UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-19034
REGENERON PHARMACEUTICALS, INC.
-------------------------------
(Exact name of registrant as specified in its charter)
New York 13-3444607
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
777 Old Saw Mill River Road
Tarrytown, New York 10591-6707
------------------- ----------
(Address of principal executive offices) (Zip code)
(914) 347-7000
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of October 30, 1998:
Class of Common Stock Number of Shares
--------------------- ----------------
Class A Stock, $0.001 par value 3,631,986
Common Stock, $0.001 par value 27,383,018
REGENERON PHARMACEUTICALS, INC.
Table of Contents
September 30, 1998
Page Numbers
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PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed balance sheets (unaudited) at September 30, 1998
and December 31, 1997 3
Condensed statements of operations (unaudited) for the three
months and nine months ended September 30, 1998 and 1997 4
Condensed statement of stockholders' equity (unaudited) for the
nine months ended September 30, 1998 5
Condensed statements of cash flows (unaudited) for the
three months and nine months ended September 30, 1998 and 1997 6
Notes to condensed financial statements 7-11
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 12-21
PART II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 22
SIGNATURE PAGE 23
Exhibit 27 Financial data schedule
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REGENERON PHARMACEUTICALS, INC.
CONDENSED BALANCE SHEETS AT SEPTEMBER 30, 1998 AND DECEMBER 31, 1997 (Unaudited)
(In thousands, except share data)
September 30, December 31,
ASSETS 1998 1997
--------- ---------
Current assets
Cash and cash equivalents $ 22,594 $ 28,921
Marketable securities 59,993 63,602
Receivable due from The Procter & Gamble Company 2,536 2,403
Receivable due from Merck & Co., Inc. 2,072 1,707
Receivable due from Amgen-Regeneron Partners 727 356
Receivable due from Sumitomo Pharmaceuticals Co., Ltd. 66 2,115
Prepaid expenses and other current assets 1,229 536
--------- ---------
Total current assets 89,217 99,640
Marketable securities 37,791 35,518
Investment in Amgen-Regeneron Partners 2,631 364
Property, plant and equipment, at cost, net of accumulated depreciation
and amortization 32,646 32,713
Other assets 154 145
--------- ---------
Total assets $ 162,439 $ 168,380
========= =========
LIABILITIES and STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 4,395 $ 4,663
Deferred revenue, current portion 3,429 4,182
Capital lease obligations, current portion 1,739 1,770
Note payable, current portion 65 73
--------- ---------
Total current liabilities 9,628 10,688
Deferred revenue 12,996 14,801
Capital lease obligations 1,064 2,077
Note payable 1,626 1,675
Other liabilities 272 242
Stockholders' equity
Preferred stock, $.01 par value; 30,000,000 shares authorized; issued and
outstanding - none
Class A Stock, convertible, $.001 par value; 40,000,000 shares authorized;
3,631,986 shares issued and outstanding in 1998
4,117,540 shares issued and outstanding in 1997 4 4
Common Stock, $.001 par value; 60,000,000 shares authorized;
27,382,858 shares issued and outstanding in 1998
26,804,941 shares issued and outstanding in 1997 27 27
Additional paid-in capital 308,547 308,109
Unearned compensation (450) (720)
Accumulated deficit (171,692) (168,608)
Accumulated other comprehensive income 417 85
--------- ---------
Total stockholders' equity 136,853 138,897
--------- ---------
Total liabilities and stockholders' equity $ 162,439 $ 168,380
========= =========
The accompanying notes are an integral part of the financial statements.
3
REGENERON PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands, except per share data)
Three months ended September 30, Nine months ended September 30,
1998 1997 1998 1997
-------- -------- -------- --------
Revenues
Contract research and development $ 3,983 $ 3,277 $ 14,759 $ 11,892
Research progress payments 4,500 2,500 9,500 2,500
Contract manufacturing 2,326 1,304 6,493 2,859
Investment income 1,757 1,792 5,259 4,452
-------- -------- -------- --------
12,566 8,873 36,011 21,703
-------- -------- -------- --------
Expenses
Research and development 9,891 6,803 27,095 20,760
Loss in Amgen-Regeneron Partners 678 655 1,551 2,834
General and administrative 1,323 1,428 4,400 4,580
Depreciation and amortization 681 970 2,330 3,336
Contract manufacturing 1,286 750 3,389 1,719
Interest 102 174 330 580
-------- -------- -------- --------
13,961 10,780 39,095 33,809
-------- -------- -------- --------
Net loss ($ 1,395) ($ 1,907) ($ 3,084) ($12,106)
======== ======== ======== ========
Net loss per share, basic and diluted ($ 0.04) ($ 0.06) ($ 0.10) ($ 0.43)
======== ======== ======== ========
The accompanying notes are an integral part of the financial statements.
4
REGENERON PHARMACEUTICALS, INC.
CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY (Unaudited)
For the nine months ended September 30, 1998
(In thousands)
Class A Stock Common Stock Additional
------------------- -------------------- Paid-in Unearned
Shares Amount Shares Amount Capital Compensation
------ ------ ------ ------ ---------- ------------
Balance, December 31, 1997 4,118 $ 4 26,805 $ 27 $ 308,109 ($720)
Amortization of unearned compensation 270
Issuance of Common Stock in connection
with exercise of stock options 92 438
Conversion of Class A Stock to
Common Stock (486) 486
Net loss
Change in net unrealized gain
on marketable securities
---------------------------------------------------------------------------------
Balance, September 30, 1998 3,632 $ 4 27,383 $ 27 $ 308,547 ($450)
=================================================================================
Accumulated Total
Accumulated Other Comprehensive Stockholders' Comprehensive
Deficit Income Equity Loss
----------- ------------------- ------------ -------------
Balance, December 31, 1997 ($168,608) $ 85 $138,897
Amortization of unearned compensation 270
Issuance of Common Stock in connection
with exercise of stock options 438
Conversion of Class A Stock to
Common Stock (3,084) (3,084) ($3,084)
Net loss
Change in net unrealized gain
on marketable securities 332 332 332
-------------------------------------------------------------------------
Balance, September 30, 1998 ($171,692) $ 417 $136,853 ($2,752)
=========================================================================
The accompanying notes are an integral part of the financial statements.
5
REGENERON PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
Nine months ended September 30,
1998 1997
-------- --------
Cash flows from operating activities
Net loss ($ 3,084) ($12,106)
-------- --------
Adjustments to reconcile net loss to net cash
used in operating activities
Loss in Amgen-Regeneron Partners 1,551 2,834
Depreciation and amortization 2,330 3,336
Stock issued in consideration for services rendered 270 270
Changes in assets and liabilities
Increase in amounts due from The Procter & Gamble Company (133) (958)
(Increase) decrease in amounts due from Merck & Co., Inc. (365) 313
(Increase) decrease in amounts due from Amgen-Regeneron Partners (371) 115
Decrease in amounts due from Sumitomo Pharmaceuticals Co., Ltd. 2,049 815
Increase in investment in Amgen-Regeneron Partners (3,818) (2,037)
Increase in prepaid expenses and other assets (702) (33)
Decrease in deferred revenue (2,558) (1,964)
Increase in accounts payable, accrued expenses,
and other liabilities 330 190
-------- --------
Total adjustments (1,417) 2,881
-------- --------
Net cash used in operating activities (4,501) (9,225)
-------- --------
Cash flows from investing activities
Purchases of marketable securities (74,108) (72,941)
Sales of marketable securities 75,776 48,941
Capital expenditures (2,380) (1,480)
-------- --------
Net cash used in investing activities (712) (25,480)
-------- --------
Cash flows from financing activities
Net proceeds from the issuance of stock 438 43,337
Principal payments on note payable (57) (58)
Capital lease payments (1,495) (2,761)
-------- --------
Net cash (used in) provided by financing activities (1,114) 40,518
-------- --------
Net (decrease) increase in cash and cash equivalents (6,327) 5,813
-------- --------
Cash and cash equivalents at beginning of period 28,921 34,475
-------- --------
Cash and cash equivalents at end of period $22,594 $40,288
======== ========
The accompanying notes are an integral part of the financial statements.
6
REGENERON PHARMACEUTICALS, INC.
Notes to Condensed Financial Statements
(In thousands, except per share data)
1. Interim Financial Statements
The interim Condensed Financial Statements of Regeneron Pharmaceuticals,
Inc. (the "Company") have been prepared in accordance with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all information and disclosures necessary for a
presentation of the Company's financial position, results of operations,
and cash flows in conformity with generally accepted accounting
principles. In the opinion of management, these financial statements
reflect all adjustments, consisting only of normal recurring accruals,
necessary for a fair presentation of the Company's financial position,
results of operation, and cash flows for such periods. The results of
operations for any interim periods are not necessarily indicative of the
results for the full year. These financial statements should be read in
conjunction with the financial statements and notes thereto contained in
the Company's Annual Report on Form 10-K for the year ended December 31,
1997.
2. Statement of Cash Flows
Supplemental disclosure of noncash investing and financing activities:
Capital lease obligations of $451 and $812 were incurred during the first
nine months of 1998 and 1997, respectively, when the Company leased new
equipment.
Included in accounts payable and accrued expenses at September 30, 1998
and December 31, 1997 were approximately $67 and $635, respectively, of
accrued capital expenditures. Included in accounts payable and accrued
expenses at September 30, 1997 and December 31, 1996 were approximately
$417 and $788, respectively, of accrued capital expenditures.
3. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses as of September 30, 1998 and
December 31, 1997 consist of the following:
September 30, December 31,
1998 1997
------ ------
Accounts payable $1,715 $2,947
Accrued payroll and related costs 1,191 654
Accrued expenses, other 1,202 712
Deferred compensation 287 350
------ ------
$4,395 $4,663
====== ======
7
REGENERON PHARMACEUTICALS, INC.
Notes to Condensed Financial Statements
(In thousands, except per share data)
4. Amgen-Regeneron Partners Research Collaboration Agreement
In August 1990, the Company and Amgen Inc. formed a partnership,
Amgen-Regeneron Partners (the "Partnership"), whereby the revenues earned
and expenses incurred by the Partnership for the research and development
of BDNF and NT-3 are shared equally. The Company accounts for its
investment in the Partnership in accordance with the equity method of
accounting.
Selected income statement data of the Partnership for the three and nine
months ended September 30, 1998 and 1997 are as follows:
Three months Nine months
Ended September 30, Ended September 30,
------------------- -------------------
1998 1997 1998 1997
------- ------- ------- -------
Total revenues $ 110 $ 79 $ 193 $ 266
Total expenses (1,465) (1,388) (3,294) (5,934)
------- ------- ------- -------
Net loss ($1,355) ($1,309) ($3,101) ($5,668)
======= ======= ======= =======
In October 1998, the Company made a capital contribution of $1,349 to the
Partnership.
8
REGENERON PHARMACEUTICALS, INC.
Notes to Condensed Financial Statements
(In thousands, except per share data)
5. Per Share Data
The Company's 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. For the three months and nine months ended September
30, 1998 and 1997, the Company reported net losses; therefore, no common
stock equivalents were included in the computation of diluted net loss
per share, since such inclusion would have been antidilutive. The
calculations of basic and diluted net loss per share are as follows:
Three Months Ended September 30,
-------------------------------------------------------------------------
Net Loss Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
1998:
Basic and Diluted ($1,395) 31,014 ($ 0.04)
1997:
Basic and Diluted ($1,907) 30,895 ($ 0.06)
-------------------------------------------------------------------------
Options and warrants which have been excluded from the diluted per share
amounts because their effect would have been anti-dilutive include the
following:
Three Months Ended September 30,
---------------------------------------------------------------------------
1998 1997
------------------------ -------------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Number Exercise Price Number Exercise Price
------- ----- -------- ------- --------------
Options and warrants
with exercise prices
below the average fair
market value of the
Company's common stock
for the respective
period 1,898 $4.70 2,179 $5.17
Options and warrants
with exercise prices
above the average fair
market value of the
Company's common stock
for the respective
period 4,592 $11.60 3,652 $12.31
----- -----
Total 6,490 5,831
===== =====
---------------------------------------------------------------------------
9
REGENERON PHARMACEUTICALS, INC.
Notes to Condensed Financial Statements
(In thousands, except per share data)
5. Per Share Data (continued)
Nine Months Ended September 30,
-------------------------------------------------------------------------
Net Loss Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
1998:
Basic and Diluted ($ 3,084) 30,983 ($0.10)
1997:
Basic and Diluted ($12,106) 27,962 ($0.43)
-------------------------------------------------------------------------
Options and warrants which have been excluded from the diluted per share
amounts because their effect would have been anti-dilutive include the
following:
Nine Months Ended September 30,
---------------------------------------------------------------------------
1998 1997
------------------------ -------------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Number Exercise Price Number Exercise Price
------- ----- -------- ------- --------------
Options and warrants
with exercise prices
below the average fair
market value of the
Company's common stock
for the respective
period 1,968 $4.77 2,192 $ 5.12
Options and warrants
with exercise prices
above the average fair
market value of the
Company's common stock
for the respective
period 4,458 $11.71 2,581 $16.71
----- -----
Total 6,426 4,773
===== =====
---------------------------------------------------------------------------
10
REGENERON PHARMACEUTICALS, INC.
Notes to Condensed Financial Statements
(In thousands, except per share data)
6. Adoption of Statement of Financial Accounting Standards No. 130
The Company has adopted Statement of Financial Accounting Standards No.
130, Reporting Comprehensive Income ("SFAS No. 130"). 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. The disclosures required by SFAS No. 130 for the nine months
ended September 30, 1998 have been included in the Statement of
Stockholders' Equity. For the nine months ended September 30, 1998 and
1997, the components of comprehensive loss were:
1998 1997
-------- --------
Net loss ($3,084) ($12,106)
Change in net unrealized gain on marketable securities 332 (193)
-------- --------
Total comprehensive loss ($2,752) ($12,299)
======== ========
7. Impact of the Future Adoption of Recently Issued Accounting Standard
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, Accounting for Derivative and
Hedging Activities ("SFAS No. 133"). SFAS No. 133 establishes a
comprehensive standard on accounting for derivatives and hedging
activities and is effective for periods beginning after June 15, 1999.
Management does not believe that the future adoption of SFAS No. 133 will
have a material effect on the Company's financial position and results of
operations.
11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
Overview. The discussion below contains forward-looking statements that
involve risks and uncertainties relating to the future financial performance
of Regeneron Pharmaceuticals, Inc. ("Regeneron" or the "Company") and actual
events or results may differ materially. These statements concern, among other
things, the possible therapeutic applications of the Company's product
candidates and research programs, the timing and nature of the Company's
clinical and research programs now underway or planned, a variety of items
described herein and in the footnotes to the Company's financial statements
(including the useful life of assets, the anticipated length of agreements,
and other matters), and the future uses of capital and financial needs of the
Company. These statements are made by the Company based on management's
current beliefs and judgment. In evaluating such statements, stockholders and
potential investors should specifically consider the various factors
identified under the caption "Factors That May Affect Future Operating
Results" which could cause actual results to differ materially from those
indicated by such forward-looking statements.
Regeneron is a leader in the application of molecular and cell biology
to discover novel potential therapeutics for human medical conditions and is
seeking to develop and commercialize these discoveries. The Company is
applying its technological expertise in protein growth factors, their
receptors, and their mechanisms of action to the discovery and development of
protein-based drugs and orally active, small molecule drugs.
The Company is pursuing research and development programs in the
following areas:
o AXOKINE(R), a second generation ciliary neurotrophic factor, for the
treatment of obesity associated with Type II diabetes and possibly
for uncomplicated obesity,
o AXOKINE for the treatment of retinitis pigmentosa and other retinal
diseases,
o Brain-derived neurotrophic factor ("BDNF") for the treatment of
amyotrophic lateral sclerosis ("ALS," commonly known as Lou Gehrig's
disease),
o Neurotrophin-3 ("NT-3") for the treatment of enteric neuropathies
(constipating conditions),
o Angiopoietins, a new family of ligands (and their receptors, called
the TIE family of receptors) that appears to regulate blood vessel
formation, or angiogenesis,
o Protein antagonists for cytokines such as interleukin-4 ("IL-4") and
interleukin-6 ("IL-6") as potential treatment of inflammatory
diseases, allergic disorders, and cancer,
o Noggin, a naturally occurring protein, for potential use in treating
abnormal bone formation and related diseases and conditions,
o Muscle atrophy, that occurs in a variety of clinical settings
following disuse or denervation of muscle, and
12
o Research programs to discover orally active, small molecule-based
drugs, some of which may mimic or antagonize protein- or
receptor-based drug candidates that the Company is developing.
Discussion of Third Quarter 1998 Activities. In the third quarter of
1998, the Company continued to develop AXOKINE under the Company's
collaboration agreement ("the P&G Agreement") with The Procter and Gamble
Company ("Procter & Gamble"). The Company and Procter & Gamble plan to file an
Investigational New Drug application ("IND") with the United States Food and
Drug Administration ("FDA") in early 1999 in order to conduct early stage
clinical studies of AXOKINE for the treatment of obesity associated with Type
II diabetes and possibly for uncomplicated obesity. No assurance can be made
regarding the timing or nature of such IND in light of the need successfully
to complete substantial preclinical development activities, the timing of
which is partially not in the control of the Company or Procter & Gamble,
before filing an IND. In addition, no assurance can be made regarding the
timing, nature, or result of any clinical trial of AXOKINE. AXOKINE has never
been administered to people. Its safety and efficacy in the treatment of any
condition have not been established and can not be predicted. Previous
clinical studies of ciliary neurotrophic factor ("CNTF"), the parent molecule
of AXOKINE, resulted in the creation of antibodies and adverse events (side
effects) in patients, including weight loss, cough, nausea, malaise, and
others. While certain aspects of the development of AXOKINE by the Company and
Procter & Gamble have focused on attempting to avoid or minimize antibody
production or adverse events, no assurance may be given that these problems
will be avoided or minimized or that they will not lead to the failure, delay,
or additional difficulty in conducting AXOKINE clinical trials.
The Company and Procter & Gamble also continued to collaborate in
research and development in the fields of angiogenesis, bone growth, and
muscle injury and atrophy, as well as small molecule (orally active) drugs.
The majority of the Company's scientific resources are devoted to its
collaborative activities with Procter & Gamble.
The Company continued independently to develop AXOKINE for use in
treating degenerative retinal diseases. The Company is collaborating with
academic investigators, government agencies, and private foundations in the
development of AXOKINE for retinal disease. Subject to completion of
appropriate preclinical experiments and regulatory approval, the Company plans
to commence a Phase I clinical study of AXOKINE to treat retinitis pigmentosa
in 1999. In July 1998, the Company and Medtronic, Inc. terminated their 1996
collaborative development agreement to conduct an exploratory research program
using Medtronic delivery systems to deliver AXOKINE to the central nervous
system, initially as a potential treatment for Huntington's disease, due to
obstacles in formulation and delivery.
During the third quarter of 1998, the Company continued to develop
independent of any corporate collaboration its proprietary cytokine traps for
the potential treatment of inflammatory disease, asthma, cancer, and
rheumatoid arthritis. In addition, the Company continued to conduct research
with Pharmacopeia, Inc. and Glaxo Wellcome plc in the area of small molecule
(orally active) drugs.
During the third quarter of 1998, Amgen-Regeneron Partners, the
partnership equally owned by Regeneron and Amgen Inc. ("Amgen"), continued to
develop BDNF and NT-3. BDNF is currently being developed by Amgen-Regeneron
Partners for potential use in treating ALS through two routes of
administration: intrathecal (infusion
13
into the spinal fluid through an implanted pump) and subcutaneous (injection
under the skin). Amgen, on behalf of Amgen-Regeneron Partners, has completed a
Phase I safety study and started a Phase II clinical trial of BDNF delivered
intrathecally. Subcutaneous studies conducted by Regeneron on behalf of the
partnership began in the first quarter of 1998. The subcutaneous studies are
based on an analysis of the Amgen-Regeneron Partners Phase III trial of BDNF
for ALS that was completed in 1996. That trial failed to achieve its
predetermined end points, but subsequent analyses indicated that a
retrospectively-defined subset of ALS patients in the trial may have received
a survival benefit from BDNF treatment.
The Company and Sumitomo Pharmaceuticals Co., Ltd. ("Sumitomo
Pharmaceuticals") are collaborating in the development of BDNF in Japan,
initially for the treatment of ALS. In March 1998, Sumitomo Pharmaceuticals
initiated a Phase I clinical trial in Japan to assess the safety of BDNF
delivered subcutaneously to normal volunteers. In August 1998, Sumitomo
Pharmaceuticals signed a license agreement for the development of BDNF in
Japan. Pursuant to the license agreement, Sumitomo Pharmaceuticals made a $5.0
million research progress payment to Regeneron in August 1998 and will make
additional payments upon the achievement of specified milestones. Sumitomo
Pharmaceuticals will also pay a royalty on sales of BDNF in Japan.
Amgen-Regeneron Partners' clinical development of NT-3 is currently
focused on enteric neuropathies (constipating conditions). The enteric nervous
system is a complex collection of nerves that control the function of the
gastrointestinal system, including gastrointestinal motility. In June 1998,
Regeneron, on behalf of Amgen-Regeneron Partners, began the first of a series
of small clinical studies of NT-3 in enteric neuropathies. The initial study
included patients suffering from severe idiopathic constipation. Additional
studies have begun in patients who suffer from constipation associated with
Parkinson's disease and use of opiate pain-killers.
No assurance can be given that extended administration of BDNF or
NT-3 will be safe or effective. The treatment of ALS has been shown, in a
number of clinical settings using a variety of treatment modalities (including
Amgen-Regeneron Partners' earlier clinical studies), to present significant
difficulties. The design of an ALS clinical study presents special
difficulties and risks, as do the facts that ALS is a progressive disease that
afflicts individual patients differently and other ALS treatments are approved
or have been or are currently being tested, creating the possibility that
patients in any BDNF study may also receive other therapeutics during all or
part of the BDNF trial. The treatment of various constipating conditions may
present additional clinical trial risks in light of the complex and not wholly
understood mechanisms of action that lead to the conditions, the concurrent
use of other drugs to treat the underlying illnesses as well as the
gastrointestinal condition, the potential difficulty of designing and
achieving significant clinical end points, and other factors. No assurance can
be given that these or any other studies of BDNF or NT-3 will be successful or
that BDNF or NT-3 will be commercialized.
Substantial risk is inherent in the research, development, and
commercialization of drugs. In addition, in each of the areas of the Company's
independent and collaborative activities, other companies and entities are
actively pursuing competitive paths toward similar objectives. The results of
the Company's and its collaborators' past activities in connection with the
research and development of AXOKINE, cytokine traps, angiopoietins, abnormal
bone growth, muscle atrophy, small molecules, BDNF, and NT-3 do not
necessarily predict the results or success of current or future activities
including, but not limited to, any additional preclinical or clinical studies.
The Company cannot
14
predict whether, when, or under what conditions any of its research or product
candidates, including without limitation AXOKINE, BDNF, or NT-3, will be shown
to be safe or effective to treat any human condition or be approved for
marketing by any regulatory agency. The delay or failure of current or future
studies to demonstrate the safety or efficacy of the Company's product
candidates to treat human conditions or to be approved for marketing could
have a material adverse impact on the Company.
To date, Regeneron has not received any revenues from the commercial
sale of products and may never receive such revenues. Before such revenues can
be realized, the Company (or its collaborators) must overcome a number of
hurdles which include successfully completing its research and development
efforts and obtaining regulatory approval from the FDA or regulatory
authorities in other countries. In addition, the biotechnology and
pharmaceutical industries are rapidly evolving and highly competitive, and new
developments may render the Company's products and technologies noncompetitive
and obsolete.
From inception on January 8, 1988 through September 30, 1998,
Regeneron had a cumulative loss of $171.7 million. In the absence of revenues
from commercial product sales or other sources (the amount, timing, nature, or
source of which cannot be predicted), the Company's losses will continue as
the Company conducts its research and development activities. The Company's
activities may expand over time and may require additional resources, and the
Company's operating losses may be substantial over at least the next several
years. The Company's losses may fluctuate from quarter to quarter and will
depend, among other factors, on the timing of certain expenses and on the
progress of the Company's research and development efforts.
Results of Operations
Three months ended September 30, 1998 and 1997. The Company's total
revenue increased to $12.6 million for the third quarter of 1998 from $8.9
million for the same period in 1997. Contract research and development revenue
increased to $4.0 million for the third quarter of 1998 from $3.3 million for
the same period in 1997, as higher revenue related to the P&G Agreement more
than offset a decrease in revenue from Sumitomo Pharmaceuticals. In the third
quarter of 1998, a research progress payment of $5.0 million (reduced by $0.5
million of Japanese withholding tax) was received from Sumitomo
Pharmaceuticals related to the development of the Company's BDNF in Japan. A
research progress payment of $2.5 million was received from Procter & Gamble
in the third quarter of 1997 related to the P&G Agreement. Contract
manufacturing revenue related to the long-term manufacturing agreement (the
"Merck Agreement") with Merck & Co., Inc. ("Merck") increased to $2.3 million
for the third quarter of 1998 compared to $1.3 million for the same period in
1997 as a result of increased activity in preparation for manufacturing a
product for Merck at the Company's Rensselaer facility.
The Company's total operating expenses increased to $14.0 million in
the third quarter of 1998 from $10.8 million for the same period in 1997.
Research and development expenses increased to $9.9 million in the third
quarter of 1998 from $6.8 million for the same period in 1997, primarily as a
result of additional employees and increased activity in the Company's
preclinical and clinical research programs. Research and development expenses
(including loss in Amgen-Regeneron Partners) were approximately 76% of total
operating expenses in the third quarter of 1998, compared to 69% for the same
period in 1997.
15
General and administrative expenses decreased to $1.3 million in the
third quarter of 1998 from $1.4 million for the same period of 1997.
Depreciation and amortization expense decreased to $0.7 million in the third
quarter of 1998 from $1.0 million in the third quarter of 1997, as certain
laboratory equipment and leasehold improvements became fully depreciated.
Contract manufacturing expenses, which are expenses directly related to the
Merck Agreement and are reimbursed by Merck, increased to $1.3 million in the
third quarter of 1998 from $0.8 million in the same period of 1997, primarily
due to increased activity in preparation for manufacturing a product for
Merck.
The Company's net loss for the third quarter of 1998 was $1.4
million, or $0.04 per share (basic and diluted), compared to a net loss of
$1.9 million, or $0.06 per share (basic and diluted), for the same period in
1997.
Nine months ended September 30, 1998 and 1997. The Company's total
revenue increased to $36.0 million for the nine months ended September 30, 1998
from $21.7 million for the same period in 1997. Contract research and
development revenue increased to $14.8 million for the nine months ended
September 30, 1998 from $11.9 million for the same period in 1997, as higher
revenue related to the P&G Agreement more than offset a decrease in revenue from
Sumitomo Pharmaceuticals. In 1998, research progress payments of $9.5 million
consist of a payment of $5.0 million from Sumitomo Pharmaceuticals related to
the development of the Company's BDNF in Japan (reduced by $0.5 million of
Japanese withholding tax) and a payment of $5.0 million from Procter & Gamble in
connection with a collaboration to develop AXOKINE for obesity associated with
Type II diabetes and possibly for uncomplicated obesity. In the first nine
months of 1997 a research progress payment of $2.5 million was received from
Procter & Gamble in connection with the P&G Agreement. Contract manufacturing
revenue related to the Merck Agreement increased to $6.5 million for the first
nine months of 1998 compared to $2.9 million for the same period in 1997 as a
result of increased activity in preparation for manufacturing a product for
Merck at the Company's Rensselaer facility. Investment income for the nine
months ended September 30, 1998 increased to $5.3 million from $4.5 million for
the same period in 1997, due mainly to higher levels of interest-bearing
investments resulting primarily from the proceeds of a private placement of
equity securities with Procter & Gamble in June 1997.
The Company's total operating expenses increased to $39.1 million for
the nine months ended September 30, 1998 from $33.8 million for the same
period in 1997. Research and development expenses increased to $27.1 million
in the first nine months of 1998 from $20.8 million for the same period in
1997, primarily as a result of additional employees and increased activity in
the Company's preclinical and clinical research programs. Loss in
Amgen-Regeneron Partners decreased to $1.6 million in the first nine months of
1998 from $2.8 million for the same period in 1997, due to lower research and
development expenses by the Partnership. Research and development expenses
(including loss in Amgen-Regeneron Partners) were approximately 73% of total
operating expenses in the first nine months of 1998, compared to 70% for the
same period in 1997.
General and administrative expenses decreased to $4.4 million for the
nine months ended September 30, 1998 from $4.6 million for the same period in
1997. Depreciation and amortization expense decreased to $2.3 million for the
nine months ended September 30, 1998 from $3.3 million for the same period in
1997, as certain laboratory equipment and leasehold improvements became fully
depreciated. Contract manufacturing expenses, which are expenses directly
related to the Merck Agreement and are reimbursed by Merck, increased to $3.4
million in the first nine months of 1998 from
16
$1.7 million in the same period of 1997, primarily due to increased activity
in preparation for manufacturing a product for Merck. Interest expense
decreased to $0.3 million from $0.6 million for the nine months ended
September 30, 1998 and 1997, respectively, as the amount of outstanding
obligations in connection with capital leases declined.
The Company's net loss for the nine months ended September 30, 1998
was $3.1 million, or $0.10 per share (basic and diluted), compared to a net
loss of $12.1 million, or $0.43 per share (basic and diluted), for the same
period in 1997.
Liquidity and Capital Resources
Since its inception in 1988, the Company has financed its operations
primarily through private placements and public offerings of its equity
securities, revenue earned under the several agreements between the Company
and each of Amgen, Sumitomo Chemical Company, Ltd., Sumitomo Pharmaceuticals,
Merck, and Procter & Gamble and investment income.
In May 1997, the Company and Procter & Gamble entered into the P&G
Agreement. Procter & Gamble agreed over the first five years of the P&G
Agreement to purchase up to $60.0 million in Regeneron equity (of which $42.9
million was purchased in June 1997) and provide up to $94.7 million in support
of Regeneron's research efforts related to the collaboration. During the
second five years of the P&G Agreement, the companies will share all research
costs equally. Clinical testing and commercialization expenses for jointly
developed products will be shared equally throughout the ten years of the
collaboration. The companies expect jointly to develop and market worldwide
any products resulting from the collaboration and share equally in profits.
Either company may terminate the P&G Agreement at the end of five years with
at least one year prior notice or earlier in the event of a default (as
defined in the P&G Agreement). In September 1997, the Company and Procter &
Gamble expanded the P&G Agreement to include AXOKINE and related molecules
(delivered systemically), and agreed to develop AXOKINE initially to treat
obesity associated with Type II diabetes. Procter & Gamble agreed to reimburse
the Company for certain research and development costs and pay as much as
$15.0 million in additional funding, partly subject to achieving certain
milestones related to AXOKINE. Of the $15.0 million, $5.0 million was paid in
1997 and $5.0 million was paid in 1998.
In connection with the Company's agreement to collaborate with
Sumitomo Pharmaceuticals in the research and development of BDNF in Japan, the
Company continues to be reimbursed in connection with supplying Sumitomo
Pharmaceuticals with BDNF for preclinical and clinical use. The Company also
received a $5.0 million research progress payment from Sumitomo
Pharmaceuticals (reduced by $0.5 million of Japanese withholding tax) in
August 1998.
The Company's activities relating to BDNF and NT-3, as agreed upon by
Amgen and Regeneron, are being reimbursed by Amgen-Regeneron Partners, and the
Company recognizes such reimbursement as revenue. The funding of
Amgen-Regeneron Partners is through capital contributions from Amgen and
Regeneron, who must make equal payments in order to maintain equal ownership
and equal sharing of any profits or losses from the partnership. The Company
has made capital contributions totaling approximately $49.0 million to
Amgen-Regeneron Partners from the partnership's inception in June 1993 through
September 30, 1998. The Company expects that its capital contributions in 1998
will total $5.2 million for the full year, all of which has been
17
funded through October 1998. These contributions could increase or decrease,
depending upon the cost of Amgen-Regeneron Partners' conducting additional
BDNF and NT-3 studies and the outcomes of those and other ongoing studies.
From its inception in January 1988 through September 30, 1998, the
Company invested approximately $58.6 million in property, plant, and
equipment. This includes $16.8 million to acquire and renovate the Rensselaer
facility and an additional $14.1 million to complete construction at the
facility pursuant to the Merck Agreement. In connection with the purchase and
renovation of the Rensselaer facility, the Company obtained financing of $2.0
million from the New York State Urban Development Corporation, of which $1.7
million is outstanding. Under the terms of such financing, the Company is not
permitted to declare or pay dividends on its equity securities.
The Company expects 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. The Company is currently involved in
interference proceedings in the Patent and Trademark Office between
Regeneron's patent applications and patents relating to CNTF issued to
Synergen, Inc. ("Synergen"). Amgen acquired all outstanding shares of Synergen
in 1994. In March 1998, the Company and Amgen entered into a covenant not to
sue each other which, among other things, resolved their patent interference
and related patent proceedings relating to CNTF and AXOKINE. The Company also
granted Amgen a license to use CNTF and second generation CNTFs other than
AXOKINE to treat retinal degenerative conditions. Neither party will pay
royalties or make other payments to the other party in consideration of this
agreement.
As of September 30, 1998, the Company had no established banking
arrangements through which it could obtain short-term financing or a line of
credit. Additional funds may be raised through, among other things, the
issuance of additional securities, other financing arrangements, and future
collaboration agreements. No assurance can be given that additional financing
will be available or, if available, that it will be available on acceptable
terms. In addition, the Company estimates that through mid-2002 it could
receive additional payments from Procter & Gamble in the form of research
funding, milestones, and equity purchases of as much as $100 million or more.
At September 30, 1998, the Company had $120.4 million in cash, cash
equivalents, and marketable securities. The Company expects to incur
substantial funding requirements for, among other things, research and
development activities (including preclinical and clinical testing),
validation of manufacturing facilities, and the acquisition of equipment. The
Company expects to incur ongoing funding requirements for capital
contributions to Amgen-Regeneron Partners to support the continued development
and clinical trials of BDNF and NT-3. The amount needed to fund operations
will also depend on other factors, including the status of competitive
products, the success of the Company's research and development programs, the
status of patents and other intellectual property rights developments, and the
continuation, extent, and success of any collaborative research programs
(including those with Amgen and Procter & Gamble). The Company believes that
its existing capital resources will enable it to meet operating needs for at
least several years. No assurance can be given that there will be no change in
projected revenues or expenses that would lead to the Company's capital being
consumed significantly before such time.
18
Factors That May Affect Future Operating Results
Regeneron cautions stockholders and potential investors that the
following important factors, among others, in some cases have affected, and in
the future could affect, Regeneron's actual results and could cause
Regeneron's actual results to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, Regeneron. The statements
under this caption are intended to serve as cautionary statements within the
meaning of the Private Securities Litigation Reform Act of 1995. The following
information is not intended to limit in any way the characterization of other
statements or information under other captions as cautionary statements for
such purpose:
o Delay, difficulty, or failure of the Company's research and
development programs to produce product candidates that are
scientifically or commercially appropriate for further development
by the Company or others.
o Cancellation or termination of material collaborative or licensing
agreements (including in particular, but not limited to, those with
Procter & Gamble and Amgen) and the resulting loss of research or
other funding could have a material adverse effect on the Company
and its operations. A change of control of one or more of the
Company's material collaborators or licensees could also have a
material adverse effect on the Company.
o Delay, difficulty, or failure of a clinical trial of any of the
Company's product candidates. A clinical trial can fail or be
delayed as a result of many causes, including, among others, failure
of the product candidate to demonstrate safety or efficacy, the
development of serious or life-threatening adverse events (side
effects) caused by or connected with exposure to the product
candidate, the creation of antibodies (in the case of protein-based
therapeutics) that weaken or neutralize the effect of the product
candidate (and possibly could have other adverse effects on
patients), the failure of clinical investigators, trial monitors and
other consultants, or trial subjects to comply with the trial plan
or protocol.
o Delay, difficulty, or failure in obtaining regulatory approval
(including approval of its facilities for production) for the
Company's products (including vaccine intermediate for Merck),
including delays or difficulties in development because of
insufficient proof of safety or efficacy.
o Increased and irregular costs of development, manufacture,
regulatory approval, sales, and marketing associated with the
introduction of products in the late stage of development.
o Competitive or market factors that may cause use of the Company's
products to be limited or otherwise fail to achieve broad
acceptance.
o The ability to obtain, maintain, and prosecute intellectual property
rights, and the cost of acquiring in-process technology and other
intellectual property rights, either by license, collaboration, or
purchase of another entity.
19
o Difficulties or high costs of obtaining adequate financing to meet
the Company's obligations under its collaboration and licensing
agreements or to fund 50 percent of the cost of developing product
candidates in order to retain 50 percent of the commercialization
rights.
o Amount and rate of growth of Regeneron's general and administrative
expenses, and the impact of unusual charges resulting from
Regeneron's ongoing evaluation of its business strategies and
organizational structure.
o Failure of corporate partners to develop or commercialize
successfully the Company's products or to retain and expand the
markets served by the commercial collaborations; conflicts of
interest, priorities, and commercial strategies which may arise
between the Company and such corporate partners.
o Delays or difficulties in developing and acquiring production
technology and technical and managerial personnel to manufacture
novel biotechnology products in commercial quantities at reasonable
costs and in compliance with applicable quality assurance and
environmental regulations and governmental permitting requirements.
o Difficulties in obtaining key raw materials and supplies for the
manufacture of the Company's product candidates.
o The costs and other effects of legal and administrative cases and
proceedings (whether civil, such as product- or employment-related,
or environmental, or criminal); settlements and investigations;
developments or assertions by or against Regeneron relating to
intellectual property rights and licenses; the issuance and use of
patents and proprietary technology by Regeneron and its competitors,
including the possible negative effect on the Company's ability to
develop, manufacture, and sell its products in circumstances where
it is unable to obtain licenses to patents which may be required for
such products.
o Underutilization of the Company's existing or new manufacturing
facilities or of any facility expansions, resulting in
inefficiencies and higher costs; start-up costs, inefficiencies,
delays, and increased depreciation costs in connection with the
start of production in new plants and expansions.
o Health care reform, including reductions or changes in reimbursement
available for prescription medications or other reforms.
o The ability to attract and retain key personnel. As Regeneron's
scientific efforts lead to potentially promising new directions,
both outside of recombinant protein therapies (into orally active,
small molecule pharmaceuticals) and outside of treatments for
neurological and neurodegenerative conditions (into, for example,
potential programs in obesity, diabetes, cancer, inflammation,
muscle disease, bone growth disorders, and angiogenesis), the
Company will require additional internal expertise or external
collaborations in areas in which it currently does not have
substantial resources and personnel.
20
1
The Company is evaluating its operations to determine the impact, if
any, Year 2000 issues may have. The Company's review includes its computer
systems and software, embedded systems in non-computer equipment, and vendor
operations. The Company has appointed a Year 2000 task force with
representatives from each operation of the Company and has retained
independent consultants to facilitate its review. To date, the Company
believes that no material Year 2000 issue exists with respect to its computer
systems and software. The Company is in the process of analyzing its
laboratory and manufacturing equipment with embedded systems. This analysis is
incomplete. The Company is also in the process of surveying its vendors to
determine their level of readiness with respect to Year 2000 issues. The
analysis of the Company's embedded systems and the information collected
regarding vendor readiness will be used to formulate a contingency plan with
respect to reasonably identifiable items of equipment and supply of materials
that are critical to the Company's operations. The costs of addressing Year
2000 issues have been minor to date, but may increase if substantial
consultant or personnel resources are required or if operationally-important
equipment must be remediated or replaced. Because the Company's analysis of
Year 2000 issues is incomplete, at this time management cannot estimate the
total expected costs of Year 2000 issues. The risks that Year 2000 issues
could present to the Company include, without limitation, disruption, delay,
or cessation of manufacturing or other operations, including operations that
are subject to regulatory compliance. In each case the correction of the
problem could result in substantial expense and disruption or delay of the
Company's operations.
Impact of the Future Adoption of Recently Issued Accounting Standard
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, Accounting for Derivative and
Hedging Activities ("SFAS No. 133"). SFAS No. 133 establishes a comprehensive
standard on accounting for derivatives and hedging activities and is effective
for periods beginning after June 15, 1999. Management does not believe that
the future adoption of SFAS No. 133 will have a material effect on the
Company's financial position and results of operations.
21
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports
No reports on Form 8-K were filed by the Registrant during the
quarter ended September 30, 1998.
22
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Regeneron Pharmaceuticals, Inc.
Date: November 5, 1998 By: /s/ Murray A. Goldberg
------------------ ---------------------------
Murray A. Goldberg
Vice President, Finance & Administration,
Chief Financial Officer, and Treasurer
23
5
1000
9-MOS
DEC-31-1998
JAN-01-1998
SEP-30-1998
22,594
97,784
5,401
0
0
89,217
58,571
25,925
162,439
9,628
0
0
0
31
136,822
162,439
0
36,011
0
0
38,765
0
330
(3,084)
0
(3,084)
0
0
0
(3,084)
(0.10)
(0.10)
