Endothelial Growth Factor was the first growth factor shown to be specific for blood vessels, by virtue of having its receptor specifically expressed on blood vessel cells. In 1994, we discovered a second family of angiogenic growth factors, termed the Angiopoietins, and we have received patents covering the members of this family. The Angiopoietins include naturally occurring positive and negative regulators of angiogenesis, as described in numerous scientific manuscripts published by our scientists and their collaborators. The Angiopoietins are being evaluated in preclinical research by us and our academic collaborators.
Our studies have revealed that VEGF and the Angiopoietins normally function in a coordinated and collaborative manner during blood vessel growth. Thus, for example, the growth of new blood vessels to nourish ischemic tissue appears to require both these agents. In addition, Angiopoietin-1 seems to play a critical role in stabilizing the blood vessel wall, and in animal models administration of this growth factor can prevent or repair leaky vessels. In terms of blocking vessel growth, manipulation of both VEGF and Angiopoietins seems to be of value.
The approach of inhibiting angiogenesis as a mechanism of action for an oncology medicine was further validated in February 2004, when the U.S. Food and Drug Administration (or FDA) approved Genentech, Inc.s VEGF inhibitor, Avastin. Avastin is an antibody product designed to inhibit VEGF and interfere with the blood supply to cancerous tumors. We exploited our Trap technology (which is described below) to develop a protein-based blocker of VEGF, referred to as the VEGF Trap.
Oncology. Cancer is a heterogeneous set of diseases and one of the leading causes of death in the developed world. A mutation in any one of dozens of normal genes can eventually lead a cell to become cancerous; however, a common feature of cancer cells is that they need to get nutrients and remove waste products, just as normal cells do. The vascular system is designed to supply nutrients and remove waste from normal tissues. Cancer cells can use the vascular system either by taking over preexisting blood vessels or by promoting the growth of new blood vessels. VEGF is secreted by many tumors to stimulate the growth of new blood vessels to support the tumor. Countering the effects of VEGF, thus blocking the blood supply to tumors, has been shown to provide therapeutic benefits.
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Diseases of the Eye. Age-Related Macular Degeneration (AMD) and Diabetic Retinopathy (DR) are two of the leading causes of adult blindness in the developed world. In both conditions, severe visual loss is caused by a combination of retinal edema and neovascular proliferation. VEGF both stimulates angiogenesis and increases vascular permeability, has been shown to be a major pathogenic factor in both DR and AMD, and is believed to be involved in other medical problems affecting the eyes. Counteracting the effects of VEGF may provide a significant therapeutic benefit to patients suffering from these disorders.
AMD is a leading cause of severe visual loss in people over the age of 55 in developed countries. It is estimated that, in the U.S., 6% of individuals aged 65-74 and 20% of those older than 75 are affected with AMD. DR is a major complication of diabetes mellitus that can lead to significant vision impairment. DR is characterized, in part, by vascular leakage, which results in the collection of fluid in the retina. When the macula, the central area that is responsible for fine visual acuity, is involved, loss of visual acuity occurs. This is referred to as Diabetic Macular Edema (DME). DME is the most prevalent cause of moderate visual loss in patients with diabetes.
Clinical Development VEGF Trap. In November 2001, we initiated a Phase I clinical trial designed to assess the safety and tolerability of the VEGF Trap in subjects with solid tumor malignancies. The Phase I trial is an open-label study in subjects with advanced tumors and is evaluating the VEGF Trap at increasing dose levels. The ongoing study is being conducted at three clinical sites in the United States, and the trial is expected to be completed in the first half of 2004. A second phase, expected to begin in the first half of 2004, will test higher doses of the VEGF Trap delivered intravenously. We are also evaluating the VEGF Trap for the potential treatment of certain diseases of the eye and in March 2004, announced the initiation of a Phase I study of the VEGF Trap in patients with the neovascular or wet form of age-related macular degeneration.
In September 2003, we entered into a Collaboration Agreement with Aventis to jointly develop and commercialize the VEGF Trap in multiple oncology, ophthalmology, and possibly other indications throughout the world with the exception of Japan, where product rights remain with us. In 2004, we and Aventis plan to invest approximately $100 million to support the development of the VEGF Trap. The broad based development program will include multiple Phase I studies to evaluate the VEGF Trap in combination with other therapies in various cancer indications, Phase II single-agent studies of the VEGF Trap in separate cancer indications, and multiple Phase I studies of the VEGF Trap in certain eye diseases.
Trap Technology and Additional Traps |
Research. Our research on ciliary neurotrophic factor, or CNTF, led to the discovery that CNTF, although it is a neurotrophic factor, belongs to the superfamily of signaling molecules called cytokines. Cytokines are soluble proteins secreted by the cells of the body. In many cases, cytokines act as messengers to help regulate immune and inflammatory responses. In excess, cytokines can be harmful and have been linked to a variety of diseases. Blocking cytokines and growth factors is a proven therapeutic approach with a number of medicines or product candidates already approved or in clinical development. The cytokine superfamily includes factors such as erythropoietin, thrombopoietin, granulocyte-colony stimulating factor, and the interleukins (or ILs).
During the 1990s, our scientists made a number of breakthroughs in understanding how receptors work for an entire family of cytokines, which had broad relevance for many other families of cytokines and growth factors. Based on these findings, we developed a new class of protein-based antagonists, termed Traps, which could be designed to target and block specific cytokines and growth factors implicated in human disease. Examples include the VEGF Trap (designed to block VEGF and PLGF), the IL-1 Trap (designed to block both IL-1 alpha and IL-1 beta), the IL-4 Trap (designed to block IL-4), the IL-6 Trap (designed to block IL-6), the IL-18 Trap (designed to block IL-18), and the IL-4/13 Trap (designed to block IL-4 and IL-13).
In preclinical studies, these Traps are more potent than other growth factor and cytokine antagonists, potentially allowing lower levels of these drug candidates to be used. Moreover, because these Traps are comprised entirely of natural human-derived protein sequences, they may be less likely to induce an immune reaction in humans. Because pathological levels of certain cytokines and growth factors seem to contribute to a variety of diseases, our Traps have the potential to be important therapeutic agents.
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We have clinical programs underway for our IL-1 Trap and IL-4/13 Trap (see below) and research programs underway for an IL-6 Trap and an IL-18 Trap. IL-6 has been implicated in the pathology and progression of multiple myeloma, certain solid tumors, AIDS, lymphomas (both AIDS-related and non-AIDS-related), osteoporosis, and other conditions. IL-18 is thought to contribute to a number of inflammatory and immunological diseases and disorders. We also have patents covering additional Traps for IL-2, IL-3, IL-5, IL-15, and others, which are being studied in earlier stage research programs. Our research also includes molecular and cellular research to improve or modify Trap technology, process development efforts to produce experimental and clinical research supplies, and in vivo and in vitro studies to further understand and demonstrate the efficacy of the Traps.
Clinical Development. |
IL-1 Trap. Rheumatoid arthritis is a chronic disease in which the immune system attacks the tissue that lines and cushions joints. Over time, the cartilage, bone, and ligaments of the joint erode, leading to progressive joint deformity and joint destruction, generally in the hand, wrist, knee, and foot. Joints become painful and swollen and motion is limited. Over two million people, 1% of the U.S. population, are estimated to have rheumatoid arthritis, and 10% of those eventually become disabled. Women account for roughly two-thirds of these patients.
In July 2002, we announced the initiation of a dose-ranging Phase II study of the IL-1 Trap in subjects with rheumatoid arthritis. This trial enrolled approximately 200 subjects who received weekly self-injections of one of three fixed doses of IL-1 Trap or placebo for 12 weeks, followed by 10 weeks of off-treatment follow-up. In October 2003, we announced that in this trial the IL-1 Trap demonstrated evidence of clinical activity and safety. Patients treated with the highest dose, 100 milligrams of the IL-1 Trap, exhibited non-statistically significant improvements in the proportion of American College of Rheumatology (ACR) 20 responses versus placebo, the primary endpoint of the trial. Patients treated with the IL-1 Trap also exhibited improvements in secondary endpoints of the trial. The IL-1 Trap was generally well tolerated and was not associated with any drug-related serious adverse events.
On February 27, 2004, we announced plans to initiate a Phase IIb study of the IL-1 Trap in patients with rheumatoid arthritis in the second half of 2004. The Phase IIb study will be conducted in a larger patient population, testing higher doses and for a longer period of time than in the previous Phase II trial. In addition, we intend to conduct studies of the IL-1 Trap in a variety of other inflammatory diseases where interleukin-1 is believed to play an important role. We are currently working on new product formulations that would allow delivery of higher doses of IL-1 Trap either through subcutaneous or intravenous administration and plan to conduct patient tolerability studies in the first half of 2004.
Since March 2003, we have been collaborating with Novartis Pharma AG on the development of the IL-1 Trap. On February 27, 2004, we announced that Novartis had provided notice of its intention not to proceed with the joint development of the IL-1 Trap. Under the terms of the collaboration agreement, Novartis remains obligated to fund agreed upon pre-Phase III IL-1 Trap development expenses during the nine-month notice period before its voluntary termination becomes effective. Novartis and we retain rights under the collaboration agreement to elect to collaborate on the development and commercialization of other IL-1 antagonists being developed independently by the other party that are in earlier stages of development than the IL-1 Trap.
IL-4/13 Trap. One in 13 Americans suffers from allergies and one in 18 suffers from asthma. The number of people afflicted with these diseases has been growing at a fast rate. It is believed that IL-4 and IL-13 play a role in these diseases. These two cytokines are essential to the normal functioning of the immune system, creating a vital communication link between white blood cells. In the case of asthma and allergies, however, it is thought that excess levels of IL-4 and IL-13 causes overactivity of the immune system, which contributes to disease initiation and progression.
Antagonists for IL-4 and IL-13 may be therapeutically useful in a number of allergy and asthma-related conditions, including as an adjunct to vaccines where blocking IL-4 and IL-13 may help to elicit more of the desired type of immune response to the vaccine. We have developed both an IL-4 Trap and an IL-4/13 Trap,
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Obesity and Metabolic Diseases |
Food intake and metabolism are regulated by complex interactions between diverse neural and hormonal signals that serve to maintain an optimal balance between energy intake, storage, and utilization. The hypothalamus, a small area at the base of the brain, is critically involved in the integration of peripheral signals which reflect nutritional status and neural outputs which regulate appetite, food seeking behaviors, and energy expenditure. Obesity and related metabolic disorders, such as type 2 diabetes, reflect a dysregulation in the systems which ordinarily tightly couple energy intake to energy expenditure. Our preclinical research program encompasses the study of both central (neuropeptide) and peripheral (hormonal) regulators of food intake and metabolism in health and disease.
Obesity is a major health problem in all developed countries. The prevalence of obesity in the United States has increased substantially during the past decade. A 1999 Congressional Report funded by the National Institutes of Health confirmed that obesity significantly increases a number of health risks, including type 2 diabetes. Obesity-related conditions, such as stroke and myocardial infarct are estimated to contribute to about 300,000 deaths yearly, ranking second only to smoking as a cause of preventable death. Several studies published in 2002 demonstrate that even modest levels of weight loss, when maintained over an extended period of time, can significantly reduce the risk of developing type 2 diabetes. Health care expenditures for obesity-related conditions now total over $200 billion a year in the United States. Current treatment of obesity consists of diet, exercise, and other lifestyle changes, and a limited number of medicines. There are several approved medicines currently indicated for the treatment of obesity, including sibutramine (Meridia®, a registered trademark of Abbott Laboratories) and orlistat (Xenical®, a registered trademark of Hoffmann-LaRoche, Inc.).
Clinical Development AXOKINE. We are developing AXOKINE for the treatment of obesity. AXOKINE is our patented genetically re-engineered form of CNTF. In March 2003, we reported data from the 12-month treatment period of our initial Phase III pivotal trial of AXOKINE. The double-blind treatment period in this study is being followed by a twelve-month open-label extension phase, during which all study subjects receive AXOKINE. The extension phase is expected to be completed in the first quarter of 2004.
Two AXOKINE trials remain ongoing. These trials, which each include approximately 300 subjects, are evaluating the safety of intermittent treatment with AXOKINE and studying maintenance of weight loss following short-term treatment regimens. Results from these trials are expected to be available in mid-2004.
We are currently conducting research on improving the formulation and delivery of AXOKINE and evaluating its commercial potential. We do not expect to initiate any Phase III clinical trials of AXOKINE in 2004.
Muscle Atrophy and Related Disorders |
Muscle atrophy occurs in many neuromuscular diseases and also when muscle is unused, as often occurs during prolonged hospital stays and during convalescence. Currently, physicians have few options to treat subjects with muscle atrophy or other muscle conditions which afflict millions of people globally. Thus, a treatment that has beneficial effects on skeletal muscle could have significant clinical benefit. Our muscle program is currently focused on conducting in vivo and in vitro experiments with the objective of demonstrating and further understanding the molecular pathways involved in muscle atrophy and hypertrophy, and discovering therapeutic candidates that can modulate these pathways. This work is being conducted in collaboration with scientists at The Procter & Gamble Company.
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Cartilage Growth Factor System and Osteoarthritis |
Osteoarthritis results from the wearing down of the articular cartilage surfaces that cover joints. Thus, growth factors that specifically act on cartilage cells could have utility in osteoarthritis. Our scientists have discovered a growth factor receptor system selectively expressed by cartilage cells, termed Regeneron Orphan Receptor 2 (ROR2). We have also demonstrated that this growth factor receptor system is required for normal cartilage development in mice. In addition, together with collaborators, we have demonstrated that mutations in this growth factor receptor system cause inherited defects in cartilage development in humans. Thus, this growth factor receptor system is a promising new target for cartilage diseases such as osteoarthritis, but we have not yet identified any therapeutic molecules from our research to advance to clinical development.
Fibrosis |
Fibrotic diseases, such as cirrhosis, result from the excess production of fibrous extracellular matrix by certain cell types. We and our collaborators identified orphan receptors, termed Discoidin Domain Receptors 1 and 2 (DDR1 and DDR2), that are expressed by the activated cell types in fibrotic disease. Our work in this area is currently focused on determining whether selective inhibition or activation of DDR1 and DDR2 would be beneficial in the setting of fibrotic disease. Further, we are studying key signaling pathways which allow particular fibrosis-inducing cells to multiply. Inhibition of such pathways may be useful in preventing the development of fibrosis. These research activities are being conducted in collaboration with scientists at Procter & Gamble.
G-Protein Coupled Receptors |
G-Protein Coupled Receptors have historically been among the most useful targets for pharmaceuticals. We use a genomics approach to discover new G-Protein Coupled Receptors and then we characterize these receptors in our disease models by examining their expression. Early stage research work on selected G-Protein Coupled Receptors is being conducted in collaboration with scientists at Procter & Gamble.
Technology Platforms
Our ability to discover and develop product candidates for a wide variety of serious medical conditions results from the leveraging of our powerful technology platforms, many of which were developed or enhanced by us. Although the primary use of these technology platforms is for our own research and development programs, we are also exploring the possibilities of exploiting these technologies commercially through, for example, direct licensing or sale of technology, or the establishment of research collaborations to discover and develop drug targets. In December 2002, we entered into an agreement with Serono S.A. to use excess capacity from our Velocigene technology platform to provide Serono with knock-out and transgenic mammalian models of gene function. Under the agreement, which was amended as of January 1, 2004 to expand the scope of services available under the Velocigene platform, Serono will pay us up to $4.0 million annually for up to five years.
Targeted Genomics . In contrast to basic genomics approaches, which attempt to identify every gene in a cell or genome, we use Targeted Genomics approaches to identify specific genes likely to be of therapeutic interest. These approaches do not depend on random gene sequencing, but rather on function-based approaches to specifically target the discovery of genes for growth factors, peptides, and their receptors that are most likely to have use for developing drug candidates. This technology has already led to our discovery of the Angiopoietin and Ephrin growth factor families for angiogenesis and vascular disorders, the MuSK growth factor receptor system for muscle disorders, and the Regeneron Orphan Receptor (ROR) growth factor receptor system that regulates cartilage formation.
Velocigene . A major challenge facing the biopharmaceutical industry in the post-genomic era is the efficient assignment of function to random gene sequences to enable the identification of validated drug targets. One way to help determine the function of a gene is to generate mammalian models in which the gene is removed (referred to as knock-out mammalian models), or is over-produced (referred to as transgenic mammalian models), or in which a color-producing gene is substituted for the gene of interest (referred to as
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Designer Protein Therapeutics . In cases in which the natural gene product is itself not a product candidate, we utilize our Designer Protein Therapeutics platform to genetically engineer product candidates with the desired properties. We use these technologies to develop derivatives of growth factors and their receptors, which can allow for modified agonistic or antagonistic properties that may prove to be therapeutically useful. This technology platform has already produced more than 10 patented proteins, including the VEGF Trap and the IL-1 Trap, which are currently in clinical testing, and several others in preclinical development.
Our Collaborative Programs
We have entered into collaboration and licensing agreements with various companies, including Aventis, Novartis, Procter & Gamble, Amgen Inc., Sumitomo Chemical Company, Ltd., Medarex, Inc., Emisphere Technologies, Inc., and Nektar Therapeutics. In addition, we conduct many research programs in collaboration with academic partners. In the future, we may enter into additional strategic collaborations or licensing agreements focusing on one or more of our product candidates, research programs, or technology platforms. Below are summaries of our major collaborations.
Aventis. In September 2003, we entered into a collaboration agreement with Aventis to jointly develop and commercialize the VEGF Trap. Aventis made a non-refundable up-front payment of $80.0 million and purchased 2,799,552 newly issued unregistered shares of our Common Stock for $45.0 million.
Under the collaboration agreement, we and Aventis will share co-promotion rights and profits on sales, if any, of the VEGF Trap. Aventis has agreed to make a $25.0 million payment to us upon achievement of an early-stage clinical milestone. We may also receive up to $360.0 million in additional milestone payments upon receipt of specified marketing approvals for up to eight VEGF Trap indications in Europe or the United States. Regeneron has agreed to continue to manufacture clinical supplies of the VEGF Trap at our plant in Rensselaer, New York. Aventis has agreed to be responsible for providing commercial scale manufacturing capacity for the VEGF Trap.
Under the collaboration agreement, agreed upon development expenses incurred by both companies during the term of the agreement will be funded by Aventis. If the collaboration becomes profitable, we will reimburse Aventis for 50 percent of the VEGF Trap development expenses in accordance with a formula based on the amount of development expenses and our share of the collaboration profits, or at a faster rate at our option.
Aventis has the right to terminate the agreement without cause with at least twelve months advance notice. Upon termination of the agreement for any reason, any remaining obligation to reimburse Aventis for 50 percent of the VEGF Trap development expenses will also terminate and we will retain all rights to the VEGF Trap.
Novartis. In March 2003, we entered into a collaboration agreement with Novartis to jointly develop and commercialize the IL-1 Trap. Novartis made a non-refundable up-front payment of $27.0 million and purchased 7,527,050 newly issued unregistered shares of our common stock for $48.0 million.
Development expenses incurred during 2003 were shared equally by us and Novartis. We funded our share of 2003 expenses through a loan from Novartis that will be forgiven, together with accrued interest, should certain preclinical and clinical milestones be reached, and is otherwise due and payable on July 1, 2004.
On February 27, 2004, we announced that Novartis had provided notice of its intention not to proceed with the joint development of the IL-1 Trap. Under the terms of the collaboration agreement, Novartis remains obligated to fund agreed upon pre-Phase III IL-1 Trap development expenses during the nine-month
8
Procter & Gamble. In May 1997, we entered into a long-term collaboration agreement with Procter & Gamble to discover, develop, and commercialize pharmaceutical products. In connection with the collaboration, Procter & Gamble made equity purchases of our Common Stock of $42.9 million in June 1997 and $17.1 million in August 2000. These equity purchases were in addition to a purchase by Procter & Gamble of $10.0 million of our common stock that was completed in March 1997. Procter & Gamble also agreed to provide funding in support of our research efforts related to the collaboration, of which we received $80.0 million through December 31, 2003. From 1997 to 1999, Procter & Gamble also provided research support for our AXOKINE program. As a result, Procter & Gamble will be entitled to receive a small royalty on any sales of AXOKINE.
In August 2000, Procter & Gamble made two non-recurring research progress payments to us totaling $3.5 million. Effective December 31, 2000, we and Procter & Gamble entered into a new long-term collaboration agreement, replacing the companies 1997 agreement. The new agreement extended Procter & Gambles obligation to fund our research under the new collaboration agreement through December 2005, with no further research obligations by either party thereafter, and focused the companies collaborative research on therapeutic areas that are of particular interest to Procter & Gamble, including muscle atrophy and muscle diseases, fibrotic diseases, and selected G-Protein Coupled Receptors. For each of these program areas, the parties contribute research activities and necessary intellectual property rights pursuant to mutually agreed upon plans and budgets established by operating committees. During the first five years of the agreement, neither party may independently perform research on targets included in the collaboration.
We and Procter & Gamble divided rights to the programs from the 1997 collaboration agreement that are no longer part of the companies collaboration. Procter & Gamble obtained rights to certain early stage programs. We have rights to all other research programs including exclusive rights to the VEGF Trap, the Angiopoietins, and our Orphan Receptors (RORs). Any product candidates that result from the new collaboration will continue to be jointly developed and marketed worldwide, with the companies equally sharing development costs and profits. Under the new agreement, beginning in the first quarter of 2001, research support from Procter & Gamble is $2.5 million per quarter (before adjustments for inflation) through December 2005.
The new collaboration agreement expires on the later of December 31, 2005 or the termination of research, development, or commercial activities relating to compounds that meet predefined success criteria before that date. In addition, if either party successfully develops a compound covered under the agreement to a predefined development stage during the two-year period following December 31, 2005, the parties shall meet to determine whether to reconvene joint development of the compound under the agreement. The agreement is also subject to termination if either party enters bankruptcy, breaches its material obligations, or undergoes a change of control. In addition to termination rights, our new collaboration agreement with Procter & Gamble has an opt-out provision, whereby a party may decline to participate further in a research or product development program. In such cases, the opting-out party generally does not have any further funding obligation and will not have any rights to the product or program in question (but may be entitled to a royalty on any product sales). If Procter & Gamble opts out of a product development program, and we do not find a new partner, we would bear the full cost of the program.
Manufacturing
We maintain an 8,000 square foot manufacturing facility in Tarrytown, New York. This facility, designed to comply with FDA current good manufacturing practices (GMP), produces preclinical and clinical supplies of our product candidates.
In 1993, we purchased our 104,000 square foot Rensselaer, New York manufacturing facility, and in 2003 completed a 19,500 square foot expansion. This facility is used to manufacture therapeutic candidates for our
9
At December 31, 2003, we employed 274 people in our manufacturing operations at these facilities.
In 1995, we entered into a long-term manufacturing agreement with Merck (called, as amended, the Merck Agreement) to produce an intermediate for a Merck pediatric vaccine at our Rensselaer facility. We agreed to modify portions of our facility for manufacture of the Merck intermediate and to assist Merck in securing regulatory approval for manufacturing in the Rensselaer facility. In December 1999, we announced that the FDA had approved us as a contract manufacturer for the Merck intermediate. Under the Merck Agreement, we are manufacturing intermediate for Merck for six years, with certain minimum order quantities each year. The Merck Agreement extends through 2005, but may be terminated at any time by Merck upon one years notice and may be extended by mutual agreement. Merck reimbursed us for the capital costs to modify the facility and for the cost of our activities performed on behalf of Merck prior to the start of production. Merck pays an annual facility fee of $1.0 million, subject to annual adjustment for inflation, reimburses us for certain manufacturing costs, pays us a variable fee based on the quantity of intermediate supplied to Merck, and makes certain additional payments. We recognized contract manufacturing revenue related to the Merck Agreement of $10.1 million in 2003, $11.1 million in 2002, and $9.8 million in 2001.
Among the conditions for regulatory marketing approval of a medicine is the requirement that the prospective manufacturers quality control and manufacturing procedures conform to the GMP regulations of the health authority. In complying with standards set forth in these regulations, manufacturers must continue to expend time, money, and effort in the area of production and quality control to ensure full technical compliance. Manufacturing establishments, both foreign and domestic, are also subject to inspections by or under the authority of the FDA and by other national, federal, state, and local agencies. If our manufacturing facilities fail to comply with FDA and other regulatory requirements, we will be required to suspend manufacturing. This will have a material adverse effect on our financial condition, results of operations, and cash flow.
Competition
There is substantial competition in the biotechnology and pharmaceutical industries from pharmaceutical, biotechnology, and chemical companies. Our competitors may include Genentech, Novartis, Pfizer Inc., Hoffmann-LaRoche, Abbott Laboratories, Sanofi-Synthelabo, Merck, Amgen, and others. Many of our competitors have substantially greater research, preclinical, and clinical product development and manufacturing capabilities, and financial, marketing, and human resources than we do. Our smaller competitors may also be significant if they acquire or discover patentable inventions, form collaborative arrangements, or merge with large pharmaceutical companies. Even if we achieve product commercialization, one or more of our competitors may achieve product commercialization earlier than we do or obtain patent protection that dominates or adversely affects our activities. Our ability to compete will depend on how fast we can develop safe and effective product candidates, complete clinical testing and approval processes, and supply commercial quantities of the product to the market. Competition among product candidates approved for sale will also be based on efficacy, safety, reliability, availability, price, patent position, and other factors.
VEGF Trap. Many companies are developing therapeutic molecules designed to block the actions of VEGF specifically and angiogenesis in general. A variety of approaches have been employed, including antibodies to VEGF, antibodies to the VEGF receptor, small molecule antagonists to the VEGF receptor tyrosine kinase, as well as multiple other anti-angiogenesis strategies. Many of these alternative approaches may offer competitive advantages to our VEGF Trap in efficacy, side-effect profile, or form of delivery. Additionally, many of these developmental molecules may be at a more advanced stage of development than our product candidate. In particular, Genentech recently was granted approval by the FDA to market and sell Avastin, a monoclonal antibody to VEGF. The marketing approval for Avastin may make it more difficult for us to enroll patients in clinical trials to support the VEGF Trap. This may delay or impair our ability to
10
Cytokine Traps. Marketed products for the treatment of rheumatoid arthritis and asthma are available as either oral or inhaled medicines, whereas our Cytokine Traps currently are only planned for clinical trials as injectibles. The markets for both rheumatoid arthritis and asthma are very competitive. Several new, highly successful medicines are available for these diseases. Examples include the TNF-antagonists Enbrel® (a registered trademark of Amgen), Remicade® (a registered trademark of Centocor), and Humira® (a registered trademark of Abbott) for rheumatoid arthritis, and the leukotriene-modifier Singulair® (a registered trademark of Merck), as well as various inexpensive corticosteroid medicines for asthma. The availability of highly effective FDA approved TNF-antagonists makes it more difficult to successfully develop the IL-1 Trap for the treatment of rheumatoid arthritis. It will be difficult to enroll patients with rheumatoid arthritis to participate in clinical trials of the IL-1 Trap, which may delay or impair our ability to successfully develop the drug candidate. In addition, even if the IL-1 Trap is ever approved for sale, it will be difficult for our drug to compete against these FDA approved TNF-antagonists because doctors and patients will have significant experience using these effective medicines.
AXOKINE. There is substantial competition in the discovery and development of treatments for obesity, as well as established, cost-effective, and emerging prescription and over-the-counter treatments for this condition. For example, Hoffmann-LaRoche and Abbott already market well-established medicines for the treatment of obesity and Amgen, Sanofi-Synthelabo, and a number of other pharmaceutical companies are developing new potential therapeutics. Sanofi-Synthelabo has a cannaboid receptor antagonist in Phase III clinical development. In March 2004, Sanofi-Synthelabo reported that patients treated with this clinical candidate demonstrated significant weight loss in completed Phase III clinical trials. Many of these medicines or therapeutic candidates appear to offer competitive advantages over AXOKINE. For example, AXOKINE currently is available only in injectible form, while the currently available marketed medicines for the treatment of obesity and Sanofi-Synthelabos product candidate are delivered in pill (or oral dosage) forms, which generally are favored by people over injectible medicines. Therefore, even if AXOKINE is approved for sale, the fact that it must be delivered by injection may severely limit its market acceptance among patients and physicians.
Other Areas. Many pharmaceutical and biotechnology companies are attempting to discover and develop small-molecule based therapeutics, similar in at least certain respects to our program with Procter & Gamble. In these and related areas, intellectual property rights have been sought and certain rights have been granted to competitors and potential competitors of ours, and we may be at a substantial competitive disadvantage in such areas as a result of, among other things, our lack of experience, trained personnel, and expertise. A number of corporate and academic competitors are involved in the discovery and development of novel therapeutics using tyrosine kinase receptors, orphan receptors, and compounds that are the focus of other research or development programs we are now conducting. These competitors include Amgen and Genentech, as well as many others. Many firms and entities are engaged in research and development in the areas of cytokines, interleukins, angiogenesis, and muscle conditions. Some of these competitors are currently conducting advanced preclinical and clinical research programs in these areas. These and other competitors may have established substantial intellectual property and other competitive advantages.
If a competitor announces a successful clinical study involving a product that may be competitive with one of our product candidates or an approval by a regulatory agency of the marketing of a competitive product, such announcement may have a material adverse effect on our operations, or future prospects, or the price of our common stock.
We also compete with academic institutions, governmental agencies, and other public or private research organizations, which conduct research, seek patent protection, and establish collaborative arrangements for the development and marketing of products that would provide royalties for use of their technology. These
11
Patents, Trademarks, and Trade Secrets
Our success depends, in part, on our ability to obtain patents, maintain trade secret protection, and operate without infringing on the proprietary rights of third parties. Our policy is to file patent applications to protect technology, inventions, and improvements that we consider important to the development of our business. We have been granted approximately 100 U.S. patents and we have approximately 100 pending U.S. applications. We are the nonexclusive licensee of a number of additional U.S. patents and patent applications. We also rely upon trade secrets, know-how, and continuing technological innovation to develop and maintain our competitive position. We or our licensors or collaborators have filed patent applications on products and processes relating to AXOKINE, Cytokine Traps, VEGF Trap, and Angiopoietins, as well as other technologies and inventions in the United States and in certain foreign countries. We intend to file additional patent applications, when appropriate, relating to improvements in these technologies and other specific products and processes. We plan to aggressively prosecute, enforce, and defend our patents and other proprietary technology.
In July 2002, we announced that Amgen and Immunex Corporation (now part of Amgen) granted us a non-exclusive license to certain patents and patent applications which may be used in the development and commercialization of the IL-1 Trap. The license followed two other licensing arrangements under which we obtained a non-exclusive license to patents owned by ZymoGenetics, Inc. and Tularik Inc. for use in connection with the IL-1 Trap program. These license agreements would require us to pay royalties based on the net sales of the IL-1 Trap if and when it is approved for sale. In total, the royalty rate under these three agreements would be in the mid-single digits.
In August 2003, Merck granted us a non-exclusive license to certain patents and patent applications which may be used in the development and commercialization of AXOKINE. In consideration for the license, we issued to Merck 109,450 newly issued unregistered shares of our Common Stock and agreed to make an additional payment to Merck if the fair market value of the shares falls below a certain threshold at the time that Merck has the right to sell them. We agreed to make an additional payment upon receipt of marketing approval for a product covered by the licensed patents and pay royalties, at staggered rates in the mid-single digits, based on the net sales, if any, of products covered by the licensed patents.
Patent law relating to the patentability and scope of claims in the biotechnology field is evolving and our patent rights are subject to this additional uncertainty. Others may independently develop similar products or processes to those developed by us, duplicate any of our products or processes or, if patents are issued to us, design around any products and processes covered by our patents. We expect to continue to file product and process patent applications with respect to our inventions. However, we may not file any such applications or, if filed, the patents may not be issued. Patents issued to or licensed by us may be infringed by the products or processes of others.
Defense and enforcement of our intellectual property rights can be expensive and time consuming, even if the outcome is favorable to us. It is possible that patents issued to or licensed to us will be successfully challenged, that a court may find that we are infringing validly issued patents of third parties, or that we may have to alter or discontinue the development of our products or pay licensing fees to take into account patent rights of third parties.
Government Regulation
Regulation by government authorities in the United States and foreign countries is a significant factor in the research, development, manufacture, and marketing of our product candidates. All of our product candidates will require regulatory approval before they can be commercialized. In particular, human therapeutic products are subject to rigorous preclinical and clinical trials and other pre-market approval
12
The activities required before a product candidate may be marketed in the United States begin with preclinical tests. Preclinical tests include laboratory evaluations and animal studies to assess the potential safety and efficacy of the product candidate and its formulations. The results of these studies must be submitted to the FDA as part of an Investigational New Drug Application, which must be reviewed by the FDA before proposed clinical testing can begin. Typically, clinical testing involves a three-phase process. In Phase I, trials are conducted with a small number of subjects to determine the early safety profile of the product candidate. In Phase II, clinical trials are conducted with subjects afflicted with a specific disease or disorder to provide enough data to evaluate the preliminary safety, tolerability, and efficacy of different potential doses of the product candidate. In Phase III, large-scale clinical trials are conducted with patients afflicted with the specific disease or disorder in order to provide enough data to understand the efficacy and safety profile of the product candidate, as required by the FDA. The results of the preclinical and clinical testing of a biologic product candidate are then submitted to the FDA in the form of a Biologics License Application, or BLA, for evaluation to determine whether the product candidate may be approved for commercial sale. In responding to a BLA, the FDA may grant marketing approval, request additional information, or deny the application.
Any approval required by the FDA for any of our product candidates may not be obtained on a timely basis, or at all. The designation of a clinical trial as being of a particular phase is not necessarily indicative that such a trial will be sufficient to satisfy the parameters of a particular phase, and a clinical trial may contain elements of more than one phase notwithstanding the designation of the trial as being of a particular phase. The results of preclinical studies or early stage clinical trials may not predict long-term safety or efficacy of our compounds when they are tested or used more broadly in humans.
Various federal and state statutes and regulations also govern or influence the research, manufacture, safety, labeling, storage, record keeping, marketing, transport, or other aspects of such product candidates. The lengthy process of seeking these approvals and the compliance with applicable statutes and regulations require the expenditure of substantial resources. Any failure by us or our collaborators or licensees to obtain, or any delay in obtaining, regulatory approvals could adversely affect the manufacturing or marketing of our products and our ability to receive product or royalty revenue.
In addition to the foregoing, our present and future business will be subject to regulation under the United States Atomic Energy Act, the Clean Air Act, the Clean Water Act, the Comprehensive Environmental Response, Compensation and Liability Act, the National Environmental Policy Act, the Toxic Substances Control Act, the Resource Conservation and Recovery Act, national restrictions, and other present and potential future local, state, federal, and foreign regulations.
Employees
As of December 31, 2003, we had 644 full-time employees, of whom 110 held a Ph.D. or M.D. degree or both. We believe that we have been successful in attracting skilled and experienced personnel in a highly competitive environment; however, competition for these personnel is intense. None of our personnel are covered by collective bargaining agreements and our management considers its relations with our employees to be good.
Available Information
We file annual, quarterly, and current reports, proxy statements, and other documents with the Securities and Exchange Commission, or SEC, under the Securities Exchange Act of 1934, or the Exchange Act. The public may read and copy any materials that we file with the SEC at the SECs Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Also, the SEC maintains an Internet website
13
We also intend to make available free of charge on or through our Internet website (http://www.regn.com) our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and, if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.
Item 2. | Properties |
We conduct our research, development, manufacturing, and administrative activities at our owned and leased facilities. We currently lease approximately 220,000 square feet, and sublease approximately 16,000 square feet, of laboratory, office, and manufacturing space in Tarrytown, New York. The sublease will convert to a direct lease with the landlord on December 31, 2005. We own a facility in Rensselaer, New York, consisting of two buildings totaling approximately 123,500 square feet of research, manufacturing, office, and warehouse space. We also lease an additional 75,000 square feet of manufacturing, office, and warehouse space in Rensselaer.
The following table summarizes the information
regarding our current property leases:
Current Monthly
Square
Base Rental
Renewal Option
Location
Footage
Expiration
Charges(1)
Available
146,000
December 31, 2007
$
243,000
none
16,000
December 31, 2007
$
25,000
none
74,000
December 31, 2009
$
148,000
one 5-year term
75,000
July 11, 2007
$
23,000
two 5-year terms
(1) | Excludes additional rental charges for utilities, taxes, and operating expenses, as defined. |
In the future, we may lease, operate, or purchase additional facilities in which to conduct expanded research and development activities and manufacturing and commercial operations.
Item 3. | Legal Proceedings |
In May 2003, securities class action lawsuits were commenced against Regeneron and certain of its officers and directors in the United States District Court for the Southern District of New York. A consolidated amended class action complaint was filed in October 2003. The complaint, which purports to be brought on behalf of a class consisting of investors in our publicly traded securities between March 28, 2000 and March 30, 2003, alleges that the defendants misstated or omitted material information concerning the safety and efficacy of AXOKINE, in violation of Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934, and Rule 10b-5 promulgated thereunder. Damages are sought in an unspecified amount. We believe that the lawsuit is without merit and, in December 2003, we filed a motion to dismiss the lawsuit. Because we do not believe that a loss is probable, no legal reserve has been established.
From time to time we are a party to other legal proceedings in the course of our business. Currently, we do not expect any other legal proceedings to have a material adverse effect on our business or financial condition.
14
Item 4. | Submission of Matters to a Vote of Security Holders |
None.
Executive Officers of the Registrant
Listed below are our executive officers as of
February 29, 2004. There are no family relationships
between any of the executive officers and there is no
arrangement or understanding between any executive officer and
any other person pursuant to which the executive officer was
selected. At the annual meeting of the Board of Directors, which
follows the Annual Meeting of Shareholders, executive officers
are elected by the Board to hold office for one year and until
their respective successors are elected and qualified, or until
their earlier resignation or removal.
Name
Age
Position
51
President, Chief Executive Officer, and Founder
44
Executive Vice President and Chief Scientific
Officer, and President, Regeneron Research Laboratories
59
Senior Vice President, Finance &
Administration, Chief Financial Officer, Treasurer, and
Assistant Secretary
56
Senior Vice President, Manufacturing Operations
47
Senior Vice President, Preclinical Development
and Biomolecular Science
15
PART II
Item 5. | Market for Registrants Common Equity and Related Stockholder Matters |
Our Common Stock is quoted on The Nasdaq Stock Market under the symbol REGN. Our Class A Stock, par value $.001 per share, is not publicly quoted or traded.
The following table sets forth, for the periods
indicated, the range of high and low sales prices for the Common
Stock as reported by The Nasdaq Stock Market.
High
Low
$
30.20
$
19.74
25.40
12.21
18.34
11.25
22.85
12.25
$
21.49
$
7.40
18.78
5.77
22.35
12.22
18.72
11.80
As of March 3, 2004, there were 635 shareholders of record of our Common Stock and 56 shareholders of record of our Class A Stock. The closing bid price for the Common Stock on that date was $15.00.
We have never paid cash dividends and do not anticipate paying any in the foreseeable future.
The information called for with respect to equity compensation plans is incorporated by reference to the material captioned Equity Compensation Plan Information in our definitive proxy statement with respect to our 2004 Annual Meeting of Shareholders to be filed with the SEC.
In March 2003, we entered into a collaboration agreement with Novartis to jointly develop and commercialize the IL-1 Trap. In connection with this agreement, we sold to Novartis 7,527,050 newly issued unregistered shares of our Common Stock for a purchase price of $48.0 million. We expect to use the proceeds from the sale of the Common Stock to fund working capital and general corporate purposes.
In August 2003, Merck granted us a non-exclusive license to certain patents and patent applications which may be used in the development and commercialization of AXOKINE. As consideration for this license, we issued to Merck 109,450 newly issued unregistered shares of our Common Stock.
In September 2003, we entered into a collaboration agreement with Aventis to jointly develop and commercialize the VEGF Trap. In connection with this agreement, we sold to Aventis 2,799,552 newly issued unregistered shares of our Common Stock for a purchase price of $45.0 million. We expect to use the proceeds from the sale of the Common Stock to fund working capital and general corporate purposes.
We view each of the aforementioned issuances as transactions not involving any public offering and therefore as exempt from registration under Section 4(2) of the Securities Act of 1933.
16
Item 6. | Selected Financial Data |
The selected financial data set forth below for
the years ended December 31, 2003, 2002, and 2001 and at
December 31, 2003 and 2002 are derived from and should be
read in conjunction with our audited financial statements,
including the notes thereto, included elsewhere in this report.
The selected financial data for the years ended
December 31, 2000 and 1999 and at December 31, 2001,
2000, and 1999 are derived from our audited financial statements
not included in this report.
Year Ended December 31,
2003
2002
2001
2000
1999
(In thousands, except per share data)
$
47,366
$
10,924
$
12,071
$
36,478
$
24,539
6,200
10,131
11,064
9,902
16,598
9,960
57,497
21,988
21,973
59,276
34,499
136,024
124,953
92,542
65,134
52,450
6,676
6,483
6,509
15,566
3,612
14,785
12,532
9,607
8,427
6,430
157,485
143,968
108,658
89,127
62,492
(99,988
)
(121,980
)
(86,685
)
(29,851
)
(27,993
)
4,462
9,462
13,162
8,480
5,207
(11,932
)
(11,859
)
(2,657
)
(281
)
(284
)
(7,470
)
(2,397
)
10,505
8,199
4,923
(107,458
)
(124,377
)
(76,180
)
(21,652
)
(23,070
)
(1,563
)
$
(107,458
)
$
(124,377
)
$
(76,180
)
$
(23,215
)
$
(23,070
)
$
(2.13
)
$
(2.83
)
$
(1.81
)
$
(0.62
)
$
(0.74
)
(0.04
)
$
(2.13
)
$
(2.83
)
$
(1.81
)
$
(0.66
)
$
(0.74
)
$
(22,699
)
$
(0.73
)
(1) | Includes Loss in Amgen-Regeneron Partners of $63, $27, $1,002, $4,575, and $4,159 for the years ended December 31, 2003, 2002, 2001, 2000, and 1999, respectively. |
(2) | See Note 2 to our audited financial statements. |
17
At December 31,
2003
2002
2001
2000
1999
(In thousands)
$
366,566
$
295,246
$
438,383
$
154,370
$
93,599
479,555
391,574
495,397
208,274
136,999
200,000
200,000
200,150
2,069
2,731
137,643
145,981
266,355
182,130
109,532
Item 7. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
Overview
We are a biopharmaceutical company that discovers, develops, and intends to commercialize pharmaceutical products for the treatment of serious medical conditions. We are currently conducting clinical programs for four product candidates, which are in various stages of development:
Current Phase of | ||||||
Product Candidate | Primary Indications | Clinical Development | ||||
|
|
|
||||
VEGF Trap
|
Cancer and eye diseases | Phase I | ||||
IL-1 Trap
|
Rheumatoid arthritis | Phase II | ||||
IL-4/13 Trap
|
Asthma | Phase I | ||||
AXOKINE
|
Obesity | Phase III |
In addition to our clinical programs, we have research programs focused on angiogenesis, metabolic diseases, muscle atrophy and related disorders, inflammatory conditions, and other diseases and disorders. We also use our Velocigene and Trap technology platforms to discover and develop new product candidates.
Developing and commercializing new medicines entails significant risk and expense. Since inception we have not generated any sales or profits from the commercialization of any of our product candidates and may never receive such revenues. Before revenues from the commercialization of our product candidates can be realized, we (or our collaborators) must overcome a number of hurdles which include successfully completing research and development and obtaining regulatory approval from the FDA and regulatory authorities in other countries. In addition, the biotechnology and pharmaceutical industries are rapidly evolving and highly competitive, and new developments may render our products and technologies uncompetitive or obsolete.
From inception on January 8, 1988 through December 31, 2003, we had a cumulative loss of $531.5 million. In the absence of revenues from the commercialization of our product candidates or other sources, the amount, timing, nature, or source of which cannot be predicted, our losses will continue as we conduct our research and development activities. We expect to incur substantial losses over the next several years as we:
| continue the clinical development of VEGF Trap, IL-1 Trap, IL-4/13 Trap, and AXOKINE, | |
| commercialize product candidates that receive regulatory approval, if any, | |
| advance new product candidates into clinical development from our existing research programs, and | |
| continue our research and development programs. |
Our activities may expand over time and may require additional resources, and we expect our operating losses to be substantial over at least the next several years. Our losses may fluctuate from quarter to quarter
18
As a company that does not expect to generate product revenues or profits over the next several years, management of cash flow is extremely important. The most significant use of our cash is for research and development activities, which include drug discovery, preclinical studies, clinical trials, and the manufacture of drug supplies for preclinical studies and clinical trials. In 2003, our research and development expenses totaled $136.0 million. We expect these expenses to increase 15-30% in 2004, depending on the progress of our clinical programs. The principal sources of cash to-date have been sales of common equity and convertible debt and funding from our collaborators in the form of up-front payments, research progress payments, contract research and development, purchases of our common stock, and loans. We also receive revenue from contract manufacturing.
A primary driver of our expenses is our number of full-time employees. Our annual average headcount in 2003 was 675 compared to 643 in 2002 and 550 in 2001. In 2004, we expect our average headcount to increase to between 730 and 750, primarily to support our VEGF Trap and IL-1 Trap clinical programs. In 2003, payroll and related costs accounted for 36% of our total operating expenses. We expect this ratio to decline in 2004, as our clinical expenses grow.
The planning, execution, and results of our
clinical programs are significant factors that can affect our
operating and financial results. In our four clinical programs,
key 2003 events and 2004 plans are as follows:
Product Candidate
2003 Events
2004 Plans
Entered into collaboration agreement
with Aventis
Continued Phase I trial in cancer
Complete Phase I subcutaneous
single-agent trial in cancer
Commence Phase I intravenous single-agent trial
in cancer
Commence Phase II single-agent trials in
cancer
Commence several Phase I combination therapy
trials in cancer
Commence multiple Phase I trials in eye diseases
Completed Phase IIa trial in
rheumatoid arthritis
Commence Phase IIb trial in
rheumatoid arthritis
Commence Phase I trial in other indications
Evaluate IL-1 Trap in other inflammatory
conditions
Conducted Phase I trial in asthma
Complete Phase I trial in
asthma
Plan for Phase II trial in asthma
Completed efficacy portion of first
pivotal Phase III trial in obesity
Complete safety extension portion of
first Phase III trial
Complete intermittent treatment trials
Additional development and market research
activities
No new Phase III trials planned
In September 2003, we entered into a major collaboration agreement with Aventis to collaborate on the development and commercialization of the VEGF Trap. Aventis made a non-refundable up-front payment of
19
Under the collaboration agreement, we and Aventis will share co-promotion rights and profits on sales, if any, of the VEGF Trap. Aventis has agreed to make a $25.0 million payment to us upon achievement of an early-stage clinical milestone. We may also receive up to $360.0 million in additional milestone payments upon receipt of specified marketing approvals for up to eight VEGF Trap indications in Europe or the United States. Regeneron has agreed to continue to manufacture clinical supplies of the VEGF Trap at our plant in Rensselaer, New York. Aventis has agreed to be responsible for providing commercial scale manufacturing capacity for the VEGF Trap.
Under the collaboration agreement, agreed upon development expenses incurred by both companies during the term of the agreement will be funded by Aventis. If the collaboration becomes profitable, we will reimburse Aventis for 50 percent of the VEGF Trap development expenses in accordance with a formula based on the amount of development expenses and our share of the collaboration profits, or at a faster rate at our option.
Aventis has the right to terminate the agreement without cause with at least twelve months advance notice. Upon termination of the agreement for any reason, any remaining obligation to reimburse Aventis for 50 percent of the VEGF Trap development expenses will also terminate and we will retain all rights to the VEGF Trap.
In March 2003, we entered into a collaboration
agreement with Novartis to jointly develop and commercialize the
IL-1 Trap. Novartis made a non-refundable payment of
$27.0 million and purchased 7,527,050 newly issued
unregistered shares of our Common Stock for $48.0 million.
On February 27, 2004, we announced that Novartis had
provided notice of its intention not to proceed with the joint
development of the IL-1 Trap. Under the terms of the
collaboration agreement, Novartis remains obligated to fund
agreed upon pre-Phase III IL-1 Trap development
expenses during the nine-month notice period before its
voluntary termination becomes effective. Novartis and we retain
rights under the collaboration agreement to elect to collaborate
on the development and commercialization of other IL-1
antagonists being developed independently by the other party
that are in earlier stages of development than the
IL-1 Trap.
Results of Operations
Revenues in the years ended December 31,
2003 and 2002 consist of the following:
Our total revenue increased to $57.5 million
in 2003 from $22.0 million in 2002 primarily from the
recognition of $21.4 million of revenue related to our
collaboration with Novartis on the IL-1 Trap and
$14.3 million of revenue related to our collaboration with
Aventis on the VEGF Trap. This collaboration revenue, as
detailed below, consists partly of reimbursement for research
and development expenses and partly of the recognition of
revenue related to non-refundable up-front payments.
Non-refundable up-front payments
20
Contract manufacturing revenue relates primarily
to our long-term agreement with Merck, which expires in October
of 2005, unless extended by mutual agreement, to manufacture a
vaccine intermediate at our Rensselaer, New York facility.
Contract manufacturing revenue decreased to $10.1 million
in 2003 from $11.1 million in 2002, due primarily to the
receipt of a non-recurring $1.0 million payment in the
third quarter of 2002 related to services we provided to Merck
in prior years. Revenue and the related manufacturing expense
are recognized as product is shipped, after acceptance by Merck.
Included in contract manufacturing revenue in 2003 and 2002 are
$1.7 million and $1.8 million, respectively, of
deferred revenue associated with capital improvement
reimbursements paid by Merck prior to commencement of
production. This deferred revenue is being recognized as product
is shipped to Merck based on the total amount of product
expected to be shipped over the life of the agreement.
Research and development expenses increased to
$136.0 million in 2003 from $125.0 million in 2002,
due primarily to (i) a $4.5 million increase in
payroll related expenses associated with an increase in
research, regulatory, and manufacturing personnel, (ii) a
$6.3 million increase in lab supply, outside testing, and
research contract expenses, and (iii) a $9.0 million
increase in facility expenses such as rent, utilities,
insurance, and depreciation. These facility related increases
were due primarily to the costs associated with the plant
expansion in Rensselaer which was completed in 2003 and the
leasing of additional warehouse and manufacturing facilities in
Rensselaer and office and lab space in Tarrytown during the
third quarter of 2002. These increases were partially offset by
an $8.8 million decrease in clinical expenses, due
primarily to the completion of the double-blind treatment
portion of the AXOKINE Phase III trial for the treatment of
obesity in January of 2003.
Contract manufacturing expenses increased to
$6.7 million in 2003, compared to $6.5 million in
2002, primarily because we shipped more product to Merck.
General and administrative expenses increased to
$14.8 million in 2003 from $12.5 million in 2002, due
primarily to (i) a $1.0 million increase in payroll
related costs, (ii) a $0.8 million increase in
professional fees, principally associated with legal expenses
for general corporate matters and the collaborations with
Aventis and Novartis, and (iii) a $0.5 million
increase in operating expenses including rent, utilities,
supplies, and insurance.
Other
Income and Expense:
Investment income decreased to $4.5 million
in 2003 from $9.5 million in 2002 due to lower effective
interest rates on investment securities and lower levels of
interest-bearing investments for most of 2003 as we funded our
operations. Average investment balances decreased to
$156.6 million in 2003 from $264.9 million
21
Revenues in the years ended December 31,
2002 and 2001 consist of the following:
Our total revenue was $22.0 million in both
2002 and 2001. Contract research and development revenue
decreased to $10.9 million in 2002 from $12.1 million
in 2001 as revenue from Amgen-Regeneron Partners decreased from
$1.2 million in 2001 to approximately $2,000 in 2002, due
to the completion of studies conducted on behalf of the
partnership. Contract manufacturing revenue, related primarily
to our long-term agreement with Merck, increased to
$11.1 million in 2002 from $9.9 million in 2001, due
primarily to the receipt of a non-recurring $1.0 million
payment related to services we provided to Merck in prior years.
We shipped similar quantities of product to Merck in 2002 and
2001. Revenue and the related manufacturing expense are
recognized as product is shipped, after acceptance by Merck.
Included in contract manufacturing revenue in both 2002 and 2001
is $1.8 million of deferred revenue associated with capital
improvement reimbursements paid by Merck prior to commencement
of production. This deferred revenue is being recognized as
product is shipped based on the total amount of product expected
to be shipped over the life of the agreement.
Research and development expenses increased to
$125.0 million in 2002 from $92.5 million in 2001, due
primarily to (i) a $14.0 million increase in clinical
expenses associated primarily with our AXOKINE Phase III
clinical trial for the treatment of obesity and our
IL-1 Trap Phase II clinical trial for the treatment of
rheumatoid arthritis, (ii) an $8.7 million increase in
payroll related expenses associated with an increase in
research, clinical, regulatory, and manufacturing personnel,
(iii) a $4.6 million increase in lab supply, outside
testing, and research contract expenses, and (iv) a
$5.2 million increase in facility expenses such as rent,
utilities, insurance, and depreciation.
Contract manufacturing expenses were
$6.5 million in both 2002 and 2001 primarily because we
shipped similar quantities of product to Merck each year.
General and administrative expenses increased to
$12.5 million in 2002 from $9.6 million in 2001, due
primarily to (i) a $1.0 million increase in payroll
related costs, (ii) an $0.8 million increase in patent
prosecution and legal expenses related principally to the
expansion of our intellectual property portfolio, (iii) a
$0.6 million increase in professional fees related to
investor relations services, bank fees, and audit services, and
(iv) a $0.5 million increase in operating expenses
including rent, utilities, supplies, and insurance.
22
Investment income decreased to $9.5 million
in 2002 from $13.2 million in 2001, due to lower effective
interest rates on investment securities during the full year
2002. Average investment balances increased to
$264.9 million in 2002 from $155.5 million in 2001.
Interest expense increased to $11.9 million in 2002 from
$2.7 million in 2001, due to interest incurred on the
$200.0 million of convertible notes that we issued in
October 2001, which mature in 2008 and bear interest at 5.5% per
annum.
Liquidity and Capital Resources
Since our inception in 1988, we have financed our
operations primarily through offerings of our equity securities,
a private placement of convertible debt, revenue earned under
our agreements with Novartis, Aventis, Merck, Procter &
Gamble, Serono, Amgen, Sumitomo Chemical Co., and Sumitomo
Pharmaceuticals Company, Ltd., and investment income.
At December 31, 2003, we had
$366.6 million in cash, cash equivalents, marketable
securities, and restricted marketable securities compared with
$295.2 million at December 31, 2002. Restricted
marketable securities are pledged U.S. government
securities which will be sufficient upon receipt of scheduled
principal and interest payments to provide for the payment in
full of the interest payments on the convertible senior
subordinated notes through 2004. Net cash used in operations was
$6.1 million in 2003 versus $110.5 million in 2002.
The decrease in cash used in operations during 2003 resulted
primarily from the receipt of contract research and development
revenue and non-refundable up-front payments associated with the
Aventis and Novartis collaborations which began in 2003. The
effect of the two agreements on net cash used in operations in
2003 was approximately $134.2 million. The majority of cash
used in operations was to fund research and development,
primarily related to our VEGF Trap and IL-1 Trap
programs.
In September 2003, the Company entered into a
collaboration agreement with Aventis to jointly develop and
commercialize the VEGF Trap. Aventis made a non-refundable
up-front payment of $80.0 million which was recorded to
deferred revenue and is being recognized as contract research
and development revenue ratably over the period over which we
are obligated to perform services. In 2003, we recognized
$3.6 million of revenue related to this up-front payment
and we anticipate, based on current VEGF Trap product
development plans, that we will recognize approximately
$10.9 million of revenue over each of the next
7 years. In addition, Aventis has agreed to fund all
development expenses incurred by both companies during the term
of the agreement. In 2003, Aventis funded $10.7 million of
our VEGF Trap development costs, of which $8.9 million
was included in accounts receivable as of December 31, 2003.
In March 2003, we entered into a collaboration
agreement with Novartis to jointly develop and commercialize the
IL-1 Trap. Novartis made a non-refundable up-front payment
of $27.0 million which was recorded to deferred revenue and
is being recognized as contract research and development revenue
ratably over the period over which we are obligated to perform
services. In 2003, we recognized $4.9 million of revenue
related to this up-front payment. Development expenses incurred
during 2003 were shared equally by Regeneron and Novartis. In
2003, Novartis agreed to reimburse us for $16.5 million of
our IL-1 Trap development costs, of which $3.2 million was
included in accounts receivable as of December 31, 2003. On
February 27, 2004, we announced that Novartis had provided
notice of its intention not to proceed with the joint
development of the IL-1 Trap. As a result, we will
recognize $22.1 million of revenue in 2004, representing
the balance of deferred revenue at December 31, 2003
related to Novartis non-refundable up-front payment.
In 2003, we recorded a non-cash expense of
$1.5 million associated with the issuance of our Common
Stock in connection with a license agreement entered into with
Merck.
In both 2003 and 2002, we made two semi-annual
interest payments totaling $11.0 million per year on our
convertible senior subordinated notes.
23
Net cash used in investing activities was
$63.8 million in 2003 compared to $58.5 million in
2002. The increase is due primarily to purchases of marketable
securities which exceeded sales and/or maturities of marketable
securities by $10.0 million. Offsetting this increase was a
$4.7 million decrease in cash payments made for capital
expenditures due to the completion of the Rensselaer plant
expansion in 2003.
Cash provided by financing activities increased
to $108.2 million in 2003 compared to $1.7 million in
2002, due primarily to the sale of stock to Aventis and Novartis
in 2003 in association with the collaboration agreements.
Aventis purchased 2,799,552 newly issued unregistered shares of
our Common Stock for $45.0 million. Novartis purchased
7,527,050 newly issued unregistered shares of our Common Stock
for $48.0 million. In addition, in accordance with our
collaboration agreement with Novartis, we elected to fund our
share of 2003 IL-1 Trap development expenses through a loan
from Novartis that will be forgiven, together with accrued
interest, should certain preclinical and clinical milestones be
reached. If these milestones are not reached, the loan is due
and payable on July 1, 2004. As of December 31, 2003,
we have drawn $13.7 million, excluding interest, against
this loan facility and we have drawn an additional
$3.8 million during the first quarter of 2004 for expenses
incurred during 2003.
Under the collaboration agreement with Aventis,
we and Aventis will share co-promotion rights and profits on
sales, if any, of the VEGF Trap. Aventis has agreed to make
a $25.0 million payment to us upon achievement of an
early-stage clinical milestone. We may also receive up to
$360.0 million in additional milestone payments upon
receipt of specified marketing approvals for up to eight
VEGF Trap indications in Europe or the United States.
We have agreed to continue to manufacture
clinical supplies of the VEGF Trap at our plant in
Rensselaer, New York. Aventis has agreed to be responsible for
providing commercial scale manufacturing capacity for the
VEGF Trap. Under the collaboration agreement, agreed upon
development expenses incurred by both companies during the term
of the agreement, including costs associated with the
manufacture of clinical drug supply, will be funded by Aventis.
If the collaboration becomes profitable, we will reimburse
Aventis for 50 percent of the VEGF Trap development
expenses in accordance with a formula based on the amount of
development expenses and our share of the collaboration profits,
or at a faster rate at our option. We have the option to conduct
additional pre-Phase III studies at our own expense. In
2003, we incurred and were reimbursed by Aventis for
$10.7 million in development expenses related to the
VEGF Trap program. In addition to expenses incurred by us
in 2003, Aventis incurred $0.1 million in development
expenses related to the VEGF Trap program.
In 2004, we and Aventis plan to invest
approximately $100 million to support the development of
the VEGF Trap. The broad based development program will
include multiple Phase I studies to evaluate the
VEGF Trap in combination with other therapies in various
cancer indications, Phase II single-agent studies of the
VEGF Trap in separate cancer indications, and multiple
Phase I studies of the VEGF Trap in certain eye
diseases.
Pursuant to the terms of our collaboration
agreement with Novartis, in 2004, Novartis will be responsible
for agreed upon pre-Phase III development expenses through
the expiration of the nine-month termination notice period,
which ends at the end of November 2004. In addition, a loan
totaling $17.5 million as of March 3, 2004 that
relates to our share of 2003 development expense will be
forgiven, together with accrued interest, should we meet certain
milestones. Otherwise, the loan is due and payable on
July 1, 2004.
24
Under the Novartis agreement, Novartis and we
retain rights under the collaboration agreement to elect to
collaborate on the development and commercialization of other
IL-1 antagonists being developed independently by the other
party that are in earlier stages of development than the
IL-1 Trap.
In August 2003, Merck granted to us a
non-exclusive license to certain patents and patent applications
which may be used in the development and commercialization of
AXOKINE. As consideration, we issued to Merck 109,450 newly
issued unregistered shares of our Common Stock (the Merck
Shares), valued at $1.5 million based on the fair market
value of shares of our Common Stock on the agreements
effective date. The agreement requires us to make an additional
payment to Merck upon receipt of marketing approval for a
product covered by the licensed patents. In addition, we would
be required to pay royalties, at staggered rates in the
mid-single digits, based on the net sales of products covered by
the licensed patents.
At any time prior to the date that Merck has the
right to sell the Merck Shares under the Securities Act of 1933
(the Sales Date), we have the right to buy back the Merck Shares
from Merck for a purchase price equal to the greater of
(a) $1.5 million and (b) the lesser of
(i) the fair market value of the shares and
(ii) $1.65 million. Unless Regeneron has previously
exercised its right to buy back the Merck Shares, on the Sales
Date if the fair market value of the Merck Shares (the Market
Price) is less than $1.5 million, we will be required to
make a cash payment to Merck equal to the difference between the
Market Price and $1.5 million. Conversely, if on the Sales
Date the Market Price is greater than $1.65 million, Merck
will be required, at its option, to either (i) make a cash
payment to us equal to the difference between the Market Price
and $1.65 million (the Excess Amount) or (ii) return a
number of the Merck Shares to us, calculated by dividing the
Excess Amount by the fair market value of a share of our Common
Stock on the Sales Date. The fair market value of the shares,
based on our closing Common Stock price at December 31,
2003, was $1.6 million.
In 2001, we issued $200.0 million aggregate
principal amount of convertible senior subordinated notes in a
private placement and received proceeds, after deducting the
initial purchasers discount and out-of pocket expenses, of
$192.7 million. The notes bear interest at 5.5% per annum,
payable semi-annually and mature in 2008. The notes are
convertible into shares of our Common Stock at a conversion
price of approximately $30.25 per share, subject to adjustment
in certain circumstances. We may redeem the notes, in whole or
in part, at any time before October 17, 2004, if the
closing price of our Common Stock has exceeded 150% of the
conversion price then in effect for a specified period of time.
Upon any such redemption, we are required to pay interest that
would have been due up through October 17, 2004. We may
also redeem some or all of the notes at any time on or after
October 17, 2004, if the closing price of our Common Stock
has exceeded 140% of the conversion price then in effect for a
specified period of time.
As part of this transaction, we pledged
$31.6 million of U.S. government securities which will
be sufficient upon receipt of scheduled principal and interest
payments to provide for the payment in full of the first six
scheduled interest payments on the notes when due.
Our additions to property, plant, and equipment
totaled $16.9 million in 2003, $45.9 million in 2002,
and $9.5 million in 2001, including a total over the three
years of $50.2 million related to the expansion of our
manufacturing facilities in Rensselaer, New York. In 2004, we
expect to incur approximately $10 million to
$15 million in capital expenditures which primarily
consists of equipment for our expanded manufacturing, research,
and development activities, a portion of which will be
reimbursed by Aventis.
Our total expenses for research and development
from inception through December 31, 2003 have been
approximately $721 million. We have not historically
segregated all the costs associated with each of our
25
We expect to continue to incur substantial
funding requirements primarily for research and development
activities (including preclinical and clinical testing). We
currently anticipate that in 2004 approximately 50-70% of our
expenditures will be directed toward the preclinical and
clinical development of product candidates, including the
VEGF Trap, IL-1 Trap, IL-4/ 13 Trap, and AXOKINE;
approximately 10-20% of our expenditures will cover our basic
research activities and the continued development of our novel
technology platforms; and the remainder of our expenditures will
be for capital expenditures and general corporate purposes,
including working capital.
In connection with our funding requirements, the
following table summarizes our contractual obligations as of
December 31, 2003 for leases and long-term debt. None of
these obligations extend beyond 5 years.
In January 2004, the Company amended its
Tarrytown lease and exercised its option to extend the lease for
certain parts of the leased space through December 2009. The
amended lease contains renewal options for certain parts of the
leased space through December 2014.
The amount we need to fund operations will depend
on various factors, including the status of competitive
products, the success of our research and development programs,
the potential future need to expand our professional and support
staff and facilities, the status of patents and other
intellectual property rights, the delay or failure of a clinical
trial of any of our potential drug candidates, and the
continuation, extent, and success of any collaborative research
and development collaborations (including those with Aventis,
Procter & Gamble, Medarex, and Emisphere). Clinical trial
costs are dependent, among other things, on the size and
duration of trials, fees charged for services provided by
clinical trial investigators and other third parties, the costs
for manufacturing the product candidate for use in the trials,
supplies, laboratory tests, and other expenses. The amount of
funding that will be required for our clinical programs depends
upon the results of our research and preclinical programs and
early-stage clinical trials, regulatory requirements, the
clinical trials underway plus additional clinical trials that we
decide to initiate, and the various factors that affect the cost
of each trial as described above. In the future, if we are able
to successfully develop, market, and sell certain of our product
candidates, we may be required to pay royalties or otherwise
share the profits generated on such sales in connection with our
collaboration and licensing agreements.
We expect that expenses related to the filing,
prosecution, defense, and enforcement of patent and other
intellectual property claims will continue to be substantial as
a result of patent filings and prosecutions in the United States
and foreign countries.
26
We believe that our existing capital resources
will enable us to meet operating needs through at least the end
of 2005. However, this is a forward-looking statement based on
our current operating plan, and there may be a change in
projected revenues or expenses that would lead to our capital
being consumed significantly before such time. If there is
insufficient capital to fund all of our planned operations and
activities, we believe we would prioritize available capital to
fund preclinical and clinical development of our product
candidates. We have no off-balance sheet arrangements and do not
guarantee the obligations of any other entity. As of
December 31, 2003, we had no established banking
arrangements through which we could obtain short-term financing
or a line of credit. In the event we need additional financing
for the operation of our business, we will consider
collaborative arrangements and additional public or private
financing, including additional equity financing. Factors
influencing the availability of additional financing include our
progress in product development, investor perception of our
prospects, and the general condition of the financial markets.
We may not be able to secure the necessary funding through new
collaborative arrangements or additional public or private
offerings. If we cannot raise adequate funds to satisfy our
capital requirements, we may have to delay, scale-back, or
eliminate certain of our research and development activities or
future operations. This could harm our business.
Critical Accounting Policies and Significant
Judgments and Estimates
We recognize revenue from contract research and
development and research progress payments in accordance with
Staff Accounting Bulletin No. 104,
Revenue Recognition
(SAB 104) and Emerging Issues Task Force 00-21,
Accounting for Revenue Arrangements with Multiple
Deliverables
(EITF 00-21). During the third quarter of
2003, we elected to change the method we use to recognize
revenue under SAB 104 related to non-refundable
collaborator payments, including up-front licensing payments,
payments for development activities, and research progress
(milestone) payments, to the Substantive Milestone Method,
adopted retroactively to January 1, 2003. Under this
method, we recognize revenue from non-refundable up-front
license payments, not tied to achieving a specific performance
milestone, ratably over the period over which we are obligated
to perform services. The period over which we are obligated to
perform services is estimated based on product development
plans. These estimates are likely to change based on the results
and progress of clinical trials and drug production. Changes in
these estimates could result in a significant change to the
amount of revenue recognized in future periods. In addition, if
a collaborator terminates the agreement in accordance with the
terms of the contract, we would recognize the remainder of the
up-front payment at the time of the termination. Payments for
development activities are recognized as revenue as earned,
ratably over the period of effort. Substantive at-risk milestone
payments, which are based on achieving a specific performance
milestone, are recognized as revenue when the milestone is
achieved and the related payment is due, provided there is no
future service obligation associated with that milestone.
Previously, we had recognized revenue from non-refundable
collaborator payments based on the percentage of costs incurred
to date, estimated costs to complete, and total expected
contract revenue. However, the revenue recognized was limited to
the amount of non-refundable payments received. The change in
accounting method was made because we believe that it better
reflects the substance of our collaborative agreements and is
more consistent with current practices in the biotechnology
industry.
We have entered into a contract manufacturing
agreement with Merck under which we manufacture a vaccine
intermediate at our Rensselaer, New York facility and perform
services. We recognize contract manufacturing revenue from this
agreement after the product is tested and approved by, and
shipped (FOB Shipping Point) to, Merck, and as services are
performed. In connection with the agreement, we agreed to modify
portions of our Rensselaer facility to manufacture Mercks
vaccine intermediate and Merck agreed to reimburse us for the
related capital costs. These capital cost payments were deferred
and are recognized as revenue as product is shipped to Merck,
based upon our estimate of Mercks order quantities each
year through the expected end of the agreement. Since we
commenced production of the vaccine intermediate in
27
For each clinical trial that we conduct, certain
clinical trial costs, which are included in research and
development expenses, are expensed based on the expected total
number of patients in the trial, the rate at which patients
enter the trial, and the period over which clinical
investigators or contract research organizations are expected to
provide services. We believe that this method best aligns the
expenses we record with the efforts we expend on a clinical
trial. During the course of a trial, we adjust our rate of
clinical expense recognition if actual results differ from our
estimates.
Property, plant, and equipment are stated at
cost. Depreciation is provided on a straight-line basis over the
estimated useful lives of the assets. Expenditures for
maintenance and repairs which do not materially extend the
useful lives of the assets are charged to expense as incurred.
The cost and accumulated depreciation or amortization of assets
retired or sold are removed from the respective accounts, and
any gain or loss is recognized in operations. The estimated
useful lives of property, plant, and equipment are as follows:
In some situations, the life of the asset may be
extended or shortened if circumstances arise that would lead us
to believe that the estimated life of the asset has changed. The
life of leasehold improvements may change based on the extension
of lease contracts with our landlords. Changes in the lives of
assets will result in an increase or decrease in the amount of
depreciation recognized in future periods. Costs of construction
of certain long-lived assets include capitalized interest which
is amortized over the estimated useful life of the related asset.
Future Impact of Recently Issued Accounting
Standards
In December 2003, the Staff of the Securities and
Exchange Commission issued SAB 104,
Revenue
Recognition,
which supercedes SAB 101,
Revenue
Recognition in Financial Statements
. SAB 104s
primary purpose is to rescind accounting guidance contained in
SAB 101 related to multiple element revenue arrangements,
superceded as a result of the issuance of EITF 00-21,
Accounting for Revenue Arrangements with Multiple
Deliverables
. Additionally, SAB 104 rescinds the
SECs
Revenue Recognition in Financial Statements
Frequently Asked Questions and Answers
(the FAQ) issued with
SAB 101 that had been codified in SEC Topic 13,
Revenue Recognition
. Selected portions of the FAQ have
been incorporated into SAB 104. While the wording of
SAB 104 has changed to reflect the issuance of
EITF 00-21, the revenue recognition principles of
SAB 101 remain largely unchanged by the issuance of
SAB 104. Adoption of SAB 104 was required immediately
and did not have a material effect on our financial statements.
In December 2003, the FASB issued a revision to
Interpretation No. 46,
Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51
(FIN 46R), which was issued in January 2003. FIN 46R
clarifies the application of ARB No. 51,
Consolidated Financial Statements
, to certain entities in
which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity
at risk for the entity to finance its activities without
additional subordinated financial support. FIN 46R requires
the consolidation of these entities, known as variable interest
entities (VIEs), by the primary beneficiary of the entity. The
primary beneficiary is the entity, if any, that will absorb a
majority of the entitys expected losses, receive a
majority of the entitys expected residual returns, or
both. Among other changes, the revisions of FIN 46R
(i) clarified some requirements of the original
FIN 46, which had been issued in January 2003,
(ii) eased some implementation problems, and
(iii) added new scope exceptions. FIN 46R deferred the
28
In May 2003, the Financial Accounting Standards
Board issued Statement No. 150 (SFAS No. 150),
Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity
.
SFAS No. 150 specifies that instruments within its
scope embody obligations of the issuer and that the issuer must
classify them as liabilities. SFAS No. 150 requires
issuers to classify as liabilities the following three types of
freestanding financial instruments: (i) mandatorily
redeemable financial instruments, (i) obligations to
repurchase the issuers equity shares by transferring
assets, and (iii) certain obligations to issue a variable number
of shares. SFAS No. 150 defines a freestanding
financial instrument as a financial instrument that
(i) is entered into separately and apart from any of the
entitys other financial instruments or equity transactions
or (ii) is entered into in conjunction with some other
transaction and can be legally detached and exercised on a
separate basis. For all financial instruments entered into or
modified after May 31, 2003, SFAS No. 150 is
effective immediately. For all other instruments of public
companies, SFAS No. 150 went into effect at the
beginning of the first interim period beginning after
June 15, 2003. The adoption of SFAS No. 150 did
not have a material impact on our financial statements. In
November 2003, the Financial Accounting Standards Board deferred
the effective date for selected provisions of
SFAS No. 150, limited to mandatorily redeemable
noncontrolling interests associated with finite-lived
subsidiaries. The deferral of those selected provisions is not
expected to have a material impact on our financial statements.
In November 2002, the FASB issued Interpretation
No. 45 (FIN 45),
Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others, an interpretation of FASB
Statements No. 5, 57 and 107 and a rescission of FASB
Interpretation No. 34
. FIN 45 elaborates on the
disclosures to be made by a guarantor in its interim and annual
financial statements about its obligations under guarantees
issued. FIN 45 also clarifies that a guarantor is required
to recognize, at inception of a guarantee, a liability for the
fair value of the obligation undertaken. The initial recognition
and measurement provisions of FIN 45 are applicable to
guarantees issued or modified after December 31, 2002 and
did not have a material impact on our financial statements.
Risk Factors
Regeneron operates in an environment that
involves a number of significant risks and uncertainties. We
caution you to read the following risk factors, which have
affected, and/or in the future could affect, our business,
operating results, financial condition, and cash flows. The
risks described below include forward-looking statements, and
our actual results may differ substantially from those discussed
in these forward-looking statements. Additional risks and
uncertainties not currently known to us or that we currently
deem immaterial may also impair our business operations.
Furthermore, additional risks and uncertainties are included
under other captions in this report and should be considered by
our investors.
Risks Related to our Financial Results and
Need for Additional Financing
From inception on January 8, 1988 through
December 31, 2003, we had a cumulative loss of
$531.5 million. If we continue to incur operating losses
and fail to become a profitable company, we may be unable to
continue our operations. We have no products that are available
for sale and do not know when we will have products available
for sale, if ever. In the absence of revenue from the sale of
products or other sources, the amount, timing, nature, or source
of which cannot be predicted, our losses will continue as we
conduct our research and development activities. The extent and
timing of our future losses and our profitability, if we are
ever to become profitable, are highly uncertain.
29
We will need to expend substantial resources for
research and development, including costs associated with
clinical testing of our product candidates. We believe our
existing capital resources will enable us to meet operating
needs through at least the end of 2005. However, this is a
forward-looking statement based on our current operating plan
and we cannot assure you that there will be no change in
projected revenue or expenses that would lead to our capital
being consumed significantly before such time. We will likely
require additional financing in the future and we cannot make
assurances that we will be able to raise such additional funds.
The sale of equity or convertible debt securities in the future
may be dilutive to our shareholders. Debt financing arrangements
may require us to pledge certain assets or enter into covenants
that would restrict certain business activities or our ability
to incur further indebtedness and may contain other terms that
are not favorable to our shareholders. We may be unable to raise
sufficient funds to complete the development of our product
candidates or to continue operations. As a result, we may face
delay, reduction, or elimination of our research and development
programs or preclinical or clinical trials, in which case our
business, financial condition, or results of operations may be
materially harmed.
We have a significant amount of convertible debt
and semi-annual interest payment obligations. The debt, unless
converted to shares of our common stock, will mature in October
2008. We may be unable to generate sufficient cash flow or
otherwise obtain funds necessary to make required payments on
our debt. Even if we are able to meet our debt service
obligations, the amount of debt we already have could hurt our
ability to obtain any necessary financing in the future for
working capital, capital expenditures, debt service
requirements, or other purposes. In addition, our debt
obligations could require us to use a substantial portion of
cash to pay principal and interest on our debt, instead of
applying those funds to other purposes, such as research and
development, working capital, and capital expenditures.
Risks Related to Development of our Product
Candidates
Only a small minority of all research and
development programs ultimately result in commercially
successful drugs. We have never developed a drug that has been
approved for marketing and sale and we may never succeed in
developing an approved drug. Even if clinical trials demonstrate
safety and effectiveness of any of our product candidates for a
specific disease and the necessary regulatory approvals are
obtained, the commercial success of any of our product
candidates will depend upon their acceptance by patients, the
medical community, and third-party payors and on our and our
partners ability to successfully manufacture and
commercialize our product candidate. Our product candidates are
delivered either by intravenous or subcutaneous injections,
which are generally less well received by patients than tablet
or capsule delivery. If our products are not successfully
commercialized, we will not be able to recover the significant
investment we have made in developing such products and our
business would be severely harmed.
We must conduct extensive testing of our product
candidates before we can obtain regulatory approval to market
and sell them. We need to conduct both preclinical animal
testing and human clinical trials. Conducting these trials is a
lengthy, time-consuming, and expensive process. These tests and
trials may not achieve favorable results for many causes,
including, among others, failure of the product candidate to
demonstrate safety or efficacy, the development of serious or
life-threatening adverse events (or side effects) caused by or
connected with exposure to the product candidate, difficulty in
enrolling and maintaining subjects in the clinical trial, lack
of sufficient supplies of the product candidate, and the failure
of clinical investigators, trial monitors and other
30
We would need to reevaluate any drug candidate
that did not test favorably and either conduct new trials, which
would be expensive and time consuming, or abandon the drug
development program. Even if we obtain positive results from
preclinical or clinical trials, we may not achieve the same
success in future trials. Many companies in the
biopharmaceutical industry, including us, have suffered
significant setbacks in clinical trials, even after promising
results have been obtained in earlier trials. The failure of
clinical trials to demonstrate safety and effectiveness for our
desired indications could harm the development of the product
candidate, and our business, financial condition, and results of
operations may be materially harmed.
During the conduct of clinical trials, patients
report changes in their health, including illnesses, injuries,
and discomforts to their study doctor. Often, it is not possible
to determine whether or not the drug candidate being studied
caused these conditions. Various illnesses, injuries, and
discomforts have been reported from time-to-time during clinical
trials of our product candidates. Although our current drug
candidates appeared to be generally well tolerated in clinical
trials, it is possible as we test any of them in larger, longer,
and more extensive clinical programs, illnesses, injuries, and
discomforts that were observed in earlier trials, as well as
conditions that did not occur or went undetected in smaller
previous trials, will be reported by patients. If additional
clinical experience indicates that any of our product candidates
has many side effects or causes serious or life-threatening side
effects, the development of the product candidate may fail or be
delayed, which would severely harm our business.
Our VEGF Trap is being studied for the potential
treatment of certain types of cancer and diseases of the eye.
There are many potential safety concerns associated with
significant blockade of vascular endothelial growth factor, or
VEGF. These safety concerns may limit our ability to
successfully develop the VEGF Trap.
Genentech and Eyetech are developing VEGF
inhibiting molecules for certain diseases of the eye that will
be delivered by direct administration to the eye. We are
studying the VEGF Trap for the potential treatment of certain
diseases of the eye through intravitreal injections in the eye
or general administration through intravenous infusions or
subcutaneous injections. Although we believe that there are
potential clinical advantages to general administration over
injections directly in the eye (including patient comfort and
acceptance), there are unique potential risks to patients
associated with systemic blockage of VEGF by intravenous
infusions or subcutaneous injections that could limit or end the
VEGF Trap development program. These risks, based on the
clinical and pre-clinical experience of systemically delivered
VEGF inhibitors, include bleeding, hypertension, and
proteinuria. In addition, patients given infusions of any
protein, including the VEGF Trap, may develop severe
hypersensitivity reactions, referred to as infusion reactions.
There may be additional complications or side effects that could
harm the development of the VEGF Trap for either the treatment
of cancer or diseases of the eye.
In addition to the safety, efficacy,
manufacturing, and regulatory hurdles faced by our product
candidates, the administration of recombinant proteins
frequently causes an immune response, resulting in the creation
of antibodies against the therapeutic protein. The antibodies
can have no effect or can totally neutralize the effectiveness
of the protein, or require that higher doses be used to obtain a
therapeutic effect. In some cases,
31
In March 2003, we reported data from the 12-month
treatment period of our initial Phase III pivotal trial of
AXOKINE. Although the Phase III study met its primary
endpoints and many individuals achieved a medically meaningful
weight loss, the average weight loss was small and limited by
the development of antibodies.
In October 2003, we reported results from the
first Phase II trial of our IL-1 Trap. While patients
treated with the highest dose, 100 milligrams of the
IL-1 Trap, exhibited improvements in the primary endpoint
of the trial, the proportion of ACR 20 responses versus
placebo, the results did not achieve statistical significance.
We plan to conduct a Phase IIb study of the IL-1 Trap
in a larger patient population, testing higher doses than were
tested in the previous Phase II trial and for a longer
period of time. However, there is no assurance that higher doses
will lead to better results than were demonstrated in the
previous Phase II trial. In addition, safety or
tolerability concerns may arise which limit our ability to
deliver higher doses of the IL-1 Trap to patients. We plan
to study higher doses of the IL-1 Trap through increased
subcutaneous injections and intravenous delivery. Either
approach may affect the safety and/or tolerability of the
IL-1 Trap, which may limit its commercial potential if the
product candidate is ever approved for marketing and sale.
Regulatory and Litigation Risks
We cannot sell or market products without
regulatory approval. If we do not obtain and maintain regulatory
approval for our product candidates, the value of our company
and our results of operations will be harmed. In the United
States, we must obtain and maintain approval from the
U.S. Food and Drug Administration, or FDA, for each drug we
intend to sell. Obtaining FDA approval is typically a lengthy
and expensive process, and approval is highly uncertain. Foreign
governments also regulate drugs distributed in their country and
approval in any country is likely to be a lengthy and expensive
process, and approval is highly uncertain. None of our product
candidates has ever received regulatory approval to be marketed
and sold in the United States or any other country. We may never
receive regulatory approval for any of our product candidates.
The testing, manufacturing, marketing, and sale
of drugs for use in people expose us to product liability risk.
We are currently involved in a product liability lawsuit brought
by a subject who participated in a clinical trial of one of our
drug candidates. Any informed consent or waivers obtained from
people who sign up for our clinical trials may not protect us
from liability or the cost of litigation. Our product liability
insurance may not cover all potential liabilities or may not
completely cover any liability arising from any such litigation.
Moreover, we may not have access to liability insurance or be
able to maintain our insurance on acceptable terms.
32
In May 2003, securities class action lawsuits
were commenced against Regeneron and certain of its officers and
directors in the United States District Court for the Southern
District of New York. A consolidated amended class action
complaint was filed in October 2003. The complaint, which
purports to be brought on behalf of a class consisting of
investors in the Companys publicly traded securities
between March 28, 2000 and March 30, 2003, alleges
that the defendants misstated or omitted material information
concerning the safety and efficacy of AXOKINE, in violation of
Sections 10(b) and 20(a) of the Securities and Exchange Act
of 1934, and Rule 10b-5 promulgated thereunder. Damages are
sought in an unspecified amount. No reserve for damages has been
established because we do not believe that a loss is probable.
However, if the outcome of the litigation is adverse to us, we
could be subject to significant liability, which could exceed
our insurance coverage.
As a biopharmaceutical company with significant
manufacturing operations, we are subject to extensive
environmental, health, and safety laws and regulations,
including those governing the use of hazardous materials. Our
research and development and manufacturing activities involve
the controlled use of chemicals, viruses, radioactive compounds,
and other hazardous materials. The cost of compliance with
environmental, health, and safety regulations is substantial. If
an accident involving these materials or an environmental
discharge were to occur, we could be held liable for any
resulting damages, or face regulatory actions, which could
exceed our resources or insurance coverage.
Risks Related to our Dependence on Third
Parties
We relied heavily on Novartis to provide their
expertise, resources, funding, manufacturing capacity, clinical
expertise, and commercial infrastructure to support the
IL-1 Trap program. Novartis decision to withdraw from
participating in the development and commercialization of the
IL-1 Trap may delay or disrupt the IL-1 Trap program.
We do not have the resources and skills to replace those of
Novartis to help the development and potential commercialization
of the IL-1 Trap. In addition, we will have to fund the
development and commercialization of the IL-1 Trap without
Novartis long-term commitment, which will require
substantially greater expenditures on our part. While the
agreement requires Novartis to continue to fund agreed
pre-Phase III development expenses for the nine-month
period following its termination decision and imposes additional
post-termination obligations on the parties, Novartis may not
fulfill all payment and other obligations we believe are
required of it under the agreement, which may cause us to incur
further costs and risk delays and disruptions to the
IL-1 Trap program.
We rely heavily on Aventis to assist with the
development of the VEGF Trap. If the VEGF Trap program
continues, we will rely on Aventis to assist with providing
commercial manufacturing capacity, enrolling and monitoring
clinical trials, obtaining regulatory approval, particularly
outside the United States, and providing sales and marketing
support. While we cannot assure you that the VEGF Trap will
ever be successfully developed and commercialized, if Aventis
does not perform its obligations in a timely manner, or at all,
our ability to develop, manufacture, and commercialize the
VEGF Trap will be significantly adversely affected. Aventis
has the right to terminate rights to our product candidates
under its collaboration agreement with us at any time. If
Aventis were to terminate its collaboration agreement with us,
we might not have the resources or skills to replace those of
our partner, which could cause significant delays in the
development and/or manufacture of the VEGF Trap and result
in substantial additional costs to us. We have no sales,
marketing,
33
Sanofi-Synthelabo has initiated a tender offer in
an attempt to acquire Aventis. It is unclear what the impact of
this or any other business combination involving Aventis would
have on the VEGF Trap collaboration, including the possibility
of a termination of the collaboration agreement and a delay in,
or disruption to, the VEGF Trap development program.
We depend upon third-party collaborators,
including Aventis and service providers such as clinical
research organizations, outside testing laboratories, clinical
investigator sites, and third party manufacturers and product
packagers and labelers, to assist us in the development of our
product candidates. If any of our existing collaborators or
service providers breaches or terminates its agreement with us
or does not perform its development or manufacturing services
under an agreement in a timely manner or at all, we would
experience additional costs, delays, and difficulties in the
development or ultimate commercialization of our product
candidates.
Risks Related to the Manufacture of our
Product Candidates
Before approving a new drug or biologic product,
the FDA requires that the facilities at which the product will
be manufactured be in compliance with current good manufacturing
practices, or cGMP requirements. Manufacturing product
candidates in compliance with these regulatory requirements is
complex, time-consuming, and expensive. To be successful, our
products must be manufactured for development and, following
approval, in commercial quantities, in compliance with
regulatory requirements and at competitive costs. If we or any
of our product collaborators or third-party manufacturers,
fillers, or labelers are unable to maintain regulatory
compliance, the FDA can impose regulatory sanctions, including,
among other things, refusal to approve a pending application for
a new drug or biologic product, or revocation of a pre-existing
approval. As a result, our business, financial condition, and
results of operations may be materially harmed.
While we believe our current manufacturing
facility is adequate for the current production of quantities of
active pharmaceutical ingredients, or API, for our product
candidates for clinical trials, our manufacturing facility is
likely to be inadequate to produce sufficient quantities of
product for commercial sale. We intend to rely on our corporate
collaborators, as well as contract manufacturers, to produce
large quantities of drug material needed for commercialization
of our products. We rely entirely on third party manufacturers
for filling and finishing services. We will have to depend on
these manufacturers to deliver material on a timely basis and to
comply with regulatory requirements. If we are unable to supply
sufficient material on acceptable terms, or if we should
encounter delays or difficulties in our relationships with our
corporate collaborators or contract manufacturers, our business,
financial condition, and results of operations may be materially
harmed.
We may expand our own manufacturing capacity to
support commercial production of API for our product candidates.
This will require substantial additional funds, and we would
need to hire and train significant numbers of employees and
managerial personnel to staff our facility. Start-up costs can
be large and scale-up entails significant risks related to
process development and manufacturing yields. We may be unable
to develop manufacturing facilities that are sufficient to
produce drug material for clinical trials or commercial use. In
addition, we may be unable to secure adequate filling and
finishing services to support our products. As a result, our
business, financial condition, and results of operations may be
materially harmed.
We may be unable to obtain key raw materials and
supplies for the manufacture of our product candidates. In
addition, we may face difficulties in developing or acquiring
production technology and managerial personnel to manufacture
sufficient quantities of our product candidates at reasonable
costs and in compliance with applicable quality assurance and
environmental regulations and governmental permitting
requirements.
34
We maintain an 8,000 square foot
manufacturing facility in Tarrytown, New York and have
large-scale manufacturing operations in Rensselaer, New York.
Under a long-term manufacturing agreement with Merck, we produce
an intermediate for a Merck pediatric vaccine at our facility in
Rensselaer, New York. We also use our facilities to produce API
for our own clinical and preclinical candidates. If we no longer
use our facilities to manufacture the Merck intermediate or
clinical candidates are discontinued, we would have to absorb
overhead costs and inefficiencies.
Risks Related to Commercialization of
Products
We have no sales or distribution personnel or
capabilities and have only a small staff with marketing
capabilities. If we are unable to obtain those capabilities,
either by developing our own organizations or entering into
agreements with service providers, we will not be able to
successfully sell our products. In that event, we will not be
able to generate significant revenue, even if our product
candidates are approved. We cannot guarantee that we will be
able to hire the qualified sales and marketing personnel we
need. We may not be able to enter into marketing, or
distribution agreements with third-party providers on acceptable
terms, if at all. Currently, we are relying on Aventis for
sales, marketing, and distribution of the VEGF Trap. We will
have to rely on a third party or devote significant resources to
develop our own sales, marketing, and distribution capabilities
for our other product candidates. We may be unsuccessful in
developing our own sales, marketing, and distribution
organization.
Changes in product formulations and manufacturing
processes may be required as product candidates progress in
clinical development and are ultimately commercialized. If we
are unable to develop suitable product formulations or
manufacturing processes to support large scale clinical testing
of our product candidates, including VEGF Trap,
IL-1 Trap, IL-4/13 Trap and AXOKINE, we may be unable
to supply necessary materials for our clinical trials, which
would delay the development of our product candidates.
Similarly, if we are unable to supply sufficient quantities of
product or develop product formulations suitable for commercial
use, we will not be able to successfully commercialize our
product candidates. For example, AXOKINE is currently formulated
for delivery in single use vials. We are in the process of
developing a formulation that may be used in multiple use vials.
If we are unable to develop this multiple use vial formulation,
potential future AXOKINE sales and profitability may be limited.
Another example is our IL-1 Trap. We are in the process of
developing formulations that would allow delivery of higher
doses of the IL-1 Trap to test in clinical trials. This
includes formulations for subcutaneous and intravenous
administration. If we are unable to develop or manufacture such
a higher dose formulation that can be produced in a
cost-effective manner, potential future IL-1 Trap sales and
profitability may be limited.
There is substantial competition in the
biotechnology and pharmaceutical industries from pharmaceutical,
biotechnology, and chemical companies. Many of our competitors
have substantially greater research, preclinical, and clinical
product development and manufacturing capabilities, and
financial, marketing, and human resources than we do. Our
smaller competitors may also be significant if they acquire or
discover patentable inventions, form collaborative arrangements,
or merge with large pharmaceutical companies. Even if we achieve
product commercialization, our competitors have achieved, and
may continue to achieve, product commercialization before our
products are approved for marketing and sale. Genentech has an
approved VEGF antagonist on the market and many different
pharmaceutical and biotechnology companies
35
Sales of biopharmaceutical products largely
depend on the reimbursement of patients medical expenses
by government health care programs and private health insurers.
Without the financial support of the governments or third-party
payors, the market for any biopharmaceutical product will be
limited. These third-party payors are increasingly challenging
the price and examining the cost-effectiveness of products and
services. Significant uncertainty exists as to the reimbursement
status of any new therapeutic, particularly if there exist
lower-cost standards of care. Third-party payors may not
reimburse sales of our products, which would harm our business.
Risks Related to Employees
We are highly dependent on our executive
officers. If we are not able to retain any of these persons or
our Chairman, our business may suffer. In particular, we depend
on the services of Roy Vagelos, M.D., the Chairman of our Board
of Directors, Leonard Schleifer, M.D., Ph.D., our President
and Chief Executive Officer, and George D.
Yancopoulos, M.D., Ph.D., our Executive Vice President,
Chief Scientific Officer and President, Regeneron Research
Laboratories. There is intense competition in the biotechnology
industry for qualified scientists and managerial personnel in
the development, manufacture, and commercialization of drugs. We
may not be able to continue to attract and retain the qualified
personnel necessary for developing our business.
Risks Related to Intellectual
Property
Our business requires using sensitive and
proprietary technology and other information that we protect as
trade secrets. We seek to prevent improper disclosure of these
trade secrets through confidentiality agreements. If our trade
secrets are improperly exposed, either by our own employees or
our collaborators, it would help our competitors and adversely
affect our business. We will be able to protect our proprietary
rights
36
Our commercial success depends significantly on
our ability to operate without infringing the patents and other
proprietary rights of third parties. Other parties could allege
to have blocking patents to our Trap products in clinical
development, either because of a proprietary position on fusion
proteins or a proprietary position covering components of the
Trap or the way it is manufactured. We are aware of certain
United States and foreign patents relating to particular IL-4
and IL-13 receptors. Our IL-4/13 Trap includes portions of
the IL-4 and IL-13 receptors. In addition, we are aware of a
broad patent held by Genentech relating to proteins fused to
certain immunoglobulin domains. Our Trap product candidates
include proteins fused to immunoglobulin domains. With regard to
these patents, we have determined that in our judgment that
either our products do not infringe the patents, we do not
believe the patents are valid, or we have identified and are
testing or developing various modifications that we believe
should not infringe the patents.
Any patent holders could sue us for damages and
seek to prevent us from manufacturing, selling, or developing
our drug candidates, and a court may find that we are infringing
validly issued patents of third parties. In the event that the
manufacture, use, or sale of any of our clinical candidates
infringes on the patents or violates other proprietary rights of
third parties, we may be prevented from pursuing product
development, manufacturing, and commercialization of our drugs
and may be required to pay costly damages. Such a result may
materially harm our business, financial condition, and results
of operations. Legal disputes are likely to be costly and time
consuming to defend.
We seek to obtain licenses to patents when, in
our judgment, such licenses are needed. If any licenses are
required, we may not be able to obtain such licenses on
commercially reasonable terms, if at all. The failure to obtain
any such license could prevent us from developing or
commercializing any one or more of our product candidates, which
could severely harm our business.
Risks Related to our Common Stock
Our stock
price may be extremely volatile.
There has been significant volatility in our
stock price and generally in the market prices of biotechnology
companies securities. Various factors and events may have
a significant impact on the market price of our common stock.
These factors include, by way of example:
37
The trading price of our common stock has been,
and could continue to be, subject to wide fluctuations in
response to these and other factors, including the sale or
attempted sale of a large amount of our common stock in the
market. Broad market fluctuations may also adversely affect the
market price of our common stock.
Future sales
of our common stock by our significant shareholders or us may
depress our stock price.
A number of our shareholders own a substantial
amount of our common stock. If our significant shareholders or
we sell substantial amounts of our common stock in the public
market, the market price of our common stock could fall. Sales
by our significant shareholders, including Amgen, Aventis, and
Novartis, also might make it more difficult for us to sell
equity or equity-related securities in the future at a time and
price that we deemed appropriate.
Years Ended December 31, 2003 and
2002
Revenues:
2003
2002
(In millions)
$
21.4
$
14.3
10.6
10.5
1.1
0.4
47.4
10.9
10.1
11.1
$
57.5
$
22.0
Table of Contents
Up-front Payment
Deferred
Total
Amount
Revenue at
Revenue
2003 Expense
Total
Recognized
December 31,
Recognized
Reimbursement
Payment
in 2003
2003
in 2003
(In millions)
$
16.5
$
27.0
$
4.9
$
22.1
$
21.4
10.7
80.0
3.6
76.4
14.3
$
27.2
$
107.0
$
8.5
$
98.5
$
35.7
Research and Development Expenses:
Contract Manufacturing Expenses:
General and Administrative Expenses:
Table of Contents
Years Ended December 31, 2002 and
2001
Revenues:
2002
2001
(In millions)
$
10.5
$
10.4
1.2
0.4
0.5
10.9
12.1
11.1
9.9
$
22.0
$
22.0
Research and Development Expenses:
Contract Manufacturing Expenses:
General and Administrative Expenses:
Table of Contents
Other Income and Expense:
Years Ended December 31, 2003 and
2002
Cash Used in Operations:
Table of Contents
Cash Used in Investing Activities:
Cash Provided by Financing
Activities:
Aventis Agreement:
Novartis Agreement:
Table of Contents
Merck License Agreement:
Convertible Debt:
Capital Expenditures:
Funding Requirements:
Table of Contents
Payments Due by Period
Less than
1 to 3
4 to 5
Total
one year
years
years
(In millions)
$
200.0
$
$
$
200.0
13.8
13.8
9.1
5.5
3.4
0.2
0.2
0.2
(1)
Includes amounts representing interest.
(2)
Excludes future contingent rental costs for
utilities, real estate taxes, and operating expenses. In 2003,
these costs were $6.0 million.
(3)
Includes long-term portion of restricted cash
awards granted in December 2003 which vest semi-annually over an
approximate two year period.
Table of Contents
Revenue Recognition:
Recognition of Deferred Revenue Related to
Contract Manufacturing Agreement:
Table of Contents
Clinical Trial Accrual Estimates:
Depreciation of Property, Plant and
Equipment:
6-30 years
Life of lease
3-5 years
5 years
Table of Contents
We have had a history of operating losses
and we may never achieve profitability. Moreover, if we continue
to incur operating losses, we may be unable to continue our
operations.
Table of Contents
We will need additional funding in the
future, which may not be available to us, and which would then
force us to delay, reduce, or eliminate our product development
programs or commercialization efforts.
We have a significant amount of debt and
may have insufficient cash to satisfy our debt service and
repayment obligations. In addition, the amount of our debt could
impede our operations and flexibility.
Successful development of any of our
product candidates is highly uncertain.
Clinical trials required for our product
candidates are expensive and time-consuming, and their outcome
is highly uncertain. If any of our drug trials are delayed or
achieve unfavorable results, we will have to delay or may be
unable to obtain regulatory approval for our product
candidates.
Table of Contents
The development of serious or
life-threatening side effects with any of our product candidates
would lead to delay or discontinuation of development, which
could severely harm our business.
Our product candidates in development are
recombinant proteins that could cause an immune response,
resulting in the creation of harmful or neutralizing antibodies
against the therapeutic protein.
Table of Contents
A previous Phase III study evaluating
AXOKINE demonstrated modest average weight loss over a 12-month
period. In addition, a completed Phase II study evaluating
the IL-1 Trap in patients with rheumatoid arthritis failed
to achieve its primary endpoint.
If we do not obtain regulatory approval for
our product candidates, we will not be able to market or sell
them.
If the testing or use of our products harms
people, we could be subject to costly and damaging product
liability claims. We could also face costly and damaging claims
arising from employment law, securities law, environmental law,
or other applicable laws governing our operations.
Table of Contents
Our operations may involve hazardous
materials and are subject to environmental, health, and safety
laws and regulations. We may incur substantial liability arising
from our activities involving the use of hazardous
materials.
On February 27, 2004, Novartis
provided notice to us that they would not participate in the
continued development and commercialization of the
IL-1 Trap under our collaboration agreement. This may harm
our ability to develop and commercialize the
IL-1 Trap.
If our collaboration with Aventis for the
VEGF Trap is terminated, our ability to develop and
commercialize the VEGF Trap in the time expected, or at all, and
our business operations would be harmed.
Table of Contents
Our collaborators and service providers may
fail to perform adequately in their efforts to support the
development, manufacture, and commercialization of our drug
candidates.
We have limited manufacturing capacity,
which could inhibit our ability to successfully develop or
commercialize our drugs.
Table of Contents
If any of our clinical programs are
discontinued, we may face costs related to the underutilization
of our manufacturing facilities.
If we are unable to establish sales,
marketing, and distribution capabilities, or enter into
agreements with third parties to do so, we will be unable to
successfully market and sell future drug products.
We may be unable to formulate or
manufacture our product candidates in a way that is suitable for
clinical or commercial use.
Even if our product candidates are ever
approved, their commercial success is highly uncertain because
our competitors may get to the marketplace before we do with
better or lower cost drugs.
Table of Contents
The successful commercialization of our
product candidates will depend on obtaining coverage and
reimbursement for use of these products from third-party
payors.
We are dependent on our key personnel and
if we cannot recruit and retain leaders in our research,
development, manufacturing, and commercial organizations, our
business will be harmed.
If we cannot protect the confidentiality of
our trade secrets or our patents are insufficient to protect our
proprietary rights, our business and competitive position will
be harmed.
Table of Contents
We may be restricted in our development
and/or commercialization activities by third party
patents.
progress, delays, or adverse results in clinical
trials;
announcement of technological innovations or
product candidates by us or competitors;
fluctuations in our operating results;
public concern as to the safety or effectiveness
of our product candidates;
developments in our relationship with
collaborative partners;
developments in the biotechnology industry or in
government regulation of healthcare;
large sales of our common stock by our executive
officers, directors, or significant shareholders;
Table of Contents
arrivals and departures of key personnel; and
general market conditions.
Item 7A. | Quantitative and Qualitative Disclosure About Market Risk. |
Our earnings and cash flows are subject to fluctuations due to changes in interest rates primarily from our investment of available cash balances in investment grade corporate and U.S. government securities. We do not believe we are materially exposed to changes in interest rates. Under our current policies we do not use interest rate derivative instruments to manage exposure to interest rate changes. We estimated that a one percent change in interest rates would result in an approximately $1.4 million and $0.7 million change in the fair market value of our investment portfolio at December 31, 2003 and 2002, respectively. The increase is due primarily to a higher investment portfolio balance and slightly longer duration as of December 31, 2003 in comparison to 2002.
Item 8. | Financial Statements and Supplementary Data |
Our financial statements required by this item are included herein as exhibits and listed under Item 15.(A)1.
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
Not applicable.
Item 9A. | Controls and Procedures |
We conducted an evaluation of the effectiveness of the Companys disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K. The evaluation was conducted under the supervision and with the participation of Leonard S. Schleifer, our President and Chief Executive Officer, and Murray A. Goldberg, our Chief Financial Officer. Based upon this evaluation, each of Dr. Schleifer and Mr. Goldberg concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our filings under the Securities Exchange Act of 1934. There has been no significant change in our internal controls over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or internal controls over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the system are met and cannot detect all deviations. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud or deviations, if any, within the company have been detected. While we believe that our disclosure controls and procedures have been effective, in light of the foregoing, we intend to continue to examine and refine our disclosure controls and procedures and monitor ongoing developments in this area.
38
PART III
Item 10. | Directors and Officers of the Registrant |
The information required by this item will be contained under the captions Election of Directors, Board Committees, Executive Officers of the Registrant, and Section 16(a) Beneficial Ownership Reporting Compliance in our definitive proxy statement with respect to our 2004 Annual Meeting of Shareholders to be filed with the SEC, and is hereby incorporated by reference thereto.
We have adopted a code of ethics that applies to our Chief Executive Officer, Chief Financial Officer, and other senior financial officers. The current version of this code of ethics can be found on the Companys website ( http://www.regn.com) under the Investor Relations heading. A broader code of business conduct and ethics, which will apply to all our officers, directors and employees, will be submitted shortly to the Board of Directors for approval.
Item 11. | Executive Compensation |
The information called for by this item is incorporated by reference to the material captioned Executive Compensation and Compensation of Directors in our definitive proxy statement with respect to our 2004 Annual Meeting of Shareholders to be filed with the SEC.
Item 12. | Security Ownership of Certain Beneficial Owners and Management |
The information called for by this item is incorporated by reference to the material captioned Stock Ownership of Executive Officers and Directors and Stock Ownership of Certain Beneficial Owners in our definitive proxy statement with respect to our 2004 Annual Meeting of Shareholders to be filed with the SEC.
Item 13. | Certain Relationships and Related Transactions |
The information called for by this item is incorporated by reference to the material captioned Certain Relationships and Related Transactions in our definitive proxy statement with respect to our 2004 Annual Meeting of Shareholders to be filed with the SEC.
Item 14. | Principal Accountant Fees and Services |
The information called for by this item is incorporated by reference to the material captioned Information about Fees Paid to Independent Auditors in our definitive proxy statement with respect to our 2004 Annual Meeting of Shareholders to be filed with the SEC.
39
PART IV
Item 15. | Exhibits, Financial Statement Schedules and Reports on Form 8-K |
(A) 1. Financial Statements
The financials statements filed as part of this report are listed on the Index to Financial Statements on page F-1.
2. Financial Statement Schedules
All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted.
3. Exhibits
Exhibit
Number
Description
3.1
(a)
Restated Certificate of Incorporation of
Regeneron Pharmaceuticals, Inc. as of June 21, 1991.
3.2
(b)
By-Laws of the Company, currently in effect
(amended as of January 22, 1995).
10.1
(c)
Certificate of Amendment of the Restated
Certificate of Incorporation of Regeneron Pharmaceuticals, Inc.,
as of October 18, 1996.
10.2
(d)
Certificate of Amendment of the Certificate of
Incorporation of Regeneron Pharmaceuticals, Inc., as of
December 17, 2001.
10.3
(e)*
Technology Development Agreement dated as of
March 20, 1989, between the Company and Sumitomo Chemical
Company, Limited.
10.4
(e)*
Collaboration Agreement dated August 31,
1990, between the Company and Amgen Inc.
10.5
(e)
1990 Amended and Restated Long-Term Incentive
Plan.
10.6
(d)
2000 Long-Term Incentive Plan.
10.6.
1
(n)
Amendment No. 1 to 2000 Long-Term Incentive
Plan, effective as of June 14, 2002.
10.6.
2
(n)
Amendment No. 2 to 2000 Long-Term Incentive
Plan, effective as of December 20, 2002.
10. 7
(f)*
Research and Development Agreement dated as of
June 2, 1994, between the Company and Sumitomo
Pharmaceuticals Company, Ltd.
10.8
(g)*
Manufacturing Agreement dated as of
September 18, 1995, between the Company and Merck &
Co., Inc.
10.9
(h)
Warrant Agreement dated as of April 15,
1996, between the Company and Amgen Inc.
10.10
(h)
Registration Rights Agreement dated as of
April 15, 1996, between the Company and Amgen Inc.
10.11
(i)
Rights Agreement, dated as of September 20,
1996, between Regeneron Pharmaceuticals, Inc. and Chase Mellon
Shareholder Services LLC, as Rights Agent, including the form of
Rights Certificate as Exhibit B thereto.
10.12
(j)
Stock Purchase Agreement dated as of
December 11, 1996, between the Company and Procter &
Gamble Pharmaceuticals, Inc.
10.13
(j)
Registration Rights Agreement dated as of
December 11, 1996, between the Company and Procter &
Gamble Pharmaceuticals, Inc.
10.14
(k)
Securities Purchase Agreement dated as of
May 13, 1997, between the Company and The Procter &
Gamble Company.
10.15
(k)
Warrant Agreement dated as of May 13, 1997,
between the Company and The Procter & Gamble Company.
10.16
(k)
Registration Rights Agreement, dated as of
May 13, 1997, between the Company and The Procter &
Gamble Company.
40
Exhibit
Number
Description
10.17
(n)
Employment Agreement, dated as of
December 20, 2002, between the Company and Leonard S.
Schleifer, M.D., Ph.D.
10.18
(l)
Indenture, dated as of October 17, 2001,
between Regeneron Pharmaceuticals, Inc. and American Stock
Transfer & Trust Company, as trustee.
10.19
(l)
Pledge Agreement, dated as of October 17,
2001, between Regeneron Pharmaceuticals, Inc. and American Stock
Transfer & Trust Company, as trustee.
10.20
(l)
Registration Rights Agreement, dated as of
October 17, 2001, among Regeneron Pharmaceuticals, Inc.,
Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner &
Smith Incorporated, and Robertson Stephens, Inc.
10.21
(m)*
Focused Collaboration Agreement, dated as of
December 31, 2000, by and between the Company and The Procter
& Gamble Company.
10.22
(m)*
IL-1 License Agreement, dated June 26, 2002,
by and among the Company, Immunex Corporation, and Amgen Inc.
10.23
(o)*
Collaboration, License and Option Agreement,
dated as of March 28, 2003, by and between Novartis Pharma
AG, Novartis Pharmaceuticals Corporation, and the Company.
10.24
(o)*
Stock Purchase Agreement, dates as of
March 28, 2003, by and between Novartis Pharma AG and the
Company.
10.25
(o)
Registration Rights Agreement, dates as of
March 28, 2003, by and between Novartis Pharma AG and the
Company.
10.26
(p)*
Collaboration Agreement, dates as of
September 5, 2003, by and between Aventis Pharmaceuticals
Inc. and Regeneron Pharmaceuticals, Inc.
10.27
(p)
Stock Purchase Agreement, dates as of
September 5, 2003, by and between Aventis Pharmaceuticals
Inc. and Regeneron Pharmaceuticals, Inc.
10.28
(p)*
Non-Exclusive Patent License Agreement, effective
as of August 18, 2003, by and between Merck & Co., Inc. and
Regeneron Pharmaceuticals, Inc.
18.1
(p)
Independent Accountants Preferability
Letter Regarding a Change in Accounting Principle.
23.1
Consent of PricewaterhouseCoopers LLP,
Independent Registered Public Accounting Firm.
23.2
Consent of Ernst & Young LLP,
Independent Auditors.
31
Certification of CEO and CFO pursuant to
Rule 13a-14(a) under the Securities and Exchange Act of
1934.
32
Certification of CEO and CFO pursuant to 18
U.S.C. Section 1350.
Description:
(a) | Incorporated by reference from the Form 10-Q for Regeneron Pharmaceuticals, Inc. for the quarter ended June 30, 1991, filed August 13, 1991. | |
(b) | Incorporated by reference from the Form 10-K for Regeneron Pharmaceuticals, Inc. for the fiscal year ended December 31, 1994, filed March 30, 1995. | |
(c) | Incorporated by reference from the Form 10-Q for Regeneron Pharmaceuticals, Inc. for the quarter ended September 30, 1996, filed November 5, 1996. | |
(d) | Incorporated by reference from the Form 10-K for Regeneron Pharmaceuticals, Inc. for the fiscal year ended December 31, 2001, filed March 22, 2002. | |
(e) | Incorporated by reference from the Companys registration statement on Form S-1 (file number 33-39043). | |
(f) | Incorporated by reference from the Form 10-Q for Regeneron Pharmaceuticals, Inc. for the quarter ended September 30, 1994, filed November 14, 1994. |
41
(g) | Incorporated by reference from the Form 10-Q for Regeneron Pharmaceuticals, Inc. for the quarter ended September 30, 1995, filed November 14, 1995. | |
(h) | Incorporated by reference from the Form 10-Q for Regeneron Pharmaceuticals, Inc. for the quarter ended June 30, 1996, filed August 14, 1996. | |
(i) | Incorporated by reference from the Form 8-A for Regeneron Pharmaceuticals, Inc. filed October 15, 1996. | |
(j) | Incorporated by reference from the Form 10-K for Regeneron Pharmaceuticals, Inc. for the fiscal year ended December 31, 1996, filed March 26, 1997. | |
(k) | Incorporated by reference from the Form 10-Q for Regeneron Pharmaceuticals, Inc. for the quarter ended June 30, 1997, filed August 12, 1997. | |
(l) | Incorporated by reference from the Companys registration statement on Form S-3 (file number 333-74464). | |
(m) | Incorporated by reference from the Form 10-Q for Regeneron Pharmaceuticals, Inc. for the quarter ended June 30, 2002, filed August 13, 2002. | |
(n) | Incorporated by reference from the Form 10-K for Regeneron Pharmaceuticals, Inc. for the fiscal year ended December 31, 2002, filed March 31, 2003. | |
(o) | Incorporated by reference from the Form 10-Q for Regeneron Pharmaceuticals, Inc. for the quarter ended March 31, 2003, filed May 15, 2003. | |
(p) | Incorporated by reference from the Form 10-Q for Regeneron Pharmaceuticals, Inc. for the quarter ended September 30, 2003, filed November 11, 2003. |
* | Portions of this document have been omitted and filed separately with the Commission pursuant to requests for confidential treatment pursuant to Rule 24b-2. |
(B) Reports on Form 8-K
Form 8-K, filed February 24, 2004: On February 23, 2004, we issued a press release announcing our fourth quarter and full year 2003 financial and operating results.
Form 8-K, filed March 1, 2004: On February 27, 2004, we issued a press release announcing our plans to initiate a Phase IIb study of the IL-1 Trap in the second half of 2004 and that Novartis Pharma AG notified the Company of its intention not to proceed with the joint development of the IL-1 Trap.
42
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
REGENERON PHARMACEUTICALS, INC. |
By: | /s/ LEONARD S. SCHLEIFER |
|
|
Leonard S. Schleifer, M.D., Ph.D. | |
President and Chief Executive Officer |
Dated: |
New York, New York
December 14, 2004 |
By: | /s/ LEONARD S. SCHLEIFER, M.D., PH.D. |
43
REGENERON PHARMACEUTICALS, INC.
Page | |||||
Numbers | |||||
|
|||||
REGENERON PHARMACEUTICALS, INC.
|
|||||
Report of Independent Registered Public
Accounting Firm
|
F- 2 | ||||
Balance Sheets at December 31, 2003 and 2002
|
F- 3 | ||||
Statements of Operations for the years ended
December 31, 2003, 2002, and 2001
|
F- 4 | ||||
Statements of Stockholders Equity for the
years ended December 31, 2003, 2002, and 2001
|
F- 5 | ||||
Statements of Cash Flows for the years ended
December 31, 2003, 2002, and 2001
|
F- 7 | ||||
Notes to Financial Statements
|
F-8 to F- 33 | ||||
AMGEN-REGENERON PARTNERS
|
|||||
Report of Ernst & Young LLP, Independent
Auditors
|
F- 34 | ||||
Balance Sheet at December 31, 2001
|
F- 35 | ||||
Statement of Operations for the year ended
December 31, 2001
|
F- 36 | ||||
Statement of Changes in Partners Capital
(Deficit) for the year ended December 31, 2001
|
F- 37 | ||||
Statement of Cash Flows for the year ended
December 31, 2001
|
F- 38 | ||||
Notes to Financial Statements
|
F-39 to F- 40 |
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To the Board of Directors and Stockholders of
In our opinion, based upon our audits and the
report of other auditors, the accompanying balance sheets and
the related statements of operations, stockholders equity
and cash flows present fairly, in all material respects, the
financial position of Regeneron Pharmaceuticals, Inc. (the
Company) at December 31, 2003 and 2002, and the
results of its operations and its cash flows for each of the
three years in the period ended December 31, 2003, in
conformity with accounting principles generally accepted in the
United States of America. These financial statements are the
responsibility of the Companys management; our
responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the financial
statements of Amgen-Regeneron Partners (the
Partnership), an entity which is fifty percent owned
by the Company, for the year ended December 31, 2001. The
Companys investment in the Partnership is accounted for in
accordance with the equity method of accounting. For the year
ended December 31, 2001, the Company recorded its pro rata
share of the Partnerships net loss of approximately $1.0
million. The Partnerships financial statements were
audited by other auditors whose report thereon has been
furnished to us, and our opinion expressed herein, insofar as it
relates to the amounts included for the Partnership, is based
solely on the report of the other auditors. We conducted our
audits of these statements in accordance with the standards of
the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits and the report of other
auditors provide a reasonable basis for the opinion expressed
above.
As discussed in Note 2 to the financial
statements, during the year ended December 31, 2003, the
Company changed its method of accounting for revenue recognition.
New York, New York
F-2
PricewaterhouseCoopers
LLP
Table of Contents
REGENERON PHARMACEUTICALS, INC.
BALANCE SHEETS
2003
2002
(In thousands,
except share data)
$
118,285
$
80,077
164,576
173,282
10,913
10,912
15,529
4,017
1,898
1,829
9,006
6,831
320,207
276,948
72,792
20,402
10,573
80,723
76,825
5,833
6,826
$
479,555
$
391,574
$
18,933
$
30,309
40,173
9,659
13,817
150
72,923
40,118
68,830
5,475
200,000
200,000
159
341,912
245,593
2,365,873 shares issued and outstanding in 2003
2,491,181 shares issued and outstanding in 2002
2
2
53,165,635 shares issued and outstanding in 2003
41,746,133 shares issued and outstanding in 2002
53
42
673,118
573,184
(4,101
)
(3,643
)
(531,533
)
(424,075
)
104
471
137,643
145,981
$
479,555
$
391,574
The accompanying notes are an integral part of the financial statements.
F-3
REGENERON PHARMACEUTICALS, INC.
STATEMENTS OF OPERATIONS
2003
2002
2001
(In thousands, except per share data)
$
47,366
$
10,924
$
12,071
10,131
11,064
9,902
57,497
21,988
21,973
136,024
124,953
92,542
6,676
6,483
6,509
14,785
12,532
9,607
157,485
143,968
108,658
(99,988
)
(121,980
)
(86,685
)
4,462
9,462
13,162
(11,932
)
(11,859
)
(2,657
)
(7,470
)
(2,397
)
10,505
$
(107,458
)
$
(124,377
)
$
(76,180
)
$
(2.13
)
$
(2.83
)
$
(1.81
)
The accompanying notes are an integral part of the financial statements.
F-4
REGENERON PHARMACEUTICALS, INC.
STATEMENTS OF STOCKHOLDERS
EQUITY
Accumulated
Class A Stock
Common Stock
Additional
Other
Total
Paid-in
Unearned
Accumulated
Comprehensive
Stockholders
Comprehensive
Shares
Amount
Shares
Amount
Capital
Compensation
Deficit
Income(Loss)
Equity
Loss
(In thousands, except per share data)
2,613
$
3
34,197
$
34
$
406,391
$
(1,314
)
$
(223,518
)
$
534
$
182,130
6,630
7
165,743
165,750
(9,096
)
(9,096
)
254
1,868
1,868
37
17
477
477
(50
)
50
79
2,207
(2,207
)
732
732
34
34
(76,180
)
(76,180
)
$
(76,180
)
640
640
640
2,563
3
41,264
41
567,624
(2,789
)
(299,698
)
1,174
266,355
$
(75,540
)
251
2,149
2,149
22
764
764
(72
)
(1
)
72
1
137
2,644
(2,644
)
1,790
1,790
3
3
(124,377
)
(124,377
)
$
(124,377
)
(703
)
(703
)
(703
)
2,491
2
41,746
42
573,184
(3,643
)
(424,075
)
471
145,981
$
(125,080
)
F-5
REGENERON PHARMACEUTICALS, INC.
STATEMENTS OF STOCKHOLDERS
EQUITY (Continued)
Accumulated
Class A Stock
Common Stock
Additional
Other
Total
Paid-in
Unearned
Accumulated
Comprehensive
Stockholders
Comprehensive
Shares
Amount
Shares
Amount
Capital
Compensation
Deficit
Income (Loss)
Equity
Loss
(In thousands, except per share data)
601
1,941
1,941
7,527
8
47,992
48,000
2,800
3
44,997
45,000
109
1,500
1,500
43
747
747
(125
)
125
215
2,757
(2,757
)
2,299
2,299
(107,458
)
(107,458
)
$
(107,458
)
(367
)
(367
)
(367
)
2,366
$
2
53,166
$
53
$
673,118
$
(4,101
)
$
(531,533
)
$
104
$
137,643
$
(107,825
)
The accompanying notes are an integral part of the financial statements.
F-6
REGENERON PHARMACEUTICALS, INC.
STATEMENTS OF CASH FLOWS
2003
2002
2001
(In thousands)
$
(107,458
)
$
(124,377
)
$
(76,180
)
12,937
8,454
6,077
2,562
1,793
766
1,500
(11,512
)
(1,042
)
10,860
589
184
(2,108
)
(1,049
)
(1,732
)
(941
)
93,869
1,498
(87
)
2,429
4,699
4,293
101,325
13,854
18,860
(6,133
)
(110,523
)
(57,320
)
(276,447
)
(234,463
)
(159,731
)
(11,055
)
(5,514
)
(31,620
)
231,261
199,317
124,189
22,054
16,514
(29,656
)
(34,370
)
(8,223
)
(63,843
)
(58,516
)
(75,385
)
94,678
2,149
158,522
192,703
(1,533
)
13,656
(150
)
(426
)
(572
)
108,184
1,723
349,120
38,208
(167,316
)
216,415
80,077
247,393
30,978
$
118,285
$
80,077
$
247,393
$
11,003
$
11,038
$
161
The accompanying notes are an integral part of the financial statements.
F-7
REGENERON PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
1. Organization
and Business
Regeneron Pharmaceuticals, Inc. (the
Company or Regeneron) was incorporated
in January 1988 in the State of New York. The Company is engaged
in research and development programs to discover and
commercialize therapeutics to treat human disorders and
conditions. The Companys facilities are located in New
York. The Companys business is subject to certain risks
including, but not limited to, uncertainties relating to
conducting pharmaceutical research, obtaining regulatory
approvals, commercializing products, and obtaining and enforcing
patents.
2. Summary of
Significant Accounting Policies
Property, plant, and equipment are stated at
cost. Depreciation is provided on a straight-line basis over the
estimated useful lives of the assets. Expenditures for
maintenance and repairs which do not materially extend the
useful lives of the assets are charged to expense as incurred.
The cost and accumulated depreciation or amortization of assets
retired or sold are removed from the respective accounts, and
any gain or loss is recognized in operations. The estimated
useful lives of property, plant, and equipment are as follows:
Costs of construction of certain long-lived
assets include capitalized interest which is amortized over the
estimated useful life of the related asset. The Company
capitalized interest costs of $0.6 million and
$0.2 million in 2003 and 2002, respectively.
The Company periodically assesses the
recoverability of property and equipment and evaluates such
assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. Asset impairment is determined to exist if
estimated future undiscounted cash flows are less than the
carrying amount in accordance with Statement of Financial
Accounting Standards No. 144,
Accounting for the
Impairment or Disposal of Long-Lived Assets
. As of
December 31, 2003, there were no impairments of long-lived
assets.
For purposes of the statement of cash flows and
the balance sheet, the Company considers all highly liquid debt
instruments with a maturity of three months or less when
purchased to be cash equivalents. The carrying amount reported
in the balance sheet for cash and cash equivalents approximates
its fair value.
Inventories are stated at the lower of cost or
market. Cost is determined based on standards that approximate
the first-in, first-out method. Inventories are shown net of
applicable reserves.
The Company recognizes revenue from contract
research and development and research progress payments in
accordance with Staff Accounting Bulletin No. 104,
Revenue Recognition
(SAB 104) and
F-8
NOTES TO FINANCIAL
STATEMENTS (Continued)
FASB Emerging Issue Task Force Issue
No. 00-21,
Accounting for Revenue Arrangements with
Multiple Deliverables
(EITF 00-21).
SAB 104 superseded Staff Accounting Bulletin No. 101,
Revenue Recognition in Financial Statement
(SAB 101), in December 2003. During the
third quarter of 2003, the Company elected to change the method
it uses to recognize revenue under SAB 101 related to
non-refundable collaborator payments, including up-front
licensing payments, payments for development activities, and
research progress (milestone) payments, to the Substantive
Milestone Method, adopted retroactively to January 1, 2003.
There is no cumulative effect of this change in accounting
principle on prior periods. Under this method, the Company
recognizes revenue from non-refundable up-front license
payments, not tied to achieving a specific performance
milestone, ratably over the period over which the Company is
obligated to perform services. Payments for development
activities are recognized as revenue as earned, ratably over the
period of effort. Substantive at-risk milestone payments, which
are based on achieving a specific performance milestone, are
recognized as revenue when the milestone is achieved and the
related payment is due, provided there is no future service
obligation associated with that milestone. The change in
accounting method was made because the Company believes that it
better reflects the substance of the Companys
collaborative agreements and is more consistent with current
practices in the biotechnology industry.
Previously, the Company had recognized revenue
from non-refundable collaborator payments based on the
percentage of costs incurred to date, estimated costs to
complete, and total expected contract revenue. However, the
revenue recognized was limited to the amount of non-refundable
payments received. This accounting method was adopted on
January 1, 2000 upon the release of SAB 101. Prior to
January 1, 2000, revenue from certain non-refundable
collaborator payments was recognized when there were no
additional contractual services to be provided or costs to be
incurred by the Company in connection with the non-refundable
payment. The cumulative effect of adopting SAB 101 at
January 1, 2000 amounted to $1.6 million of additional
loss, with a corresponding increase to deferred revenue that is
being recognized in subsequent periods, of which
$0.4 million was included in contract research and
development revenue in each of 2003, 2002, and 2001. The
$1.6 million represents a portion of a 1989 payment
received from Sumitomo Chemical Co. Ltd. in consideration for a
fifteen year limited right of first negotiation to license up to
three of the Companys product candidates in Japan (see
Note 11d). The effect of income taxes on the cumulative
effect adjustment was immaterial.
The Company has entered into contract
manufacturing agreements under which it manufactures products
and performs services for third parties. Contract manufacturing
revenue is recognized as products are shipped and as services
are performed (see Notes 11d and 12).
Interest income, which is included in investment
income, is recognized as earned.
Long-lived assets, such as fixed assets, are
reviewed for impairment when events or circumstances indicate
that their carrying value may not be recoverable. Estimated
undiscounted expected future cash flows are used to determine if
an asset is impaired in which case the assets carrying
value would be reduced to fair value. For all periods presented,
no impairment losses were recorded.
F-9
NOTES TO FINANCIAL
STATEMENTS (Continued)
As a result of the Companys research and
development efforts, it has obtained, applied, or is applying
for a number of patents to protect proprietary technology and
inventions. All costs associated with patents are expensed as
incurred.
Research and development expenses include costs
directly attributable to the conduct of research and development
programs, including the cost of salaries, payroll taxes,
employee benefits, materials, supplies, depreciation on and
maintenance of research equipment, costs related to research
collaboration and licensing agreements (see Note 10f), the
cost of services provided by outside contractors, including
services related to the Companys clinical trials, clinical
trial expenses, the full cost of manufacturing drug for use in
research, preclinical development, and clinical trials, expenses
related to the development of manufacturing processes prior to
commencing commercial production of a product under contract
manufacturing arrangements, and the allocable portions of
facility costs, such as rent, utilities, insurance, repairs and
maintenance, depreciation, and general support services. All
costs associated with research and development are expensed as
incurred.
For each clinical trial that the Company
conducts, certain clinical trial costs, which are included in
research and development expenses, are expensed based on the
expected total number of patients in the trial, the rate at
which patients enter the trial, and the period over which
clinical investigators or contract research organizations are
expected to provide services. During the course of a clinical
trial, the Company adjusts its rate of clinical expense
recognition if actual results differ from the Companys
estimates.
Net loss per share, basic and diluted, is
computed on the basis of the net loss for the period divided by
the weighted average number of shares of Common Stock and
Class A Stock outstanding during the period. The basic net
loss per share excludes restricted stock awards until vested.
The diluted net loss per share for all periods presented
excludes unvested restricted stock awards and the number of
shares issuable upon conversion of outstanding convertible debt
and exercise of outstanding stock options and warrants, since
such inclusion would be antidilutive. Disclosures required by
Statement of Financial Accounting Standards No. 128,
Earnings per Share
, have been included in Note 18.
The Company recognizes deferred tax liabilities
and assets for the expected future tax consequences of events
that have been included in the financial statements or tax
returns. Under this method, deferred tax liabilities and assets
are determined on the basis of the difference between the tax
basis of assets and liabilities and their respective financial
reporting amounts (temporary differences) at enacted
tax rates in effect for the years in which the differences are
expected to reverse. A valuation allowance is established for
deferred tax assets for which realization is uncertain. See
Note 16.
Comprehensive loss represents the change in net
assets of a business enterprise during a period from
transactions and other events and circumstances from non-owner
sources. Comprehensive loss of the Company includes net loss
adjusted for the change in net unrealized gain or loss on
marketable securities. The net effect of income taxes on
comprehensive loss is immaterial. Comprehensive losses for the
years ended December 31, 2003, 2002, and 2001 have been
included in the Statements of Stockholders Equity.
F-10
NOTES TO FINANCIAL
STATEMENTS (Continued)
Financial instruments which potentially subject
the Company to concentrations of credit risk consist of cash,
cash equivalents, marketable securities, restricted marketable
securities, and receivables from Aventis Pharmaceuticals Inc.,
Novartis Pharma AG, The Procter & Gamble Company,
and Merck & Co., Inc. The Company generally invests its
excess cash in obligations of the U.S. government and its
agencies, bank deposits, investment grade debt securities issued
by corporations, governments, and financial institutions, and
money market funds that invest in these instruments. The Company
has established guidelines that relate to credit quality,
diversification, and maturity, and that limit exposure to any
one issue of securities.
Regeneron has had no sales of its products and
there is no assurance that the Companys research and
development efforts will be successful, that the Company will
ever have commercially approved products, or that the Company
will achieve significant sales of any such products. The Company
has incurred net losses and negative cash flows from operations
since its inception, and revenues to date have principally been
limited to payments for research from six collaborators and for
contract manufacturing from two pharmaceutical companies and
investment income (see Notes 11 and 12). The Company operates in
an environment of rapid change in technology and is dependent
upon the services of its employees, consultants, collaborators,
and certain third-party suppliers of materials. Regeneron, as
licensee, licenses certain technologies that are important to
the Companys business which impose various obligations on
the Company. If Regeneron fails to comply with these
requirements, licensors may have the right to terminate the
Companys licenses.
Contract research and development revenue in 2003
was primarily earned from Aventis Pharmaceuticals Inc., Novartis
Pharma AG, and The Procter & Gamble Company under
collaboration agreements (see Notes 11a, 11b and 11e).
Under the collaboration agreement with Aventis, agreed upon
VEGF Trap development expenses incurred by Regeneron during
the term of the agreement will be funded by Aventis. In
addition, the Company may receive a $25.0 million payment
upon achievement of an early-stage clinical milestone and up to
$360.0 million in additional milestone payments upon
receipt of specified VEGF Trap marketing approvals. Aventis
has the right to terminate the agreement without cause with at
least twelve months advance notice. Under the collaboration
agreement with Novartis, agreed upon IL-1 Trap development
expenses will either be shared with or fully funded by Novartis,
depending on the phase of clinical development. The agreement
with Novartis contains provisions for termination, including
termination by Novartis without cause with at least nine months
advance notice. Under the long-term collaboration with
Procter & Gamble, Procter & Gamble is
obligated to provide payments to fund Regeneron research of
$2.5 million per quarter, before adjustments for inflation,
through December 2005, with no further research obligations by
either party thereafter. Contract manufacturing revenue in 2003
was earned from Merck & Co., Inc. under a long-term
manufacturing agreement that extends until November 2005 (see
Note 12), but may be terminated at any time by Merck with
at least one years notice without penalty and may be
extended by mutual agreement.
The Company has entered into a license and supply
agreement with Nektar Therapeutics under which Nektar is the
only supplier of a pegylated reagent used to formulate pegylated
AXOKINE, one of our product candidates.
The preparation of financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those
estimates. Significant estimates include useful lives of
property, plant, and equipment and the periods over which
certain revenues and
F-11
NOTES TO FINANCIAL
STATEMENTS (Continued)
expenses will be recognized, including contract
research and development revenue recognized from non-refundable
up-front licensing payments, contract manufacturing revenue
recognized from reimbursed deferred capital costs, and expense
recognition of certain clinical trial costs which are included
in research and development expenses.
The accompanying financial position and results
of operations of the Company have been prepared in accordance
with APB Opinion No. 25,
Accounting for Stock Issued to
Employees
(APB No. 25). Under
APB No. 25, generally, no compensation expense is
recognized in the accompanying financial statements in
connection with the awarding of stock option grants to employees
provided that, as of the grant date, all terms associated with
the award are fixed and the quoted market price of the
Companys stock, as of the grant date, is equal to or less
than the amount an employee must pay to acquire the stock as
defined.
The Company has stock-based incentive plans,
which are more fully described in Note 14a. The following
table illustrates the effect on the Companys net loss and
net loss per share had compensation costs for the incentive
plans been determined in accordance with the fair value based
method of accounting for stock-based compensation as prescribed
by Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation
(SFAS No. 123). Since option grants
awarded during 2003, 2002, and 2001 vest over several years and
additional awards are expected to be issued in the future, the
pro forma results shown below are not likely to be
representative of the effects on future years of the application
of the fair value based method.
In 2003, the Companys Chief Executive
Officer was granted permission by the Board of Directors to
initiate a one-time net cashless exercise of stock options. Upon
completion of the net cashless exercise, the Company recognized
$0.3 million of compensation expense, which equaled the
excess of the fair market value of the shares over the option
exercise price on the date that the Board of Directors granted
its consent for the transaction.
Other disclosures required by
SFAS No. 123 have been included in Note 14a.
Supplemental disclosure of noncash investing and
financing activities:
In 2003, 2002, and 2001, the Company awarded
219,367, 139,611, and 80,535 shares, respectively, of
Restricted Stock under the Regeneron Pharmaceuticals, Inc.
Long-Term Incentive Plan (see Note 14a). The Company
records unearned compensation in Stockholders Equity
related to these awards based on the fair
F-12
NOTES TO FINANCIAL
STATEMENTS (Continued)
market value of shares of the Companys
Common Stock on the grant date of the Restricted Stock award,
which is expensed, on a pro rata basis, over the approximately
two year period that the restrictions on these shares lapse. In
2003, 2002 and 2001, the Company recognized $2.3 million,
$1.8 million and $0.7 million, respectively, of
compensation expense related to Restricted Stock awards.
Included in accounts payable and accrued expenses
at December 31, 2003, 2002, and 2001 were
$0.8 million, $13.5 million, and $1.9 million of
capital expenditures, respectively.
Included in accounts payable and accrued expenses
at December 31, 2002, 2001, and 2000 were
$0.7 million, $0.8 million, and $0.5 million,
respectively, of accrued 401(k) Savings Plan contribution
expense. During the first quarter of 2003, 2002, and 2001, the
Company contributed 42,543, 21,953, and 17,484 shares,
respectively, of Common Stock to the 401(k) Savings Plan in
satisfaction of these obligations.
Included in marketable securities at
December 31, 2003, 2002, and 2001 were $0.9 million,
$2.0 million, and $2.0 million of accrued interest
income, respectively.
Certain reclassifications have been made to the
financial statements for 2002 and 2001 to conform with the
current years presentation.
In December 2003, the Staff of the Securities and
Exchange Commission issued SAB 104,
Revenue
Recognition
, which supercedes SAB 101,
Revenue
Recognition in Financial Statements
. SAB 104s
primary purpose is to rescind accounting guidance contained in
SAB 101 related to multiple element revenue arrangements,
superceded as a result of the issuance of EITF 00-21,
Accounting for Revenue Arrangements with Multiple
Deliverables
. Additionally, SAB 104 rescinds the
SECs
Revenue Recognition in Financial Statements
Frequently Asked Questions and Answers
(the FAQ)
issued with SAB 101 that had been codified in
SEC Topic 13,
Revenue Recognition
. Selected
portions of the FAQ have been incorporated into SAB 104.
While the wording of SAB 104 has changed to reflect the
issuance of EITF 00-21, the revenue recognition principles
of SAB 101 remain largely unchanged by the issuance of
SAB 104. Adoption of SAB 104 was required immediately
and did not have a material effect on the Companys
financial statements.
In December 2003, the FASB issued a revision to
Interpretation No. 46,
Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51
(FIN 46R), which was issued in January 2003.
FIN 46R clarifies the application of ARB No. 51,
Consolidated Financial Statements
to certain entities in
which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity
at risk for the entity to finance its activities without
additional subordinated financial support. FIN 46R requires
the consolidation of these entities, known as variable interest
entities (VIEs), by the primary beneficiary of the
entity. The primary beneficiary is the entity, if any, that will
absorb a majority of the entitys expected losses, receive
a majority of the entitys expected residual returns, or
both. Among other changes, the revisions of FIN 46R
(a) clarified some requirements of the original FIN 46,
which had been issued in January 2003, (b) eased some
implementation problems, and (c) added new scope
exceptions. FIN 46R deferred the effective date of the
Interpretation for public companies to the end of the first
reporting period ending after March 15, 2004, except that
all public companies must at a minimum apply the provisions of
the Interpretation to entities that were previously considered
special-purpose entities under the FASB literature
prior to the issuance of FIN 46R by the end of the first
reporting period ending after December 15, 2003. Adoption
of FIN 46R did not have a material impact on the Companys
financial statements.
In May 2003, the Financial Accounting Standards
Board issued Statement No. 150 (SFAS No. 150),
Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity
. SFAS
F-13
NOTES TO FINANCIAL
STATEMENTS (Continued)
No. 150 specifies that instruments within
its scope embody obligations of the issuer and that the issuer
must classify them as liabilities. SFAS No. 150 requires
issuers to classify as liabilities the following three types of
freestanding financial instruments: (1) mandatorily
redeemable financial instruments, (2) obligations to
repurchase the issuers equity shares by transferring
assets, and (3) certain obligations to issue a variable
number of shares. SFAS No. 150 defines a freestanding
financial instrument as a financial instrument that
(1) is entered into separately and apart from any of the
entitys other financial instruments or equity transactions
or (2) is entered into in conjunction with some other
transaction and can be legally detached and exercised on a
separate basis. For all financial instruments entered into or
modified after May 31, 2003, SFAS No. 150 is effective
immediately. For all other instruments of public companies, SFAS
No. 150 went into effect at the beginning of the first
interim period beginning after June 15, 2003. The adoption
of SFAS No. 150 did not have a material impact on the
Companys financial statements. In November 2003, the
Financial Accounting Standards Board deferred the effective date
for selected provisions of SFAS No. 150, limited to
mandatorily redeemable noncontrolling interests associated with
finite-lived subsidiaries. The deferral of those selected
provisions is not expected to have a material impact on the
Companys financial statements.
In November 2002, the FASB issued Interpretation
No. 45 (FIN 45),
Guarantors
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness to Others, an interpretation
of FASB Statements No. 5, 57 and 107 and a rescission of
FASB Interpretation No. 34.
FIN 45 elaborates on
the disclosures to be made by a guarantor in its interim and
annual financial statements about its obligations under
guarantees issued. FIN 45 also clarifies that a guarantor is
required to recognize, at inception of a guarantee, a liability
for the fair value of the obligation undertaken. The initial
recognition and measurement provisions of FIN 45 are applicable
to guarantees issued or modified after December 31, 2002
and did not have a material impact on the Companys
financial statements.
3. Marketable
Securities
The Company considers its unrestricted marketable
securities to be available-for-sale, as defined by
Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity
Securities
. Gross unrealized holding gains and losses are
reported as a net amount in a separate component of
stockholders equity entitled Accumulated Other
Comprehensive Income (Loss). The net change in unrealized
holding gains and losses is excluded from operations and
included in stockholders equity as a separate component of
comprehensive loss.
F-14
NOTES TO FINANCIAL
STATEMENTS (Continued)
The following tables summarize the amortized cost
basis of marketable securities, the aggregate fair value of
marketable securities, and gross unrealized holding gains and
losses at December 31, 2003 and 2002:
Realized gains and losses are included as a
component of investment income. For the years ended
December 31, 2003, 2002, and 2001, gross realized gains and
losses were not significant. In computing realized gains and
losses, the Company computes the cost of its investments on a
specific identification basis. Such cost includes the direct
costs to acquire the securities, adjusted for the amortization
of any discount or premium. The fair value of marketable
securities has been estimated based on quoted market prices.
Unrealized holding losses at December 31, 2003 have been
losses for less than one year.
F-15
NOTES TO FINANCIAL
STATEMENTS (Continued)
4. Accounts
Receivable
Accounts receivable as of December 31, 2003
and 2002 consist of the following:
5. Inventories
Inventory balances at December 31, 2003 and
2002 consist of raw materials, work-in process, and finished
products associated with the production of an intermediate for a
Merck & Co., Inc. pediatric vaccine under a long-term
manufacturing agreement (see Note 12).
Inventories as of December 31, 2003 and 2002
consist of the following:
6. Property,
Plant, and Equipment
Property, plant, and equipment as of
December 31, 2003 and 2002 consist of the following:
Depreciation and amortization expense on
property, plant, and equipment amounted to $13.0 million,
$8.5 million, and $7.0 million, for the years ended
December 31, 2003, 2002, and 2001, respectively. Included
F-16
NOTES TO FINANCIAL
STATEMENTS (Continued)
in these amounts was $1.1 million of
depreciation and amortization expense related to contract
manufacturing that was capitalized into inventory for each of
the three years ended December 31, 2003, 2002, and 2001.
7. Accounts
Payable and Accrued Expenses
Accounts payable and accrued expenses as of
December 31, 2003 and 2002 consist of the following:
8. Deferred
Revenue
Deferred revenue as of December 31, 2003 and
2002 consists of the following:
9. Stockholders
Equity
The Companys Amended Certificate of
Incorporation provides for the issuance of up to 40 million
shares of Class A Stock, par value $0.001 per share, and
160 million shares of Common Stock, par value $0.001 per
share. Shares of Class A Stock are convertible, at any
time, at the option of the holder into shares of Common Stock on
a share-for-share basis. Holders of Class A Stock have
rights and privileges identical to Common Stockholders except
that Class A Stockholders are entitled to ten votes per
share, while Common Stockholders are entitled to one vote per
share. Class A Stock may only be transferred to specified
Permitted Transferees, as defined. The Companys Board of
Directors (the Board) is authorized to issue up to
30 million shares of preferred stock, in series, with
rights, privileges, and qualifications of each series determined
by the Board.
During 1996, the Company adopted a Shareholder
Rights Plan in which Rights were distributed as a dividend at
the rate of one Right for each share of Common Stock and
Class A Stock (collectively, Stock)
F-17
NOTES TO FINANCIAL
STATEMENTS (Continued)
held by shareholders of record as of the close of
business on October 18, 1996. Each Right initially entitles
the registered holder to buy a unit (Unit)
consisting of one-one thousandth of a share of Series A
Junior Participating Preferred Stock (A Preferred
Stock) at a purchase price of $120 per Unit (the
Purchase Price). Initially the Rights were attached
to all Stock certificates representing shares then outstanding,
and no separate Rights certificates were distributed. The Rights
will separate from the Stock and a distribution date
will occur upon the earlier of (i) ten days after a public
announcement that a person or group of affiliated or associated
persons, excluding certain defined persons, (an Acquiring
Person) has acquired, or has obtained the right to
acquire, beneficial ownership of 20% or more of the outstanding
shares of Stock or (ii) ten business days following the
commencement of a tender offer or exchange offer that would
result in a person or group beneficially owning 20% or more of
such outstanding shares of Stock. The Rights are not exercisable
unless a distribution date occurs and will expire at the close
of business on October 18, 2006 unless earlier redeemed by
the Company, subject to certain defined restrictions, for $.01
per Right. In the event that an Acquiring Person becomes the
beneficial owner of 20% or more of the then outstanding shares
of Stock (unless such acquisition is made pursuant to a tender
or exchange offer for all outstanding shares of the Company, at
a price determined by a majority of the independent directors of
the Company who are not representatives, nominees, affiliates,
or associates of an Acquiring Person to be fair and otherwise in
the best interest of the Company and its shareholders after
receiving advice from one or more investment banking firms),
each Right will entitle the holder to purchase, at the
Rights then current exercise price, common shares (or, in
certain circumstances, cash, property or other securities of the
Company) having a value twice the Rights Exercise Price.
The Rights Exercise Price is the Purchase Price times the
number of shares of Common Stock associated with each Right
(initially, one). Upon the occurrence of any such events, the
Rights held by an Acquiring Person become null and void. In
certain circumstances, a Right entitles the holder to receive,
upon exercise, shares of common stock of an acquiring company
having a value equal to two times the Rights Exercise
Price.
As a result of the Shareholder Rights Plan, the
Companys Board designated 100,000 shares of preferred
stock as A Preferred Stock. The A Preferred Stock has
certain preferences, as defined.
In April 2000, the Company completed a public
offering of 2.6 million shares of Common Stock at a price
of $29.75 per share for net proceeds, after commissions and
expenses, of $72.9 million. In March and April 2001, the
Company completed a public offering in which it issued
6.63 million shares of Common Stock at a price of $25.00
per share and received proceeds, after commissions and expenses,
of $156.7 million.
In March 2001, Medtronic, Inc. exercised 107,400
warrants with an exercise price of $21.72 per share on a
cashless basis and received 37,306 shares of the
Companys Common Stock.
In October 2001, the Company completed a private
placement of $200.0 million aggregate principal amount of
senior subordinated notes, which are convertible into shares of
the Companys Common Stock. See Note 10e.
In March 2003, Novartis Pharma AG purchased
$48.0 million of newly issued unregistered shares of the
Companys Common Stock. Regeneron issued 2,400,000 shares
of Common Stock to Novartis in March 2003 and an additional
5,127,050 shares in May 2003 for a total of 7,527,050 shares
based upon the average closing price of the Common Stock for the
20 consecutive trading days ending May 12, 2003. See
Note 11b.
In August 2003, Regeneron issued to Merck &
Co., Inc., 109,450 newly issued unregistered shares of the
Companys Common Stock as consideration for a non-exclusive
license agreement granted by Merck to the Company. See
Note 10f.
In September 2003, Aventis Pharmaceuticals Inc.
purchased 2,799,552 newly issued unregistered shares of the
Companys Common Stock for $45.0 million, based upon
the average closing price of the Common Stock for the five
consecutive trading days ending September 4, 2003. See
Note 11a.
F-18
NOTES TO FINANCIAL
STATEMENTS (Continued)
10. Commitments
and Contingencies
The Company leases and subleases laboratory,
manufacturing, and office facilities in Tarrytown, New York
under operating lease agreements which, as of December 31,
2003, expired through December 2006. In January 2004, the
Company extended these leases, which, as amended, expire through
December 2009 and contain renewal options for lease extensions
on certain facilities through December 2014. The Company also
leases manufacturing, office, and warehouse facilities in
Rensselaer, New York under an operating lease agreement which
expires in July 2007 and contains renewal options to extend the
lease for two additional five-year terms and a purchase option.
The leases provide for base rent plus additional rental charges
for utilities, taxes, and operating expenses, as defined.
The Company leases certain laboratory and office
equipment under operating leases which expire at various times
through 2007.
At December 31, 2003, the future minimum
noncancelable lease commitments under operating leases were as
follows:
Rent expense under operating leases was:
In addition to its rent expense for various
facilities, the Company paid additional rental charges for
utilities, real estate taxes, and operating expenses of
$6.0 million, $3.6 million, and $3.0 million for
the years ended December 31, 2003, 2002, and 2001,
respectively.
In 2003 and prior years, the Company had leased
equipment under noncancelable capital leases. Lease terms were
generally four years after which, for certain leases, the
Company purchased the equipment at amounts defined by the
agreements. As of December 31, 2003, the Company had no
remaining capital leases outstanding.
At December 31, 2002, leased equipment and
building improvements included in property, plant, and equipment
was $1.1 million; related accumulated depreciation was
$0.9 million.
In 1994, the Company borrowed $2.0 million
from the New York State Urban Development Corporation. The terms
of the note provided for monthly payments of principal and
interest through December 2014. In October 2001, the remaining
principal balance on this note of $1.5 million was paid in
full.
F-19
NOTES TO FINANCIAL
STATEMENTS (Continued)
In March 2003, the Company entered into a
collaboration agreement with Novartis Pharma AG
(Novartis). In accordance with that agreement,
Regeneron funded its share of 2003 development expenses through
a loan from Novartis, which bears interest at a rate per annum
equal to the LIBOR rate plus 2.5%, compounded quarterly (3.65%
at December 31, 2003). The loan and accrued interest
thereon will be forgiven should certain defined pre-clinical and
clinical milestones be reached; otherwise, such amounts are
payable on July 1, 2004. As of December 31, 2003, the
loan due Novartis, including accrued interest, totaled
$13.8 million. See Note 11b.
In October 2001, the Company issued
$200.0 million aggregate principal amount of convertible
senior subordinated notes (Notes) in a private
placement for proceeds to the Company of $192.7 million,
after deducting the initial purchasers discount and
out-of-pocket expenses (collectively, Deferred Financing
Costs). The Notes bear interest at 5.5% per annum, payable
semi-annually, and mature on October 17, 2008. Deferred
Financing Costs, which are included in other assets, are
amortized as interest expense over the period from the
Notes issuance to stated maturity. The Notes are
convertible, at the option of the holder at any time, into
shares of the Companys Common Stock at a conversion price
of approximately $30.25 per share, subject to adjustment in
certain circumstances. Regeneron may redeem the Notes, in whole
or in part, at any time before October 17, 2004 if the
closing price of the Companys Common Stock has exceeded
150% of the conversion price then in effect for a specified
period of time (Early Redemption). Upon any such
Early Redemption, the Company is required to pay interest that
would have been due up through October 17, 2004. Regeneron
may also redeem some or all of the Notes at any time on or after
October 17, 2004 if the closing price of the Companys
Common Stock has exceeded 140% of the conversion price then in
effect for a specified period of time. The fair market value of
the Notes fluctuates over time. The estimated fair value of the
Notes at December 31, 2003 was approximately
$190.3 million.
With respect to the Notes, the Company pledged as
collateral $31.6 million of U.S. government securities
(Restricted Marketable Securities) with maturities
at various dates through October 2004. At December 31,
2003, the balance of the Restricted Marketable Securities had an
amortized cost basis of $10.9 million, due to scheduled
interest payments made on the Notes in 2002 and 2003. Upon
maturity, the proceeds of the Restricted Marketable Securities
will be sufficient to pay the scheduled interest payments on the
Notes when due in 2004. The Company considers its Restricted
Marketable Securities to be held-to-maturity, as
defined by Statement of Financial Accounting Standards
No. 115,
Accounting for Certain Investments in Debt and
Equity Securities
. These securities are reported at their
amortized cost, which includes the direct costs to acquire the
securities, plus the amortization of any discount or premium,
and accrued interest earned on the securities.
F-20
NOTES TO FINANCIAL
STATEMENTS (Continued)
The following table summarizes the amortized cost
basis and aggregate fair value of Restricted Marketable
Securities, and gross unrealized holding gains and losses, at
December 31, 2003 and 2002. Fair value has been estimated
based on quoted market prices.
f. Research
Collaboration and Licensing Agreements
As part of the Companys research and
development efforts, the Company enters into research
collaboration and licensing agreements with related and
unrelated companies, scientific collaborators, universities, and
consultants. The Company also has research collaborations with
Medarex, Inc. and Emisphere Technologies, Inc., and a license
and supply agreement with Nektar Therapeutics. These agreements
contain varying terms and provisions which include fees and
milestones to be paid by the Company, services to be provided,
and ownership rights to certain proprietary technology developed
under the agreements. Some of the agreements contain provisions
which require the Company to pay royalties, as defined, at rates
that range from 0.25% to 12%, in the event the Company sells or
licenses any proprietary products developed under the respective
agreements.
Certain agreements, where the Company is required
to pay fees, provide for the Company, upon 30 to 90-day written
notice, to terminate such agreements. With respect to payments
associated with these agreements, the Company incurred expenses
of $2.7 million, $1.7 million, and $1.1 million
for the years ended December 31, 2003, 2002, and 2001,
respectively.
In August 2003, Merck & Co., Inc.
(Merck) granted the Company a non-exclusive license
agreement to certain patents and patent applications which may
be used in the development and commercialization of
AXOKINE®. As consideration, the Company issued to Merck
109,450 newly issued unregistered shares of its Common Stock
(the Merck Shares), valued at $1.5 million
based on the fair market value of shares of the Companys
Common Stock on the agreements effective date. The
agreement also requires the Company to make an additional
payment to Merck upon receipt of marketing approval for a
product covered by the licensed patents. In addition, the
Company would be required to pay royalties, at staggered rates
in the mid-single digits, based on the net sales of products
covered by the licensed patents.
At any time prior to the date that Merck has the
right to sell the Merck Shares under the Securities Act of 1933
(the Sales Date), Regeneron has the right to buy
back the Merck Shares from Merck for a purchase price equal to
the greater of (a) $1.5 million and (b) the lesser of
(i) the fair market value of the shares and (ii)
$1.65 million. Unless Regeneron has previously exercised
its right to buy back the Merck Shares, on the Sales Date if the
fair market value of the Merck Shares (the Market
Price) is less than
F-21
NOTES TO FINANCIAL
STATEMENTS (Continued)
$1.5 million, Regeneron will be required to
make a cash payment to Merck equal to the difference between the
Market Price and $1.5 million. Conversely, if on the Sales
Date the Market Price is greater than $1.65 million, Merck
will be required, at its option, to either (i) make a cash
payment to Regeneron equal to the difference between the Market
Price and $1.65 million (the Excess Amount) or
(ii) return a number of the Merck Shares to Regeneron,
calculated by dividing the Excess Amount by the fair market
value of a share of the Companys Common Stock on the Sales
Date. The fair market value of the shares based on the
Companys closing Common Stock price at December 31,
2003, was $1.6 million.
11. Collaboration
Agreements
In September 2003, the Company entered into
a collaboration agreement (the Aventis Agreement)
with Aventis Pharmaceuticals Inc. (Aventis) to
jointly develop and commercialize the Companys Vascular
Endothelial Growth Factor (VEGF) Trap throughout the
world with the exception of Japan, where product rights remain
with Regeneron. In connection with this agreement, Aventis made
a non-refundable up-front payment of $80.0 million and
purchased 2,799,552 newly issued unregistered shares of the
Companys Common Stock for $45.0 million, based upon
the average closing price of the Common Stock for the five
consecutive trading days ending September 4, 2003.
Under the Aventis Agreement, Regeneron and
Aventis will share co-promotion rights and profits on sales, if
any, of the VEGF Trap. Aventis has agreed to make a
$25.0 million payment to the Company upon achievement of an
early-stage clinical milestone. The Company may also receive up
to $360.0 million in additional milestone payments upon
receipt of specified marketing approvals for up to eight VEGF
Trap indications in Europe or the United States.
Under the Aventis Agreement, agreed upon
development expenses incurred by both companies during the term
of the agreement will be funded by Aventis. If the collaboration
becomes profitable, Regeneron will reimburse Aventis for
50 percent of the VEGF Trap development expenses, or
$10.8 million as of December 31, 2003, in accordance
with a formula based on the amount of development expenses and
Regenerons share of the collaboration profits, or at a
faster rate at Regenerons option. Regeneron has the option
to conduct additional pre-Phase III studies at its own
expense.
Aventis has the right to terminate the agreement
without cause with at least twelve months advance notice. Upon
termination of the agreement for any reason, Regenerons
obligation with respect to reimbursing Aventis, from a portion
of the Companys profits, for 50 percent of the VEGF
Trap development expenses will also terminate and the Company
will retain all rights to the VEGF Trap.
Revenue related to payments from Aventis is being
recognized under the Substantive Milestone Method (see
Note 2) in accordance with SAB 104. The up-front
payment of $80.0 million and reimbursement of
Regeneron-incurred development expenses are being recognized as
contract research and development revenue. Milestone payments
will be recognized as research progress payments. In 2003 the
Company recognized $14.3 million of contract research and
development revenue in connection with the Aventis Agreement. At
December 31, 2003, amounts receivable from Aventis totaled
$8.9 million and deferred revenue was $76.4 million.
b. Novartis
Pharma AG
In March 2003, the Company entered into a
collaboration agreement (the Novartis Agreement)
with Novartis Pharma AG (Novartis) to jointly
develop and commercialize the Companys Interleukin-1
Cytokine Trap (IL-1 Trap). In connection with
this agreement, Novartis made a non-refundable up-front payment
of $27.0 million and purchased $48.0 million of newly
issued unregistered shares of the Companys
F-22
NOTES TO FINANCIAL
STATEMENTS (Continued)
Common Stock. Regeneron issued
2,400,000 shares of Common Stock to Novartis in
March 2003 and an additional 5,127,050 shares in
May 2003 for a total of 7,527,050 shares based upon
the average closing price of the Common Stock for the 20
consecutive trading days ending May 12, 2003.
Development expenses incurred during 2003 were
shared equally by the Company and Novartis. Regeneron funded its
share of 2003 development expenses through a loan (the
2003 Loan) from Novartis, which bears interest at a
rate per annum equal to the LIBOR rate plus 2.5%, compounded
quarterly (3.65% at December 31, 2003). The 2003 Loan and
accrued interest thereon will be forgiven should certain defined
pre-clinical and clinical milestones be reached; otherwise, such
amounts are payable on July 1, 2004. As of
December 31, 2003, the 2003 Loan balance due Novartis,
including accrued interest, totaled $13.8 million.
Revenue related to payments from Novartis is
being recognized as contract research and development revenue
under the Substantive Milestone Method (see Note 2) in
accordance with SAB 104. The up-front payment of
$27.0 million and reimbursement of Novartis share of
Regeneron-incurred development expenses are being recognized as
contract research and development revenue. Forgiveness of the
2003 Loan and accrued interest (if forgiven as described above)
will be recognized as a research progress payment. In 2003 the
Company recognized $21.4 million of contract research and
development revenue in connection with the Novartis Agreement.
At December 31, 2003, amounts receivable from Novartis
totaled $3.2 million and deferred revenue was
$22.1 million.
On February 27, 2004, the Company announced
that Novartis had provided notice of its intention not to
proceed with the joint development of the IL-1 Trap. Under
the terms of the collaboration agreement, Novartis remains
obligated to fund agreed upon pre-Phase III IL-1 Trap
development expenses during the nine-month notice period before
its voluntary termination becomes effective. Novartis and the
Company retain rights under the collaboration agreement to elect
to collaborate on the development and commercialization of other
IL-1 Trap antagonists being developed independently by the
other party that are in earlier stages of development than the
IL-1 Trap.
c. Amgen
Inc.
In August 1990, the Company entered into a
collaboration agreement (the Amgen Agreement) with
Amgen Inc. (Amgen) to develop and attempt to
commercialize two proprietary products (BDNF and NT-3,
individually the Product, collectively the
Products). The Amgen Agreement, among other things,
provided for Amgen and the Company to form a partnership
(Amgen-Regeneron Partners or the
Partnership) to complete the development and to
commercialize the Products. Amgen and the Company hold equal
ownership interests (subject to adjustment for any future
inequities in capital contributions, as defined). The
Partnership is the exclusive distributor of Products in the
United States, and Amgen has received a license from the Company
to market the Products outside the United States and outside
Japan and certain Pacific Rim countries. The Company accounts
for its investment in the Partnership in accordance with the
equity method of accounting. In 2003, 2002, and 2001, the
Company recognized its share of the Partnership net loss in the
amounts of $63 thousand, $27 thousand, and
$1.0 million, respectively, which represents 50% of the
total Partnership net loss. In September 2002, the Company
and Amgen each made capital withdrawals of $0.5 million
from the Partnership. At December 31, 2003, the Company
continues to be an equal partner in the Partnership.
In January 2001, Amgen-Regeneron Partners
discontinued all clinical development of BDNF for the potential
treatment of amyotrophic lateral sclerosis (ALS)
following notification that BDNF did not provide a therapeutic
advantage to ALS patients in clinical trials. The Partnership
has no ongoing development activities for NT-3 at this time.
Payments the Company receives from the
Partnership in connection with services provided to the
Partnership, are recognized as contract research and development
revenue as earned. Such revenue for the
F-23
NOTES TO FINANCIAL
STATEMENTS (Continued)
years ended December 31, 2003, 2002, and
2001 totaled $2 thousand, $2 thousand and
$1.2 million, respectively.
Selected financial data as of and for the years
ended December 31, 2003 and 2002 are not significant.
Selected financial data of the Partnership for the year ended
December 31, 2001 are as follows.
In October 2000, Amgen and Regeneron entered
into an agreement whereby Regeneron acquired Amgens
patents and patent applications relating to ciliary neurotrophic
factor (CNTF) and related molecules for
$1.0 million. As part of this agreement, Regeneron granted
back to Amgen exclusive, royalty free rights under these patents
and patent applications solely for human ophthalmic uses. In
addition, Regeneron entered into a covenant not to sue Amgen
under Regenerons patents and patent applications relating
to CNTF and related molecules solely for human ophthalmic uses.
In July 2002, Amgen and Immunex Corporation
(now part of Amgen) granted the Company a non-exclusive license
to certain patents and patent applications which may be used in
the development and commercialization of the IL-1 Trap. The
license followed two other licensing arrangements under which
Regeneron obtained a non-exclusive license to patents owned by
ZymoGenetics, Inc. and Tularik Inc. for use in connection with
the IL-1 Trap program. These license agreements would
require the Company to pay royalties based on the net sales of
the IL-1 Trap if and when it is approved for sale. In
total, the royalty rate under these three agreements would be in
the mid-single digits.
d. Sumitomo
Pharmaceuticals Company, Ltd.
In June 1994, the Company entered into a
research and development agreement (the R&D
Agreement) with Sumitomo Pharmaceuticals Company, Ltd.
(Sumitomo Pharmaceuticals) to collaborate in the
research and development of BDNF in Japan. In connection with
the R&D Agreement, Sumitomo Pharmaceuticals made payments to
the Company for its activities in developing and validating
manufacturing processes for BDNF, and manufacturing and
supplying BDNF and other research materials to Sumitomo
Pharmaceuticals. In 2001, Regeneron recognized contract research
and development revenue from Sumitomo Pharmaceuticals of
$0.1 million. In addition, the Company recognized contract
manufacturing revenue of $0.1 million in 2001 as supplies
of BDNF were received (FOB Destination Point) by Sumitomo
Pharmaceuticals.
During 1989, Sumitomo Chemical Co., Ltd.
(Sumitomo Chemical), an affiliate of Sumitomo
Pharmaceuticals, entered into a Technology Development Agreement
(TDA) with Regeneron and paid the Company
$5.6 million. In consideration for this payment, Sumitomo
Chemical received a fifteen year limited right of first
negotiation to license up to three of the Companys product
candidates in Japan. In connection with the Companys
implementation of SAB 101 (see Note 2), the Company is
recognizing this payment as revenue on a straight-line basis
over the term of the TDA.
e. The
Procter & Gamble Company
In May 1997, the Company entered into a
long-term collaboration agreement with The Procter &
Gamble Company (Procter & Gamble) to
discover, develop, and commercialize pharmaceutical products
F-24
NOTES TO FINANCIAL
STATEMENTS (Continued)
(the P&G Agreement) and
Procter & Gamble agreed to provide funding for
Regenerons research efforts related to the collaboration.
In connection with the collaboration, in June 1997 and
August 2000, Procter & Gamble purchased
4.35 million and 573,630 shares of the Companys
Common Stock at $9.87 and $29.75 per share for a total of
$42.9 million and $17.1 million, respectively. In
June 1997, Procter & Gamble also received five
year warrants to purchase an additional 1.45 million shares
of the Companys stock at $9.87 per share, which were
exercised in August 2000. As consideration for the exercise
price, Procter & Gamble tendered 511,125 shares of
the Companys Common Stock which had an aggregate value at
the time of exercise, based upon the average market price of the
Companys Common Stock over approximately the prior 30
trading days, equal to the aggregate exercise price of the
warrants. The net result of this warrant exercise was that
Procter & Gamble acquired an additional
938,875 shares of the Companys Common Stock. The
511,125 shares of Common Stock delivered to the Company by
Procter & Gamble were retired upon receipt. These
equity purchases were in addition to a purchase by
Procter & Gamble Pharmaceuticals, Inc. of 800,000
shares of the Companys Common Stock for $10.0 million
that was completed in March 1997.
Effective December 31, 2000, the Company and
Procter & Gamble entered into a new collaboration
agreement, replacing the P&G Agreement. The new agreement
extends Procter & Gambles obligation to fund
Regeneron research through December 2005, with no further
research obligations by either party thereafter, and focuses the
companies collaborative research on therapeutic areas that
are of particular interest to Procter & Gamble. Under
the new agreement, research support from Procter &
Gamble is $2.5 million per quarter, before adjustments for
inflation, through December 2005. Any drugs that result
from the collaboration will continue to be jointly developed and
marketed worldwide, with the companies equally sharing
development costs and profits. Procter & Gamble and the
Company divided rights to programs from the
P&G Agreement that are no longer part of the
companies collaboration. Research funding from
Procter & Gamble related to the collaboration totaled
$80.0 million through December 31, 2003. In addition,
in 1997 through 1999, Procter & Gamble also provided
research support for the Companys AXOKINE program and, as
a result, will be entitled to receive a small royalty on any
sales of AXOKINE.
Contract research and development revenue related
to the Companys collaboration with Procter &
Gamble was $10.6 million, $10.5 million, and
$10.4 million in 2003, 2002, and 2001, respectively. At
December 31, 2003, 2002, and 2001, the Procter &
Gamble contract research revenue receivable was
$2.7 million, $2.6 million, and $2.7 million,
respectively.
12. Manufacturing
Agreement
During 1995, the Company entered into a long-term
manufacturing agreement with Merck & Co., Inc., as
amended, (the Merck Agreement) to produce an
intermediate (the Intermediate) for a Merck
pediatric vaccine at the Companys Rensselaer, New York
facility. The Company agreed to modify portions of its facility
for manufacture of the Intermediate and to assist Merck in
securing regulatory approval for such manufacture in the
Companys facility. The Merck Agreement calls for the
Company to manufacture Intermediate for Merck for six years (the
Production Period), with certain minimum order
quantities each year. The Production Period commenced in
November of 1999, is expected to extend until
November 2005, and may be extended by mutual agreement.
Merck may terminate the agreement with at least one years
notice without payment of a termination fee.
Merck agreed to reimburse the Company for the
capital costs to modify the facility (Capital
Costs). Merck also agreed to pay an annual facility fee
(the Facility Fee) of $1.0 million beginning
March 1995, subject to annual adjustment for inflation.
During the Production Period, Merck agreed to reimburse the
Company for certain manufacturing costs, pay the Company a
variable fee based on the quantity of Intermediate supplied to
Merck, and make additional bi-annual payments (Additional
Payments), as defined. In addition, Merck agreed to
reimburse the Company for the cost of Company activities
performed on behalf of Merck prior to the Production Period and
for miscellaneous costs during the Production Period
F-25
NOTES TO FINANCIAL
STATEMENTS (Continued)
(Internal Costs). These payments are
recognized as contract manufacturing revenue as follows:
(i) payments for Internal Costs are recognized as the
activities are performed, (ii) the Facility Fee and
Additional Payments are recognized over the period to which they
relate, (iii) payments for Capital Costs were deferred and
are recognized as Intermediate is shipped to Merck, and
(iv) payments related to the manufacture of Intermediate
during the Production Period (Manufacturing
Payments) are recognized after the Intermediate is tested
and approved by, and shipped (FOB Shipping Point) to, Merck.
In 2003, 2002, and 2001, Merck contract
manufacturing revenue totaled $10.1 million,
$11.1 million, and $9.8 million, respectively. Such
amounts include $1.7 million, $1.8 million, and
$1.8 million of previously deferred Capital Costs,
respectively. In addition, Merck contract manufacturing revenue
for 2002 includes a non-recurring $1.0 million payment
received in August 2002 related to services the Company
provided in prior years.
13. Supply
Agreement
In December 2002, the Company entered into
an agreement (the Serono Agreement) with
Serono S.A. (Serono) to use Regenerons
proprietary Velocigene technology platform to provide Serono
with knock-out and transgenic mammalian models of gene function
(Materials). Serono made an advance payment of
$1.5 million (the Retainer) to Regeneron in
December 2002, which was accounted for as deferred revenue.
Regeneron recognizes revenue and reduces the Retainer as
Materials are shipped to and accepted by Serono. The Serono
Agreement contains provisions for minimum yearly order
quantities and replenishment of the Retainer when the balance
declines below a specified threshold. In 2003, the Company
recognized $0.7 million of contract research and
development revenue in connection with the Serono Agreement.
14. Incentive and
Stock Purchase Plans
During 2000, the Company established the
Regeneron Pharmaceuticals, Inc. 2000 Long-Term Incentive Plan
(2000 Incentive Plan) which, as amended, provides
for the issuance of up to 11,000,000 shares of Common Stock
in respect of awards. In addition, shares of Common Stock
previously approved by shareholders for issuance under the
Regeneron Pharmaceuticals, Inc. 1990 Long-Term Incentive Plan
(1990 Incentive Plan) that are not issued under the
1990 Incentive Plan, may be issued as awards under the 2000
Incentive Plan. Employees of the Company, including officers,
and nonemployees, including consultants and nonemployee members
of the Board of Directors, (collectively,
Participants) may receive awards as determined by a
committee of independent directors (Committee). The
awards that may be made under the 2000 Incentive Plan include:
(a) Incentive Stock Options (ISOs) and
Nonqualified Stock Options, (b) shares of Restricted Stock,
(c) shares of Phantom Stock, (d) Stock Bonuses, and
(e) Other Awards.
Stock Option awards grant Participants the right
to purchase shares of Common Stock at prices determined by the
Committee; however, in the case of an ISO, the option exercise
price will not be less than the fair market value of a share of
Common Stock on the date the Option is granted. Options vest
over a period of time determined by the Committee, generally on
a pro rata basis over a three to five year period. The Committee
also determines the expiration date of each Option; however, no
ISO is exercisable more than ten years after the date of grant.
Restricted Stock awards grant Participants shares
of restricted Common Stock or allow Participants to purchase
such shares at a price determined by the Committee. Such shares
are nontransferable for a period determined by the Committee
(vesting period). Should employment terminate, as
defined by the 2000 Incentive Plan, the ownership of the
Restricted Stock, which has not vested, will be transferred to
the Company, except under defined circumstances with Committee
approval, in consideration of amounts, if any,
F-26
NOTES TO FINANCIAL
STATEMENTS (Continued)
paid by the Participant to acquire such shares.
In addition, if the Company requires a return of the Restricted
Shares, it also has the right to require a return of all
dividends paid on such shares.
Phantom Stock awards provide the Participant the
right to receive, within 30 days of the date on which the
share vests, an amount, in cash and/or shares of the
Companys Common Stock as determined by the Committee,
equal to the sum of the fair market value of a share of Common
Stock on the date such share of Phantom Stock vests and the
aggregate amount of cash dividends paid with respect to a share
of Common Stock during the period from the grant date of the
share of Phantom Stock to the date on which the share vests.
Stock Bonus awards are bonuses payable in shares of Common Stock
which are granted at the discretion of the Committee.
Other Awards are other forms of awards which are
valued based on the Companys Common Stock. Subject to the
provisions of the 2000 Incentive Plan, the terms and provisions
of such Other Awards are determined solely on the authority of
the Committee.
During 1990, the Company established the 1990
Incentive Plan which, as amended, provided for a maximum of
6,900,000 shares of Common Stock in respect of awards.
Employees of the Company, including officers, and nonemployees,
including consultants and nonemployee members of the Board of
Directors, received awards as determined by a committee of
independent directors. Under the provisions of the 1990
Incentive Plan, there will be no future awards from the plan.
Awards under the 1990 Incentive Plan consisted of Incentive
Stock Options and Nonqualified Stock Options which generally
vest on a pro rata basis over a three or five year period and
have a term of ten years.
The 1990 and 2000 Incentive Plans contain
provisions that allow for the Committee to provide for the
immediate vesting of awards upon a change in control of the
Company, as defined.
The Company may incur charges to operations in
connection with awards from these Incentive Plans. In accordance
with APB No. 25 and related interpretations, the
Company will record compensation expense from employee
stock-based awards under certain conditions. Generally, when the
terms of the award and the amount the employee must pay to
acquire the stock are fixed, compensation expense for options,
restricted stock, and stock bonus awards will total the grant
date intrinsic value, if any, amortized over the vesting period.
For other awards, including phantom stock, compensation expense
will be recognized over the life of the award based on the cash
remitted to settle the award or the intrinsic value of the award
on the date of exercise.
Transactions involving stock option awards during
2003, 2002, and 2001, under the 1990 and 2000 Incentive Plans,
are summarized in the table below. Option exercise prices were
equal to the fair market value of the Companys Common
Stock on the date of grant. The total number of options
exercisable at December 31, 2003, 2002, and 2001 was
5,940,268, 4,670,695, and 3,374,169, respectively, with weighted
average exercise prices of $19.45, $15.80, and $11.99,
respectively.
F-27
NOTES TO FINANCIAL
STATEMENTS (Continued)
The following table summarizes stock option
information as of December 31, 2003:
The effect on the Companys net loss and net
loss per share had compensation costs for the Incentive Plans
been determined in accordance with the fair value based method
of accounting for stock-based compensation as prescribed by
SFAS No. 123 is shown in Note 2. For the purpose
of the pro forma calculation, the fair value of each option
granted from the Incentive Plans during 2003, 2002, and 2001 was
estimated on the date of grant using the Black-Scholes
option-pricing model. The weighted-average fair value of the
options granted during 2003, 2002, and 2001 was $10.11, $14.10,
and $21.22, respectively. The following table summarizes the
assumptions used in computing the fair value of option grants.
F-28
NOTES TO FINANCIAL
STATEMENTS (Continued)
During 2003, 2002, and 2001, 219,367, 139,611,
and 80,535 shares, respectively, of Restricted Stock were
awarded under the 2000 Incentive Plan. These shares are
nontransferable with such restriction lapsing with respect to
25% of the shares every six months over a two-year period
beginning in January 2004, 2003, and 2002, respectively. In
accordance with generally accepted accounting principles, the
Company recorded unearned compensation within Stockholders
Equity of $2.9 million, $2.7 million, and
$2.3 million in 2003, 2002, and 2001, respectively, related
to these awards. This amount was based on the fair market value
of shares of the Companys Common Stock on the date of
grant and will be expensed, on a pro rata basis, over the two
year period that the restriction on these shares lapses. During
2003, 2002 and 2001, 4,431, 2,183 and 1,413 shares,
respectively, of Restricted Stock were forfeited due to employee
terminations. The Company reduced unearned compensation within
Stockholders Equity by $0.1 million, in each of the
three years ended December 31, 2003, 2002 and 2001 related
to these forfeited awards.
The Company recognized compensation expense from
stock-based awards of $2.3 million $1.8 million, and
$0.7 million in 2003, 2002, and 2001, respectively.
As of December 31, 2003, there were
1,653,642 shares available for future grants under the 2000
Incentive Plan.
In 1989, the Company adopted an Executive Stock
Purchase Plan (the Plan) under which
1,027,500 shares of Class A Stock were reserved for
restricted stock awards. The Plan provides for the compensation
committee of the Board of Directors to award employees,
directors, consultants, and other individuals (Plan
participants) who render service to the Company the right
to purchase Class A Stock at a price set by the
compensation committee. The Plan provides for the vesting of
shares as determined by the compensation committee and, should
the Companys relationship with a Plan participant
terminate before all shares are vested, unvested shares will be
repurchased by the Company at a price per share equal to the
original amount paid by the Plan participant. During 1989 and
1990, a total of 983,254 shares were issued, all of which
vested as of December 31, 1999. As of December 31,
2003, there were 44,246 shares available for future grants under
the Plan.
In 1993, the Company adopted the provisions of
the Regeneron Pharmaceuticals, Inc. 401(k) Savings Plan
(the Savings Plan). The terms of the Savings Plan
provide for employees who have met defined service requirements
to participate in the Savings Plan by electing to contribute to
the Savings Plan a percentage of their compensation to be set
aside to pay their future retirement benefits, as defined. The
Savings Plan, as amended and restated during 1998, provides for
the Company to make discretionary contributions
(Contribution), as defined. The Company recorded
Contribution expense of $0.9 million in 2003,
$0.8 million in 2002, and $0.8 million in 2001; such
amounts were accrued as liabilities at December 31, 2003,
2002, and 2001, respectively. During the first quarter of 2004,
2003, and 2002, the Company contributed 64,333, 42,543, and
21,953 shares, respectively, of Common Stock to the Savings
Plan in satisfaction of these obligations.
There is no benefit for federal or state income
taxes for the years ended December 31, 2003 and 2002, since
the Company has incurred operating losses since inception and
established a valuation allowance equal to the total deferred
tax asset. During the year ended December 31, 2001, the
Company capitalized research and development costs for tax
purposes resulting in taxable income of $7.0 million, which
was offset by net operating loss carryforwards. The effects of
the alternative minimum tax on the 2001 provision were
immaterial.
F-29
NOTES TO FINANCIAL
STATEMENTS (Continued)
The tax effect of temporary differences, net
operating loss carry-forwards, and research and experimental tax
credit carry-forwards as of December 31, 2003 and 2002 was
as follows:
For all years presented, the Companys
effective income tax rate is zero. The difference between the
Companys effective income tax rate and the Federal
statutory rate of 34% is attributable to state tax benefits and
tax credit carry-forwards offset by an increase in the deferred
tax valuation allowance.
As of December 31, 2003, the Company had
available for tax purposes unused net operating loss
carry-forwards of $340.2 million which will expire in various
years from 2006 to 2023. The Companys research and
experimental tax credit carry-forwards expire in various years
from 2004 to 2023. Under the Internal Revenue Code and similar
state provisions, substantial changes in the Companys
ownership could result in an annual limitation on the amount of
net operating loss and tax credit carry-forwards that can be
utilized in future years to offset future taxable income. The
annual limitation may result in the expiration of net operating
losses and tax credit carry-forwards before utilization.
In May 2003, securities class action lawsuits
were commenced against Regeneron and certain of the
Companys officers and directors in the United States
District Court for the Southern District of New York. The
complaints, which purport to be brought on behalf of a class
consisting of investors in the Companys publicly traded
securities between March 28, 2000 and March 30, 2003,
allege that the defendants misstated or omitted material
information concerning the safety and efficacy of AXOKINE, in
violation of Sections 10(b) and 20(a) of the Securities and
Exchange Act of 1934, and Rule 10b-5 promulgated
thereunder. Damages are sought in an unspecified amount. The
Companys management believes that the lawsuits are without
merit. The ultimate outcome of these matters cannot presently be
determined. Accordingly, no provision for any liability that may
result upon the resolution of these matters has been made in the
accompanying financial statements.
The Company, from time to time, has been subject
to other legal claims arising in connection with its business.
While the ultimate results of the legal claims cannot be
predicted with certainty, at December 31, 2003 there were
no asserted claims against the Company which, in the opinion of
management, if adversely decided would have a material adverse
effect on the Companys financial position, results of
operations, and cash flows.
The Companys basic net loss per share
amounts have been computed by dividing net loss by the weighted
average number of Common and Class A shares outstanding. In
2003, 2002, and 2001, the Company reported net losses and,
therefore, no common stock equivalents were included in the
computation of diluted
F-30
NOTES TO FINANCIAL
STATEMENTS (Continued)
net loss per share since such inclusion would
have been antidilutive. The calculations of basic and diluted
net loss per share are as follows:
Shares issuable upon the exercise of options and
warrants, vesting of restricted stock awards, and conversion of
convertible debt, which have been excluded from the diluted per
share amounts because their effect would have been antidilutive,
include the following:
The Companys operations are managed in two
business segments: research and development, and contract
manufacturing.
Research and
development:
Includes all activities
related to the discovery of potential therapeutics for human
medical conditions, and the development and commercialization of
these discoveries. Also includes revenues and expenses related
to (i) the development of manufacturing processes prior to
commencing commercial production of a product under contract
manufacturing arrangements and (ii) the supply of
specified, ordered research materials using Regeneron-developed
proprietary technology (see Note 13).
Contract
manufacturing:
Includes all revenues
and expenses related to the commercial production of products
under contract manufacturing arrangements. During 2003, 2002,
and 2001, the Company produced Intermediate under the Merck
Agreement (see Note 12).
F-31
NOTES TO FINANCIAL
STATEMENTS (Continued)
The table below presents information about
reported segments for the years ended December 31, 2003,
2002, and 2001:
During the third quarter of 2003, the Company
elected to change the method it uses to recognize revenue under
SAB 101 related to non-refundable collaborator payments,
including up-front licensing payments, payments for development
activities, and research progress (milestone) payments, to
the Substantive Milestone Method, adopted retroactively to
January 1, 2003 (see Note 2). The Companys
unaudited financial results for the quarters ended March 31
and June 30, 2003 have been restated in accordance with the
new revenue recognition method. There is no impact on the
Companys financial results for any period prior to
January 1, 2003.
F-32
NOTES TO FINANCIAL
STATEMENTS (Continued)
Summarized quarterly financial data for the years
ended December 31, 2003 and 2002 are displayed in the
following tables.
F-33
Property, Plant, and
Equipment
6-30 years
Life of lease
3-5 years
5 years
Cash and Cash Equivalents
Inventories
Revenue Recognition and Change in
Accounting Principle
a.
Contract Research and Development and Research
Progress Payments
Table of Contents
b.
Contract Manufacturing
Investment Income
Accounting for the Impairment of Long-Lived
Assets
Table of Contents
Patents
Research and Development
Expenses
Net Loss Per Share
Income Taxes
Comprehensive Loss
Table of Contents
Concentrations of Credit Risk
Risks and Uncertainties
Use of Estimates
Table of Contents
Stock-based Employee
Compensation
2003
2002
2001
$
(107,458
)
$
(124,377
)
$
(76,180
)
2,562
1,790
732
(45,042
)
(45,676
)
(32,890
)
$
(149,938
)
$
(168,263
)
$
(108,338
)
$
(2.13
)
$
(2.83
)
$
(1.81
)
$
(2.97
)
$
(3.83
)
$
(2.57
)
Statement of Cash Flows
Table of Contents
Reclassifications
Future Impact of Recently Issued Accounting
Standards
Table of Contents
Table of Contents
Unrealized Holding
Amortized
Fair
Cost Basis
Value
Gains
(Losses)
Net
$
40,586
$
40,578
$
6
$
(14
)
$
(8
)
123,893
123,998
107
(2
)
105
164,479
164,576
113
(16
)
97
28,928
28,931
18
(15
)
3
40,749
40,803
54
54
3,108
3,058
(50
)
(50
)
72,785
72,792
72
(65
)
7
$
237,264
$
237,368
$
185
$
(81
)
$
104
$
69,531
$
69,580
$
99
$
(50
)
$
49
98,057
98,410
353
353
3,059
3,067
8
8
2,225
2,225
172,872
173,282
460
(50
)
410
6,015
6,007
(8
)
(8
)
2,047
2,131
84
84
12,279
12,264
15
(30
)
(15
)
20,341
20,402
99
(38
)
61
$
193,213
$
193,684
$
559
$
(88
)
$
471
Table of Contents
2003
2002
$
8,917
3,177
2,670
$
2,610
765
1,404
3
$
15,529
$
4,017
2003
2002
$
388
$
357
(1)
261
(2)
8,618
6,213
(3)
$
9,006
$
6,831
(1)
Net of reserves of $0.2 million.
(2)
Net of reserves of $30 thousand.
(3)
Net of reserves of $1.2 million.
2003
2002
$
475
$
475
56,054
32,547
29,108
14,224
1,443
38,645
51,536
36,762
5,092
4,540
143,708
127,193
(62,985
)
(50,368
)
$
80,723
$
76,825
Table of Contents
2003
2002
$
3,878
$
13,297
5,125
4,162
3,876
4,515
211
4,322
3,551
1,721
2,292
2,292
$
18,933
$
30,309
2003
2002
$
10,909
22,100
6,262
$
7,788
902
1,871
$
40,173
$
9,659
$
65,455
3,375
$
5,398
77
$
68,830
$
5,475
Table of Contents
Table of Contents
a. Operating
Leases
December 31,
Facilities
Equipment
Total
$
5,327
$
190
$
5,517
1,810
119
1,929
1,495
33
1,528
159
2
161
$
8,791
$
344
$
9,135
Year Ending December 31,
Facilities
Equipment
Total
$
5,394
$
305
$
5,699
4,556
257
4,813
3,455
249
3,704
b. Capital
Leases
c. Note
Payable
Table of Contents
d. Loan
Payable
e. Convertible
Debt
Table of Contents
Unrealized
Amortized
Fair
Holding
Cost Basis
Value
Gains
$
10,913
$
10,989
$
76
$
10,912
$
10,963
$
51
10,573
10,803
230
$
21,485
$
21,766
$
281
Table of Contents
a. Aventis
Pharmaceuticals Inc.
Table of Contents
Table of Contents
Statement of Operations Data
2001
$
169
(2,172
)
$
(2,003
)
(1)
Includes $1.2 million related to services
provided by the Company in 2001.
Table of Contents
Table of Contents
a. Long-Term
Incentive Plans
Table of Contents
Table of Contents
Weighted-Average
Number of Shares
Exercise Price
7,431,059
$
18.37
2,325,947
$
28.51
(170,712
)
$
23.74
(258,255
)
$
7.67
9,328,039
$
21.10
2,693,010
$
19.97
(183,031
)
$
22.63
(274,068
)
$
9.96
11,563,950
$
21.08
2,609,570
$
13.45
(265,107
)
$
22.62
(795,114
)
$
7.07
13,113,299
$
20.38
Options Outstanding
Options Exercisable
Weighted Average
Weighted
Weighted
Range of
Number
Remaining
Average
Number
Average
Exercise Prices
Outstanding
Contractual Life
Exercise Price
Exercisable
Exercise Price
357,640
.98
$
5.04
357,640
$
5.04
2,948,836
4.59
$
9.00
2,531,747
$
9.10
2,352,705
9.92
$
13.00
1,035
$
12.98
2,406,199
8.83
$
19.00
669,476
$
19.00
2,776,899
7.72
$
26.83
1,154,435
$
27.41
2,271,020
6.90
$
38.76
1,225,935
$
37.77
13,113,299
7.29
$
20.38
5,940,268
$
19.45
2003
2002
2001
80%
70%
75%
5 years
5 years
5 years
0%
0%
0%
3.01%-4.26%
3.98%-4.72%
4.74%-5.23%
Table of Contents
b. Executive
Stock Purchase Plan
15.
Employee Savings Plan
16.
Income Taxes
Table of Contents
2003
2002
$
135,357
$
125,544
7,177
4,199
43,372
6,022
18,233
16,092
33,102
37,646
3,832
3,395
(241,073
)
(192,898
)
17.
Legal Matters
18.
Net Loss Per Share
Table of Contents
Net Loss
Shares
(Numerator,
(Denominator,
Per Share
in thousands)
in thousands)
Amount
$
(107,458
)
50,490
$
(2.13
)
$
(124,377
)
43,918
$
(2.83
)
$
(76,180
)
42,075
$
(1.81
)
December 31,
2003
2002
2001
11,299
9,533
7,598
$
22.07
$
19.43
$
22.40
159
88
39
6,611
6,611
1,377
$
30.25
$
30.25
$
30.25
19.
Segment Information
Table of Contents
Research &
Contract
Reconciling
Development
Manufacturing
Items
Total
$
47,366
$
10,131
$
57,497
11,894
(1)
$
1,043
12,937
161
11,771
11,932
(103,604
)
3,455
(7,309
)(2)
(107,458
)
16,944
16,944
92,369
12,889
374,297
(3)
479,555
$
10,924
$
11,064
$
21,988
7,411
(1)
$
1,043
8,454
36
2
11,821
11,859
(126,597
)
4,579
(2,359
)(2)
(124,377
)
45,878
36
45,914
75,589
12,479
303,506
(3)
391,574
$
12,071
$
9,902
$
21,973
5,866
(1)
$
211
6,077
114
40
2,503
2,657
(90,192
)
3,353
10,659
(2)
(76,180
)
9,469
29
9,498
37,948
9,369
448,080
(3)
495,397
(1)
Depreciation and amortization related to contract
manufacturing is capitalized into inventory and included in
contract manufacturing expense when the product is shipped.
(2)
Represents investment income net of interest
expense related to convertible notes issued in October 2001 (see
Note 10e).
(3)
Includes cash and cash equivalents, marketable
securities, restricted marketable securities, prepaid expenses
and other current assets, and other assets.
20.
Unaudited Quarterly Results
Table of Contents
First Quarter Ended
Second Quarter Ended
March 31, 2003
September 30, 2003
(Unaudited)
(Unaudited)
As Previously
As Previously
Reported
As Restated
Reported
As Restated
$
10,136
$
9,925
$
10,532
$
8,908
(30,110
)
(30,321
)
(28,736
)
(30,360
)
$
(0.68
)
$
(0.68
)
$
(0.58
)
$
(0.61
)
Third Quarter Ended
Fourth Quarter Ended
September 30, 2003
December 31, 2003
(Unaudited)
(Unaudited)
$
17,392
$
21,272
(27,400
)
(19,377
)
$
(0.52
)
$
(0.35
)
First Quarter
Third Quarter
Fourth Quarter
Ended
Second Quarter
Ended
Ended
March 31,
Ended June 30,
September 30,
December 31,
2002
2002
2002
2002
(Unaudited)
(Unaudited)
(Unaudited)
(Unaudited)
$
4,941
$
5,569
$
6,566
$
4,912
(25,445
)
(30,423
)
(32,816
)
(35,693
)
$
(0.58
)
$
(0.69
)
$
(0.75
)
$
(0.81
)
Table of Contents
REPORT OF ERNST & YOUNG LLP, INDEPENDENT
AUDITORS
The Partners
We have audited the accompanying balance sheet of
Amgen-Regeneron Partners, a Delaware general partnership as of
December 31, 2001 and the related statements of operations,
changes in partners capital (deficit), and cash flows for
year ended December 31, 2001. These financial statements
are the responsibility of the Partnerships management. Our
responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with
auditing standards generally accepted in the United States.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the financial statements referred
to above present fairly, in all material respects, the financial
position of Amgen-Regeneron Partners at December 31, 2001,
and the results of its operations and its cash flows for the
year ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States.
Los Angeles, California
F-34
AMGEN-REGENERON PARTNERS
BALANCE SHEET
/s/ ERNST & YOUNG LLP
Table of Contents
ASSETS
$
2,610
LIABILITIES AND PARTNERS
CAPITAL
$
768
921
921
1,842
$
2,610
See accompanying notes.
F-35
AMGEN-REGENERON PARTNERS
STATEMENT OF OPERATIONS
F-36
AMGEN-REGENERON PARTNERS
STATEMENT OF CHANGES IN PARTNERS CAPITAL
(DEFICIT)
F-37
AMGEN-REGENERON PARTNERS
STATEMENT OF CASH FLOWS
F-38
AMGEN-REGENERON PARTNERS
NOTES TO FINANCIAL STATEMENTS
Amgen-Regeneron Partners (the Partnership), a
general partnership, was formed on June 21, 1991, under the
laws of the state of Delaware between Amgen Inc. (Amgen) and
Regeneron Pharmaceuticals, Inc. (Regeneron). The Partnership was
formed to develop and commercialize in the United States
brain-derived neurotrophic factor (BDNF) and Neurotrophin-3
(NT-3, together with BDNF, the Products) for human
pharmaceutical use, in conformity with a collaboration agreement
(the Collaboration Agreement) (Note 3).
The Partnership has conducted clinical trials of
the Products in the past. Following a review of available
clinical trial data, the Partnership discontinued the
development of BDNF for the treatment of amyotrophic lateral
sclerosis (ALS) in January 2001. There are no ongoing
development activities for NT-3 at this time.
The Partnership considers only those investments
which are highly liquid, readily convertible to cash and which
mature within three months of the date of purchase as cash
equivalents. At December 31, 2001, cash and cash
equivalents consisted of a single interest bearing money market
account.
Research and development costs are expensed as
incurred. Clinical trial costs, which are a component of
research and development costs, are recognized based upon the
estimated levels of effort expended on those trials.
The Partnerships financial statements do
not include a provision (credit) for income taxes. Income
taxes, if any, are the liability of the individual partners.
The preparation of financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those
estimates.
Capital contributions are recorded in the capital
account of each partner. Capital account contributions are
generally made quarterly in advance based upon capital calls
made by the Committee pursuant to projected cash requirements of
the Partnership. Cash distributions, if any, and profits or
losses are allocated to each partners capital account in
proportion to their respective capital account contributions.
F-39
NOTES TO FINANCIAL
STATEMENTS (Continued)
In August 1990, Amgen and Regeneron entered into
the Collaboration Agreement to develop and commercialize BDNF
and NT-3, compounds for which Regeneron possesses substantial
scientific, technical and proprietary information. Each party
agreed to perform research and development on the Products under
product development programs approved by the Committee. Upon
Amgens notification in writing to Regeneron that the
preparation of an Investigational New Drug Application for each
Product was to commence, the licenses granted by the partners to
the Partnership for the underlying technologies, discussed
below, became effective on a Product-by-Product basis. Also,
upon such notification, further research and development of the
Products under the licenses became the obligation of the
Partnership. These licenses grant the Partnership an exclusive
royalty-free right to develop, make, have made, use, sell and
distribute each Product for human pharmaceutical use in the
United States. The Partnership has, in turn, granted to Amgen
and Regeneron exclusive royalty-free sublicenses for the
underlying technologies to the extent necessary to fulfill their
obligations under the Collaboration Agreement. These sublicenses
became effective at the same time the related licenses granted
the Partnership became effective.
Under the Collaboration Agreement, Amgen would be
primarily responsible for the manufacture and commercialization
of the Products in the United States if successfully developed
by the Partnership. Amgens costs in connection with such
activities would be reimbursed at agreed-to rates. Unless
terminated earlier, the Partnership will continue in effect,
with respect to each Product, until the later of the expiration
of the last United States patent of each Product, or
15 years from the date on which each Product was approved
for sale in the United States.
A Joint Management Committee (the Committee) is
responsible for the overall management of the business and
affairs of the Partnership as well as activities performed under
the Collaboration Agreement. Each partner has appointed three
representatives to the Committee. One additional representative
may be appointed by a partner if the balance of their capital
account becomes more than twice the amount of the balance of the
other partners capital account (Note 2).
Pursuant to the terms of the Collaboration
Agreement, and subject to the approval by both parties, Amgen
and Regeneron can conduct certain research and development
activities on behalf of the Partnership, including contracting
with third parties to conduct clinical trials. Amgen also
provides on behalf of the Partnership certain quantities of
materials, primarily for clinical testing. Amgen and Regeneron
are paid for such services and materials at amounts approved by
the Committee. During the year ended December 31, 2001, the
Partnership incurred expenses (including accrued expenses) of
$866,000 from Amgen and $1,228,000 from Regeneron for such
services and materials. These amounts are included in research
and development expense in the accompanying statements of
operations. In addition, certain other costs associated with the
development of the Products have been incurred by the partners
but not charged to the Partnership or reflected in the
accompanying financial statements as the related development
activities are not billable to the Partnership under the terms
of the Collaboration Agreement. At December 31, 2001,
accounts payable and accrued expenses due to partners was
composed of $143,000 of accounts payable and
$378,000 of accrued clinical costs due to Amgen and
$170,000 of accounts payable and $77,000 of accrued
clinical costs due to Regeneron.
F-40
$
169
169
2,094
78
2,172
$
(2,003
)
Table of Contents
Amgen
Regeneron
(In thousands)
$
267
$
267
1,655
1,656
(1,001
)
(1,002
)
$
921
$
921
Table of Contents
$
(2,003
)
(3,867
)
(5,870
)
3,311
(2,559
)
5,169
$
2,610
Table of Contents
1.
Summary of Significant Accounting
Policies
Business and Organization
Cash Equivalents
Research and Development
Income Taxes
Use of Estimates
2.
Capital Contributions, Allocation of Profits
and Losses and Cash Distributions
Table of Contents
3.
Collaboration Agreement
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
We hereby consent to the incorporation by
reference in the Registration Statements on Form S-8 (File
Nos. 33-50480, 33-85330, 33-97176, 333-33891, 333-80663,
333-61132, 333-97375, and 333-119257) and on Form S-3 (File
No. 333-74464) of Regeneron Pharmaceuticals, Inc., of our
report dated January 30, 2004, except for the last
paragraph of Note 11b, as to which the date is
February 27, 2004, relating to the financial statements
which appear in this Annual Report on Form 10-K/A Amendment
No. 2.
New York, New York
PricewaterhouseCoopers LLP
Exhibit 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT
AUDITORS
We consent to the incorporation by reference in
the Registration Statement (Form S-8 No. 33-50480)
pertaining to the Regeneron Pharmaceuticals, Inc. 1990 Long-Term
Incentive Plan, the Registration Statements (Form S-8 No.
33-85330, Form S-8 No. 33-97176, Form S-8 No.
333-33891, and Form S-8 No. 333-80663) pertaining to the
Regeneron Pharmaceuticals, Inc. Amended and Restated 1990
Long-Term Incentive Plan, the Registration Statements
(Form S-8 No. 333-61132, Form S-8 No. 333-97375
and Form S-8 No. 333-119257) pertaining to the Regeneron
Pharmaceuticals, Inc. 2000 Long-Term Incentive Plan, and the
Registration Statement (Form S-3 No. 333-74464)
pertaining to the registration of common stock issuable upon the
conversion of Regeneron Pharmaceuticals, Inc.s Senior
Subordinated Notes due 2008, of our report dated
February 4, 2002, with respect to the 2001 financial
statements of Amgen-Regeneron Partners included in Regeneron
Pharmaceuticals, Inc.s Annual Report (Form 10-K/A
Amendment No. 2) for the year ended December 31, 2003,
filed with the Securities and Exchange Commission.
Los Angeles, California
/s/ ERNST & YOUNG LLP
Exhibit 31
CERTIFICATIONS
I, Leonard S. Schleifer, certify that:
1. I have reviewed this annual report on Form 10-K, as amended by Amendment No. 2 filed on December 14, 2004, of Regeneron Pharmaceuticals, Inc.; | |
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; | |
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; | |
4. The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: |
(a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant is made known to us by others within the registrant, particularly during the period in which this annual report is being prepared; | |
(b) [Intentionally omitted per SECs transition rules in SECs Release Nos. 33-8238 and 34-47986]; | |
(c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and | |
(d) Disclosed in this annual report any change in the registrants internal control over financial reporting that occurred during the registrants fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. The registrants other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent functions): |
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and | |
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
By: | /s/ LEONARD S. SCHLEIFER |
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Leonard S. Schleifer, M.D., Ph.D. | |
President and Chief Executive Officer |
Date: December 14, 2004
I, Murray A. Goldberg, certify that:
1. I have reviewed this annual report on Form 10-K, as amended by Amendment No. 2 filed on December 14, 2004, of Regeneron Pharmaceuticals, Inc.; | |
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; | |
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; | |
4. The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: |
(a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant is made known to us by others within the registrant, particularly during the period in which this annual report is being prepared; | |
(b) [Intentionally omitted per SECs transition rules in SEC Release Nos. 33-8238 and 34-47986]; | |
(c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and | |
(d) Disclosed in this annual report any change in the registrants internal control over financial reporting that occurred during the registrants fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. The registrants other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent functions): |
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and | |
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
By: | /s/ MURRAY A. GOLDBERG |
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Murray A. Goldberg | |
Senior Vice President, Finance & Administration, | |
Treasurer, and Assistant Secretary |
Date: December 14, 2004
Exhibit 32
Certification of CEO and CFO Pursuant
to
In connection with Amendment No. 2 to the
Annual Report of Regeneron Pharmaceuticals, Inc. (the
Company) on Form 10-K for the period ending
December 31, 2003 as filed with the Securities and Exchange
Commission on the date hereof (the Report),
Leonard S. Schleifer, M.D., Ph.D., as Chief Executive
Officer of the Company, and Murray A. Goldberg, as Chief
Financial Officer of the Company, each hereby certifies,
pursuant to 18 U.S.C. § 1350, as adopted pursuant
to § 906 of the Sarbanes-Oxley Act of 2002, to the
best of his knowledge, that:
(1) The Report fully complies with the
requirements of section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
(2) The information contained in the Report
fairly presents, in all material respects, the financial
condition and result of operations of the Company.
/s/ Leonard S. Schleifer
/s/ Murray A. Goldberg
This certification accompanies the Report
pursuant to § 906 of the Sarbanes-Oxley Act of 2002
and shall not, except to the extent required by the
Sarbanes-Oxley Act of 2002, be deemed filed by the Company for
purposes of § 18 of the Securities Exchange Act of
1934, as amended.