Regeneron Pharmaceuticals - 10-Q quarterly report FY

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

OR

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.

         Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of October 31, 2001:

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REGENERON PHARMACEUTICALS, INC.
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September 30, 2001

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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

REGENERON PHARMACEUTICALS, INC.
CONDENSED BALANCE SHEETS AT SEPTEMBER 30, 2001 AND DECEMBER 31, 2000 (Unaudited)
(In thousands, except share data)

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

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REGENERON PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands, except per share data)

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

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REGENERON PHARMACEUTICALS, INC.
CONDENSED STATEMENT OF STOCKHOLDERS’ EQUITY (Unaudited)
For the nine months ended September 30, 2001
(In thousands)

[Additional columns below]

[Continued from above table, first column(s) repeated]

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

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REGENERON PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)

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

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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. and actual events or results may differ materially. These statements concern, among other things, the possible 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 uses of capital and our financial needs. These statements are made by us 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. 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.

         Regeneron Pharmaceuticals, Inc., which may be referred to as “we”, “us”, or “our”, is a biopharmaceutical company that discovers, develops, and intends to commercialize therapeutic drugs for the treatment of serious medical conditions. Our product pipeline includes product candidates for the treatment of obesity, rheumatoid arthritis and other inflammatory conditions, cancer and related disorders, allergies, asthma, and other diseases and disorders. Since inception, we have not generated sales or any profits from the commercialization of any of our product candidates.

         Our core business strategy is to combine our strong foundation in science and technology with state-of-the-art 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. Our ability to develop product candidates results from the application of our technology platforms. In contrast to basic genomics approaches which attempt to identify every gene in a cell or genome, our technology platforms are designed to discover specific genes of therapeutic interest for a particular disease or cell type. We will continue to invest in the development of enabling technologies to assist in our efforts to identify, develop, and commercialize new product candidates.

         A key aspect of our strategy is to retain significant ownership and commercialization rights to our pipeline. Below is a summary of our leading clinical programs, as well as several product candidates that are expected to enter clinical trials over the next two years. We retain sole ownership and marketing rights for each of these programs and currently are developing them independent of any corporate partners.

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         In addition to the above programs which we are conducting independent of any corporate partners, we have formed collaborations to advance other research and development efforts. We are conducting research with The Procter & Gamble Company in muscle diseases and other fields. We are also collaborating with Medarex, Inc. to discover, develop, and commercialize certain human antibodies as therapeutics. In partnership with Amgen Inc., we have development rights to Neurotrophin-3, or NT-3, a clinical compound for the treatment of constipating conditions. In all of these research collaborations, we retain 50% of the commercialization rights.

Discussion of Third Quarter 2001 Activities

         In November 2000, we announced the preliminary results of a Phase II clinical trial, which tested the safety and efficacy of AXOKINE in severely obese patients. The Phase II trial was a randomized, double-blind, placebo-controlled, out-patient study conducted with 170 patients at seven sites in the United States. The trial established an optimal daily dose of AXOKINE of 1.0 mcg/kg. Patients who received the optimal dose over the twelve-week treatment period averaged 10 pounds more weight loss than patients on placebo. Moreover, 46% of the patients in the optimal dose group lost at least 10 pounds, compared with just 5% of the patients who received placebo. No serious adverse events associated with the drug were reported during the trial and the drug was generally well tolerated. In September 2001, we reported that patients who completed 36 weeks of follow-up after cessation of treatment, on average, maintained the weight loss observed in the twelve-week treatment period.

         In July 2001, we initiated a Phase III clinical program of AXOKINE in overweight and obese patients. The initial pivotal trial will enroll approximately 2,000 patients at over 60 study sites across the United States in a double-blind, randomized, placebo-controlled study. This trial will have a twelve-month treatment period, in which patients will receive daily subcutaneous self-injections of placebo or AXOKINE at a dose of 1.0 microgram (mcg) per kilogram (kg) of body weight. The treatment period will be followed by a twelve-month open-label safety extension phase, during which all patients will receive AXOKINE. Endpoints of the study are based on changes in body weight versus baseline during the treatment period. As part of the overall Phase III program, Regeneron will conduct additional confirmatory and ancillary studies of AXOKINE in obese and obese diabetic patients. These studies will vary in duration and size and are planned to be completed within the same time frame as the initial pivotal study described above. The Phase III program is expected to enroll over 4,000 subjects in total.

         Amgen-Regeneron Partners, the partnership equally owned by Amgen Inc. and us, has the development rights to NT-3 in the United States. In 2000, we, on behalf of Amgen-Regeneron Partners initiated Phase II studies of NT-3 in patients with functional constipation and spinal cord injury patients with bowel dysfunction. We are currently evaluating preliminary data from these studies, and based in part on this data Amgen-Regeneron Partners will determine whether and how to proceed with the development of NT-3.

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         Regeneron’s Board of Directors approved amendments to our insider trading policy permitting officers, directors and employees to enter into written trading plans complying with Rule 10b5-1 adopted by the Securities and Exchange Commission. Each Rule 10b5-1 trading plan may provide for purchases and sales of our securities subject to certain pre-specified conditions.

         A minority of all research and development programs ultimately results in commercially successful pharmaceutical drugs; it is not possible to predict whether any program will succeed until it actually produces a medicine that is commercially marketed for a significant period of time. In addition, in each of the areas of our independent and collaborative activities, other companies and entities are actively pursuing competitive paths toward similar objectives. The results of Regeneron’s and its collaborators’ past activities in connection with the research and development of AXOKINE, Cytokine Traps, Angiopoietins, cancer, abnormal bone growth, muscle atrophy, small molecules, NT-3, and other programs or areas of research or development do not necessarily predict the results or success of current or future activities including, but not limited to, any additional preclinical or clinical studies. We cannot predict whether, when, or under what conditions any of our research or product candidates, including without limitation AXOKINE, IL-1 Trap, 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 its product candidates to treat human conditions or to be approved for marketing could have a material adverse impact on Regeneron. We discuss the risks associated with pharmaceutical drug development in the section of this report titled “Factors That May Affect Future Operating Results.”

         We have not received revenue from the commercialization 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 our 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 our products and technologies noncompetitive or obsolete.

         From inception on January 8, 1988 through September 30, 2001, we had a cumulative loss of $271.3 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. 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 and will depend, among other factors, on the timing of certain expenses and on the progress of our research and development efforts.

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Results of Operations

         Three months ended September 30, 2001 and 2000. Our total revenue decreased to $5.5 million for the third quarter of 2001 from $15.0 million for the same period in 2000. Contract research and development revenue decreased to $2.8 million in the third quarter of 2001 from $8.9 million for the same period in 2000. Under our long-term collaboration agreement with Procter & Gamble, research payments decreased effective in the first quarter of 2001 to $2.5 million per quarter versus $6.8 million for the same period of 2000. In addition, revenue from Amgen-Regeneron Partners decreased to $0.2 million for the third quarter of 2001 from $1.7 million for the same period in 2000 due to the cessation of clinical trial activity on brain derived neurotrophic factor, or BDNF, in January 2001 and the substantial completion of our Phase II studies of NT-3. In the third quarter of 2000, we received two non-recurring research progress payments totaling $3.5 million from Procter & Gamble related to our long-term collaboration agreement. Contract manufacturing revenue, related primarily to a long-term agreement with Merck & Co., Inc. (Merck) to manufacture a vaccine intermediate, was $2.7 million and $2.6 million for the third quarters of 2001 and 2000, respectively.

         Our total operating expenses increased to $28.8 million in the third quarter of 2001 from $19.5 million for the same period in 2000. Research and development expenses increased to $25.0 million in the third quarter of 2001 from $15.2 million for the same period in 2000, primarily as a result of higher staffing and increased activity in our preclinical and clinical development programs. For example, in July 2001, we initiated a Phase III clinical program of AXOKINE for the treatment of obesity. Research and development expenses were 87% of total operating expenses in the third quarter of 2001, compared to 78% for the same period in 2000. Contract manufacturing expenses decreased to $1.3 million in the third quarter of 2001 from $2.5 million for the same period in 2000, due primarily to higher costs in 2000 associated with initiating commercial production at our Rensselaer, New York facility of both vaccine intermediate for Merck and BDNF for clinical use by Sumitomo Pharmaceuticals Co., Ltd. We stopped producing clinical supplies of BDNF for Sumitomo Pharmaceuticals at the end of 2000. General and administrative expenses increased to $2.5 million in the third quarter of 2001 from $1.8 million for the same period of 2000, due primarily to higher administrative staffing and related occupancy costs.

         Investment income increased to $3.2 million for the third quarter of 2001 from $2.5 million for the same period in 2000 due primarily to interest earned on the proceeds of our public offering in March 2001. We earned $0.2 million from Amgen-Regeneron Partners for the third quarter of 2001 compared to a loss of $1.1 million for the same period in 2000. The partnership discontinued clinical trial activity on BDNF in January 2001 and has substantially completed Phase II studies of NT-3. The partnership’s third quarter 2001 net income is attributable to a $0.8 million reduction of previously estimated costs to wind-down the BDNF clinical study.

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         Our net loss for the third quarter of 2001 was $19.9 million, or $0.46 per share (basic and diluted), compared with a net loss of $3.1 million, or $0.09 per share (basic and diluted), for the same period in 2000.

         Nine months ended September 30, 2001 and 2000. Our total revenue decreased to $17.6 million for the nine months ended September 30, 2001 from $40.1 million for the same period in 2000, as higher contract manufacturing revenue was more than offset by decreases in contract research and development revenue and research progress payments. Contract research and development revenue decreased to $9.4 million for the nine months ended September 30, 2001 from $27.3 million for the same period in 2000. Under our long-term collaboration agreement with Procter & Gamble, research payments decreased effective in the first quarter of 2001 to $2.5 million per quarter from $7.1 million per quarter for the first two quarters of 2000 and $6.8 million for the third quarter of 2000. In addition, revenue from Amgen-Regeneron Partners decreased to $1.3 million for the nine months ended September 30, 2001 from $5.0 million for the same period in 2000, due primarily to the cessation of clinical trial activity on BDNF in January 2001. In the first nine months of 2000, research progress payments consisted of two non-recurring payments totaling $3.5 million from Procter & Gamble related to our long-term collaboration agreement and a payment of $3.0 million (reduced by $0.3 million of Japanese withholding tax) from Sumitomo Pharmaceuticals related to the development of BDNF in Japan. Contract manufacturing revenue, related primarily to our long-term agreement with Merck to manufacture a vaccine intermediate, increased to $8.2 million in the first nine months of 2001 from $6.6 million for the same period in 2000, due to an increase in the revenue we received per shipment of intermediate to Merck during the first nine months of 2001.

         Our total operating expenses increased to $73.7 million for the nine months ended September 30, 2001 from $55.6 million for the same period in 2000. Research and development expenses increased to $61.4 million in the first nine months of 2001 from $43.5 million for the same period in 2000, primarily as a result of higher staffing and increased activity in our preclinical and clinical development programs. Research and development expenses were 83% of total operating expenses for the first nine months of 2001, compared to 78% for the same period in 2000. Contract manufacturing expenses decreased to $5.3 million in the first nine months of 2001 from $6.8 million for the same period in 2000 due, in part, to higher costs in 2000 associated with initiating commercial production at our Rensselaer, New York facility of both vaccine intermediate for Merck and BDNF for clinical use by Sumitomo Pharmaceuticals. We stopped producing clinical supplies of BDNF for Sumitomo Pharmaceuticals at the end of 2000. General and administrative expenses increased to $6.9 million in the first nine months of 2001 from $5.3 million for the same period of 2000, due primarily to higher administrative staffing and related occupancy costs.

         Investment income increased to $9.5 million for the nine months ended September 30, 2001 from $6.0 million for the same period in 2000 due to interest earned on the proceeds of our public offerings in March 2001 and April 2000 and our sale of Common Stock to Procter & Gamble in August 2000. The loss in Amgen-Regeneron Partners

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decreased to $1.1 million for the first nine months of 2001 from $3.5 million for the same period in 2000 due primarily to the cessation of clinical trial activity on BDNF in January 2001.

         During the fourth quarter of 2000, we changed our method of accounting for revenue recognition to conform with the guidance provided by Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements, (SAB 101). The change in accounting method was effective January 1, 2000 and, as a result, we restated the previously issued interim financial statements for the nine months ended September 30, 2000 to reflect the adoption of SAB 101 as if it had occurred on January 1, 2000. The cumulative effect of adopting SAB 101 as of January 1, 2000 was to increase our net loss by $1.6 million as of that date, or $0.05 per share, with a corresponding increase to deferred revenue to be recognized in subsequent periods. The SAB 101 adjustment relates to a portion of a 1989 payment received from Sumitomo Chemical Company, Ltd. in consideration for a fifteen year limited right of first negotiation to license up to three of our product candidates in Japan. In the first nine months of both 2001 and 2000, we recognized contract research and development revenue of $0.3 million that was included in the cumulative effect adjustment as of January 1, 2000.

         Our net loss for the nine months ended September 30, 2001 was $47.8 million, or $1.15 per share (basic and diluted), compared with a net loss of $14.8 million, or $0.43 per share (basic and diluted), for the same period in 2000.

Liquidity and Capital Resources

         Since our inception in 1988, we have financed our operations primarily through private placements and public offerings of our equity securities, a private placement of convertible debt, revenue earned under our agreements with Amgen, Sumitomo Chemical, Sumitomo Pharmaceuticals, Merck, and Procter & Gamble, and investment income.

         In May 1997, we entered into a long-term collaboration agreement with Procter and Gamble. Procter & Gamble agreed over the first five years of the 1997 collaboration to purchase up to $60.0 million in Regeneron equity, of which $42.9 million was purchased in June 1997 and $17.1 million was purchased in August 2000, and provide funding in support of our research efforts related to the collaboration, of which we have received $56.6 million through September 30, 2001. 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 extends Procter & Gamble’s obligation to fund Regeneron’s 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, beginning in the first quarter of 2001, research support from Procter & Gamble is $2.5 million per quarter, before adjustments for future inflation, through December 2005.

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         Our activities relating to BDNF and NT-3, as agreed upon by Amgen and us, are being compensated by Amgen-Regeneron Partners for services rendered, and we recognize these amounts as revenue. In January 2001, Amgen-Regeneron Partners discontinued all development of BDNF for the potential treatment of amyotrophic lateral sclerosis, or ALS. We and Amgen fund Amgen-Regeneron Partners through capital contributions, and must make equal payments in order to maintain equal ownership and equal sharing of any profits or losses from the partnership. Our aggregate capital contribution to Amgen-Regeneron Partners from the partnership’s inception in June 1993 through September 30, 2001 was $57.9 million. For the remainder of 2001, no capital contributions to the partnership are expected, but additional contributions may be required, depending upon, among other things, whether and how Amgen-Regeneron Partners proceeds with the development of NT-3.

         In connection with our agreement to collaborate with Sumitomo Pharmaceuticals in the research and development of BDNF in Japan, we received a research progress payment from Sumitomo Pharmaceuticals of $3.0 million (reduced by $0.3 million Japanese withholding tax) in April 2000. In addition, Sumitomo Pharmaceuticals has paid us $32.0 million through September 30, 2001 in connection with supplying BDNF for preclinical and clinical use. In light of the discontinuation of BDNF development for ALS, we do not expect to receive further payments from Sumitomo Pharmaceuticals for research progress payments, contract research and development, or contract manufacturing, other than any wind-down costs.

         Our additions to property, plant, and equipment totaled $5.6 million for both the nine months ended September 30, 2001 and 2000. In connection with the purchase and renovation of our Rensselaer facility, we obtained financing of $2.0 million from the New York State Urban Development Corporation. The outstanding balance on this note of approximately $1.5 million was fully repaid in October 2001.

         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. In September 2000, Immunex Corporation filed a request with the European Patent Office seeking the declaration of an Opposition regarding our European patent relating to Cytokine Traps. This is a legal challenge to the validity and scope of our patent and we may incur substantial expenses in defending the patent.

         At September 30, 2001, we had $268.0 million in cash, cash equivalents, and marketable securities. As of September 30, 2001, we had no established banking arrangements through which we could obtain short-term financing or a line of credit. We may seek additional funding through, among other things, future collaboration agreements and public or private financing. We cannot assure you that additional financing will be available to us or, if available, that it will be available on acceptable terms.

         In April 2000, we completed a public offering of 2.6 million shares of Common Stock at a price of $29.75 per share and received proceeds, after commissions and

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expenses, of $72.9 million. In August 2000, we sold 573,630 shares of Common Stock to Procter & Gamble at a price of $29.75 per share and received total proceeds of $17.1 million. The sale of stock to Procter & Gamble was made pursuant to a 1997 securities purchase agreement. In March 2001, we completed a public offering in which we issued 6.5 million shares of Common Stock at a price of $25.00 per share and received proceeds, after commissions and expenses, of $153.6 million. In April 2001, we sold an additional 130,000 shares of Common Stock pursuant to the underwriters’ over-allotment option from the March 2001 public offering at a price of $25.00 per share and received proceeds, after commissions and expenses, of $3.1 million.

         In October 2001, we issued $200 million aggregate principal amount of convertible senior subordinated notes in a private placement and received proceeds, after deducting the initial purchasers’ discount and before out-of-pocket expenses, of $193.4 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. 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.

         We expect to incur substantial funding requirements for, among other things, research and development activities (including preclinical and clinical testing), expansion and validation of manufacturing facilities, and the acquisition of equipment. We currently anticipate that for the remainder of 2001 and 2002, approximately 50-70% of our expenditures will be directed toward the preclinical and clinical development of product candidates, including AXOKINE, Pegylated AXOKINE, IL-1 Trap, IL-4/13 Trap, VEGF Trap, and the Angiopoietins; approximately 5-15% of our expenditures will be invested in expansion of our manufacturing facilities; approximately 10-30% of our expenditures will cover our basic research activities; approximately 5-15% of our expenditures will be directed toward the continued development of our novel technology platforms, including potential efforts to commercialize these technologies; and the remainder of our expenditures will be for general corporate purposes, including working capital. The amount we need to fund operations and the allocation of our resources 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 arrangements (including those with Procter & Gamble, Medarex, Emisphere Technologies, Inc., and Amgen). We believe that our existing capital resources will enable us to meet operating needs through

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at least 2003. 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 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.

Future Impact of Recently Issued Accounting Standards

         The Financial Accounting Standards Board has recently issued Statement of Financial Accounting Standards, or SFAS, No. 141, Business Combinations, SFAS No. 142, Goodwill and Other Intangible Assets, SFAS No. 143, Accounting for Obligations Associated with the Retirement of Long-Lived Assets, and SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which we will be required to adopt in future periods. Management believes that the future adoption of these accounting standards will not have a material impact on our financial statements.

Factors That May Affect Future Operating Results

         We caution shareholders and potential investors that the following important factors, among others, in some cases have affected, and in the future could affect, our actual results and could cause our actual results to differ materially from those expressed in any forward-looking statements made by, or on behalf of, us. 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:

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         As our scientific efforts lead to potentially promising new directions, both outside of recombinant protein therapies and into conditions or diseases outside of our current areas of experience and expertise, we will require additional internal expertise or external collaborations in areas in which we currently do not have substantial resources and personnel.

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Item 3. 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.