REGN-9/30/12-10Q
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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, 2012
 
 
 
 
 

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) 847-7000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes 
X

No 
 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes 
X

No 
 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
X   
 
Accelerated filer

Non-accelerated filer
 
(Do not check if a smaller reporting company)
Smaller reporting company


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes 
 

No 
X
 
Number of shares outstanding of each of the registrant’s classes of common stock as of October 12, 2012:
Class of Common Stock
 
Number of Shares
Class A Stock, $0.001 par value
 
2,089,512
Common Stock, $0.001 par value
 
94,470,885


Table of Contents

REGENERON PHARMACEUTICALS, INC.
Table of Contents
September 30, 2012

 
 
Page Numbers
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

"ARCALYST®", "EYLEA®", "ZALTRAP®, “VelocImmune®, “VelociGene®, ”VelociMouse®, “VelociMab®, and “VelociSuite are trademarks of Regeneron Pharmaceuticals, Inc. All other trademarks in this Form 10-Q are the property of their respective owners.

2

Table of Contents

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REGENERON PHARMACEUTICALS, INC.
CONDENSED BALANCE SHEETS (Unaudited)
(In thousands, except share data)
ASSETS
September 30,
2012
 
December 31,
2011
Current assets:
 
 
 
Cash and cash equivalents
$
118,998

 
$
483,610

Marketable securities
143,554

 
43,332

Accounts receivable - trade, net
506,682

 
28,254

Accounts receivable from Sanofi
94,589

 
74,781

Prepaid expenses and other current assets
84,780

 
35,800

Total current assets
948,603

 
665,777

 
 
 
 
Restricted cash and marketable securities
8,173

 
7,721

Marketable securities
312,600

 
275,887

Property, plant, and equipment, at cost, net of accumulated depreciation and amortization
372,917

 
367,955

Other assets
18,322

 
6,243

Total assets
$
1,660,615

 
$
1,323,583

 
 
 
 
LIABILITIES and STOCKHOLDERS' EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable and accrued expenses
$
124,224

 
$
95,625

Deferred revenue from Sanofi, current portion
19,588

 
20,011

Deferred revenue - other, current portion
33,479

 
31,629

Facility lease obligations, current portion
1,277

 
1,006

Total current liabilities
178,568

 
148,271

 
 
 
 
Deferred revenue from Sanofi
77,446

 
86,017

Deferred revenue - other
141,132

 
162,593

Facility lease obligations
159,499

 
159,508

Convertible senior notes
290,959

 
275,019

Other long term liabilities
6,987

 
6,443

Total liabilities
854,591

 
837,851

 
 
 
 
Commitments and contingencies


 


 
 
 
 
Stockholders' equity:
 
 
 
Preferred stock, $.01 par value; 30,000,000 shares authorized; issued and outstanding - none

 

Class A Stock, convertible, $.001 par value; 40,000,000 shares authorized; shares issued and outstanding - 2,089,512 at September 30, 2012 and 2,109,512 at December 31, 2011
2

 
2

Common Stock, $.001 par value; 160,000,000 shares authorized; shares issued and outstanding - 94,410,423 at September 30, 2012 and 90,692,071 at December 31, 2011
94

 
91

Additional paid-in capital
1,795,293

 
1,754,824

Accumulated deficit
(987,461
)
 
(1,267,323
)
Accumulated other comprehensive loss
(1,904
)
 
(1,862
)
Total stockholders' equity
806,024

 
485,732

Total liabilities and stockholders' equity
$
1,660,615

 
$
1,323,583

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


3

Table of Contents

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

 
Three months ended September 30,
 
Nine months ended September 30,
 
2012
 
2011
 
2012
 
2011
Condensed Statements of Operations
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
Net product sales
$
249,172

 
$
5,468

 
$
576,622

 
$
14,934

Sanofi collaboration revenue
145,042

 
79,802

 
319,035

 
249,577

Bayer HealthCare collaboration revenue
26,701

 
10,094

 
48,308

 
33,698

Technology licensing
5,893

 
5,893

 
17,679

 
18,966

Contract research and other
879

 
1,576

 
2,231

 
5,672

 
427,687

 
102,833

 
963,875

 
322,847

 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
Research and development
158,295

 
127,924

 
444,530

 
400,465

Selling, general, and administrative
46,883

 
32,916

 
153,016

 
80,912

Cost of goods sold
20,145

 
450

 
54,286

 
1,227

 
225,323

 
161,290

 
651,832

 
482,604

 
 
 
 
 
 
 
 
Income (loss) from operations
202,364

 
(58,457
)
 
312,043

 
(159,757
)
 
 
 
 
 
 
 
 
Other income (expense):
 
 
 
 
 
 
 
Investment income
517

 
715

 
1,628

 
2,750

Interest expense
(11,413
)
 
(4,061
)
 
(33,809
)
 
(11,827
)
 
(10,896
)
 
(3,346
)
 
(32,181
)
 
(9,077
)
 
 
 
 
 
 
 
 
Income (loss) before income taxes
191,468

 
(61,803
)
 
279,862

 
(168,834
)
 
 
 
 
 
 
 
 
Income tax (expense) benefit

 
(562
)
 

 
517

 
 
 
 
 
 
 
 
Net income (loss)
$
191,468

 
$
(62,365
)
 
$
279,862

 
$
(168,317
)
 
 
 
 
 
 
 
 
Net income (loss) per share - basic
$
2.02

 
$
(0.68
)
 
$
2.97

 
$
(1.87
)
Net income (loss) per share - diluted
$
1.72

 
$
(0.68
)
 
$
2.55

 
$
(1.87
)
 
 
 
 
 
 
 
 
Weighted average shares outstanding - basic
95,012

 
91,046

 
94,349

 
90,215

Weighted average shares outstanding - diluted
115,830

 
91,046

 
109,780

 
90,215

 
 
 
 
 
 
 
 
Condensed Statements of Comprehensive Income (Loss)
 
 
 
 
 
 
 
Net income (loss)
$
191,468

 
$
(62,365
)
 
$
279,862

 
$
(168,317
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized gain (loss) on marketable securities, net of tax
467

 
(827
)
 
(42
)
 
760

Comprehensive income (loss)
$
191,935

 
$
(63,192
)
 
$
279,820

 
$
(167,557
)

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



4

Table of Contents

REGENERON PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited)
For the nine months ended September 30, 2012 and 2011
(In thousands)
 
 
Class A Stock
 
Common Stock
 
Additional Paid-in Capital
 
Accumulated Deficit
 
Accumulated Other Comprehensive Income (Loss)
 
Total Stockholders' Equity
 
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
Balance, December 31, 2011
 
2,109

 
$
2

 
90,692

 
$
91

 
$
1,754,824

 
$
(1,267,323
)
 
$
(1,862
)
 
$
485,732

Issuance of Common Stock in connection with exercise of stock options
 
 
 
 
 
3,773

 
4

 
48,436

 
 
 
 
 
48,440

Common Stock tendered upon exercise of stock options in connection with employee tax obligations
 
 
 
 
 
(639
)
 
(1
)
 
(71,474
)
 
 
 
 
 
(71,475
)
Issuance of Common Stock in connection with Company 401(k) Savings Plan contribution
 
 
 
 
 
64

 
 
 
 
 
 
 
 
 


Issuance of restricted Common Stock under Long-Term Incentive Plan
 
 
 
 
 
500

 
 
 
 
 
 
 
 
 

Conversion of Class A Stock to Common Stock
 
(20
)
 
 
 
20

 
 
 
 
 
 
 
 
 

Stock-based compensation charges
 
 
 
 
 
 
 
 
 
63,507

 
 
 
 
 
63,507

Net income
 
 
 
 
 
 
 
 
 
 
 
279,862

 
 
 
279,862

Other comprehensive loss
 
 
 
 
 
 
 
 
 
 
 
 
 
(42
)
 
(42
)
Balance, September 30, 2012
 
2,089

 
$
2

 
94,410

 
$
94

 
$
1,795,293

 
$
(987,461
)
 
$
(1,904
)
 
$
806,024

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2010
 
2,182

 
$
2

 
87,238

 
$
87

 
$
1,575,780

 
$
(1,045,563
)
 
$
(2,491
)
 
$
527,815

Issuance of Common Stock in connection with exercise of stock options
 
 
 
 
 
3,284

 
3

 
40,135

 
 
 
 
 
40,138

Common Stock tendered upon exercise of stock options in connection with employee tax obligations
 
 
 
 
 
(284
)
 
 
 
(16,316
)
 
 
 
 
 
(16,316
)
Issuance of Common Stock in connection with Company 401(k) Savings Plan contribution
 
 
 
 
 
92

 
 
 
3,405

 
 
 
 
 
3,405

Issuance of restricted Common Stock under Long-Term Incentive Plan
 


 
 
 
16

 
 
 
 
 
 
 
 
 


Conversion of Class A to Common Stock
 
(73
)
 
 
 
73

 
 
 
 
 
 
 
 
 


Stock-based compensation charges
 
 
 
 
 
 
 
 
 
40,768

 
 
 
 
 
40,768

Net loss
 
 
 
 
 
 
 
 
 
 
 
(168,317
)
 
 
 
(168,317
)
Other comprehensive income, net of tax
 
 
 
 
 
 
 
 
 
 
 
 
 
760

 
760

Balance, September 30, 2011
 
2,109

 
$
2

 
90,419

 
$
90

 
$
1,643,772

 
$
(1,213,880
)
 
$
(1,731
)
 
$
428,253


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


5

Table of Contents

REGENERON PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
 
Nine months ended September 30,
 
2012
 
2011
Cash flows from operating activities:
 
 
 
Net income (loss)
$
279,862

 
$
(168,317
)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
 
 
 
Depreciation and amortization
27,162

 
23,156

Non-cash compensation expense
63,385

 
40,561

Other non-cash charges and expenses, net
21,293

 
2,121

Changes in assets and liabilities:
 
 
 
(Increase) decrease in Sanofi and trade accounts receivable
(498,236
)
 
4,933

(Increase) decrease in prepaid expenses and other assets
(61,892
)
 
3,425

Decrease in deferred revenue
(28,605
)
 
(32,498
)
Increase in accounts payable, accrued expenses, and other liabilities
29,231

 
35,254

Total adjustments
(447,662
)
 
76,952

Net cash used in operating activities
(167,800
)
 
(91,365
)
 
 
 
 
Cash flows from investing activities:
 
 
 
Purchases of marketable securities
(398,253
)
 
(115,538
)
Sales or maturities of marketable securities
260,770

 
324,530

Increase in restricted cash and marketable securities
(518
)
 
(685
)
Capital expenditures
(34,175
)
 
(45,928
)
Net cash (used in) provided by investing activities
(172,176
)
 
162,379

 
 
 
 
Cash flows from financing activities:
 
 
 
Payments in connection with facility and capital lease obligations
(1,601
)
 
(1,010
)
Net proceeds from issuances of Common Stock
48,440

 
40,135

Payments in connection with Common Stock tendered for employee tax obligations
(71,475
)
 
(16,316
)
Net cash (used in) provided by financing activities
(24,636
)
 
22,809

 
 
 
 
Net (decrease) increase in cash and cash equivalents
(364,612
)
 
93,823

 
 
 
 
Cash and cash equivalents at beginning of period
483,610

 
112,572

 
 
 
 
Cash and cash equivalents at end of period
$
118,998

 
$
206,395


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


6

Table of Contents
REGENERON PHARMACEUTICALS, INC.
Notes to Condensed Financial Statements (Unaudited)
(Unless otherwise noted, dollars in thousands, except per share data)


1. Interim Financial Statements
     The interim Condensed Financial Statements of Regeneron Pharmaceuticals, Inc. (“Regeneron” or 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 accounting principles generally accepted in the United States of America. In the opinion of management, these financial statements reflect all normal recurring adjustments and accruals necessary for a fair statement of the Company’s financial position, results of operations, and cash flows for such periods. The results of operations for any interim periods are not necessarily indicative of the results for the full year. The December 31, 2011 Condensed Balance Sheet data were derived from audited financial statements, but do not include all disclosures required by accounting principles generally accepted in the United States of America. These financial statements should be read in conjunction with the financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.
     Certain reclassifications have been made to prior period amounts to conform with the current period’s presentation.

2. Revenues
     Net Product Sales
In November 2011, the Company received marketing approval from the U.S. Food and Drug Administration (“FDA”) for EYLEA® (aflibercept) Injection for the treatment of neovascular wet age-related macular degeneration (“wet AMD”). In September 2012, the Company received marketing approval from the FDA for EYLEA Injection for the treatment of macular edema following central retinal vein occlusion ("CRVO"). EYLEA net product sales totaled $244.4 million and $561.9 million for the three and nine months ended September 30, 2012, respectively.
     In February 2008, the Company received marketing approval from the FDA for ARCALYST® Injection for Subcutaneous Use for the treatment of Cryopyrin-Associated Periodic Syndromes (“CAPS”). ARCALYST net product sales totaled $4.8 million and $5.5 million for the three months ended September 30, 2012 and 2011, respectively, and $14.7 million and $14.9 million for the nine months ended September 30, 2012 and 2011, respectively.
     The Company sells EYLEA in the United States to three distributors and several specialty pharmacies. The Company sells ARCALYST in the United States to two specialty pharmacies. Under these distribution agreements, the distributors and specialty pharmacies (collectively, the Company’s “customers”) generally take physical delivery of product. For EYLEA, the distributors and specialty pharmacies generally sell the product directly to healthcare providers; whereas for ARCALYST, the specialty pharmacies sell the product directly to patients. The Company records revenue from product sales upon delivery to its customers. For both the three and nine months ended September 30, 2012, the Company recorded 79% of its gross product revenue from sales to Besse Medical, a subsidiary of AmerisourceBergen Corporation.
     Revenue from product sales are recorded net of applicable provisions for prompt pay discounts, rebates and chargebacks under governmental programs (including Medicaid), product returns, distribution-related fees, and other sales-related deductions. The following table summarizes the provisions, and credits/payments, for government rebates and chargebacks, distribution-related fees, and other sales-related deductions; such amounts were not significant as of and for the nine months ended September 30, 2011.
 
Rebates &
Chargebacks
 
Distribution-
Related
Fees
 
Other Sales-
Related
Deductions
 
Total
Balance as of December 31, 2011
$
585

 
$
1,451

 
$
182

 
$
2,218

Provision related to current period sales
10,021

 
31,545

 
2,905

 
44,471

Credits/payments
(7,185
)
 
(16,847
)
 
(1,193
)
 
(25,225
)
Balance as of September 30, 2012
$
3,421

 
$
16,149

 
$
1,894

 
$
21,464


Collaboration Revenue
In August 2012, the FDA approved ZALTRAP® (ziv-aflibercept) Injection for Intravenous Infusion, in combination with 5-fluorouracil, leucovorin, irinotecan (FOLFIRI), for patients with metastatic colorectal cancer (“mCRC”) that is resistant to or has progressed following an oxaliplatin-containing regimen, and Sanofi commenced ZALTRAP sales in the United States. The Company and Sanofi globally collaborate on the development and commercialization of ZALTRAP. Under the terms of the companies' September 2003 collaboration agreement, as amended, Regeneron and Sanofi share co-promotion rights and profits and losses on sales of ZALTRAP in the United States. For the three months ended September 30, 2012, the Company recorded its $7.4 million share of the collaboration's loss in connection with commercialization of ZALTRAP within Sanofi collaboration revenue in the Company's condensed statements of operations and comprehensive income (loss).
In addition, under the terms of the Company's collaboration agreement with Sanofi, the Company earned, and recorded as revenue in the third quarter of 2012, a $50.0 million substantive milestone payment from Sanofi upon FDA approval of ZALTRAP, and such payment was received by the Company in August 2012.
In September 2012, the Japanese Ministry of Health, Labour and Welfare (“MHLW”) approved EYLEA for the treatment of wet AMD. The Company and Bayer HealthCare globally collaborate on the development and commercialization of EYLEA outside of the United States. Under the terms of the companies' collaboration agreement, the Company earned, and recorded as revenue in the third quarter of 2012, a $15.0 million substantive milestone payment from Bayer HealthCare upon receipt of approval from MHLW of EYLEA for wet AMD, and such payment was received by the Company in October 2012. Commercial sales of EYLEA in Japan had not commenced as of the end of the third quarter of 2012.



7

Table of Contents
REGENERON PHARMACEUTICALS, INC.
Notes to Condensed Financial Statements (Unaudited)
(Unless otherwise noted, dollars in thousands, except per share data)

3. Per Share Data
     The Company’s basic net income (loss) per share amounts have been computed by dividing net income (loss) by the weighted average number of shares of Common Stock and Class A Stock outstanding. Net income (loss) per share is presented on a combined basis, inclusive of Common Stock and Class A Stock outstanding, as each class of stock has equivalent economic rights. Diluted net income per share includes the potential dilutive effect of other securities as if such securities were converted or exercised during the period, when the effect is dilutive. For the three and nine months ended September 30, 2011, the Company reported a net loss; therefore, no common stock equivalents were included in the computation of diluted net loss per share for this period, since such inclusion would have been antidilutive. The calculations of basic and diluted net income (loss) per share are as follows:
 
 
Three Months Ended September 30,
 
 
2012
 
2011
Net income (loss) - basic
 
$
191,468

 
$
(62,365
)
Effect of dilutive securities:
 
 
 
 
Convertible senior notes - interest expense related to contractual coupon interest rate and amortization of discount and note issuance costs
 
7,374

 

Net income (loss) - diluted
 
$
198,842

 
$
(62,365
)
 
 
 
 
 
(Shares in thousands)
 
 
 
 
Weighted average shares - basic
 
95,012

 
91,046

Effect of dilutive securities:
 
 
 
 
Stock options
 
14,106

 


Restricted stock
 
797

 


Convertible senior notes
 
4,761

 


Warrants
 
1,154

 


Dilutive potential shares
 
20,818

 

Weighted average shares - diluted
 
115,830

 
91,046

 
 
 
 
 
Net income (loss) per share - basic
 
$
2.02

 
$
(0.68
)
Net income (loss) per share - diluted
 
$
1.72

 
$
(0.68
)
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
 
2012
 
2011
Net income (loss) - basic and diluted
 
$
279,862

 
$
(168,317
)
 
 
 
 
 
(Shares in thousands)
 
 
 
 
Weighted average shares - basic
 
94,349

 
90,215

Effect of dilutive securities:
 
 
 
 
Stock options
 
14,080

 

Restricted stock
 
699

 


Warrants
 
652

 

Dilutive potential shares
 
15,431

 

Weighted average shares - diluted
 
109,780

 
90,215

 
 
 
 
 
Net income (loss) per share - basic
 
$
2.97

 
$
(1.87
)
Net income (loss) per share - diluted
 
$
2.55

 
$
(1.87
)

8

Table of Contents
REGENERON PHARMACEUTICALS, INC.
Notes to Condensed Financial Statements (Unaudited)
(Unless otherwise noted, dollars in thousands, except per share data)



Shares which have been excluded from the September 30, 2012 and 2011 diluted per share amounts because their effect would have been antidilutive, include the following (shares in thousands):

 
 
Three Months Ended September 30,
 
 
2012
 
2011
Stock options
 
175

 
20,395

Restricted stock
 


 
854

Warrants
 
3,607

 


 
 
 
 
 
 
 
Nine Months Ended September 30,
 
 
2012
 
2011
Stock options
 
91

 
21,239

Restricted stock
 

 
848

Convertible senior notes
 
4,761

 

Warrants
 
4,109

 



4. Statement of Cash Flows
     Supplemental disclosure of non-cash investing and financing activities:
    Included in accounts payable and accrued expenses at September 30, 2012 and December 31, 2011 were $7.0 million and $6.2 million, respectively, of accrued capital expenditures. Included in accounts payable and accrued expenses at September 30, 2011 and December 31, 2010 were $4.9 million and $10.7 million, respectively, of accrued capital expenditures. In addition, during the nine months ended September 30, 2012, the Company incurred non-cash charges of $2.7 million in connection with disposals and retirements of fixed assets.
     Included in marketable securities at September 30, 2012 and December 31, 2011 were $1.7 million and $0.7 million, respectively, of accrued interest income. Included in marketable securities at September 30, 2011 and December 31, 2010 were $1.1 million and $1.4 million, respectively, of accrued interest income.

5. Marketable Securities
     Marketable securities at September 30, 2012 and December 31, 2011 consisted of debt securities, as detailed below, and equity securities. The aggregate fair value of the equity securities was $2.5 million and $3.0 million at September 30, 2012 and December 31, 2011, respectively, and the aggregate cost basis was $4.0 million at both September 30, 2012 and December 31, 2011. The Company also held restricted marketable securities at both September 30, 2012 and December 31, 2011, which consisted of debt securities, as detailed below, that collateralize letters of credit and lease obligations.
     The following tables summarize the amortized cost basis of debt securities included in marketable securities, the aggregate fair value of those securities, and gross unrealized gains and losses on those securities at September 30, 2012 and December 31, 2011. The Company classifies its debt securities, other than mortgage-backed securities, based on their contractual maturity dates. Maturities of mortgage-backed securities have been estimated based primarily on repayment characteristics and experience of the senior tranches that the Company holds. The debt securities listed at September 30, 2012, excluding mortgage-backed securities, mature at various dates through August 2015. The mortgage-backed securities listed at September 30, 2012 mature at various dates through April 2028.



9

Table of Contents
REGENERON PHARMACEUTICALS, INC.
Notes to Condensed Financial Statements (Unaudited)
(Unless otherwise noted, dollars in thousands, except per share data)

 
 
Amortized
 
Unrealized
 
Fair
At September 30, 2012
 
Cost Basis
 
Gains
 
Losses
 
Value
Unrestricted
 
 
 
 
 
 
 
 
Maturities within one year:
 
 
 
 
 
 
 
 
U.S. government obligations
 
$
76,443

 
$
84

 
$
(1
)
 
$
76,526

U.S. government guaranteed corporate bonds
 
57,963

 
18

 
(1
)
 
57,980

Municipal bonds
 
9,052

 


 

 
9,052

 
 
143,458

 
102

 
(2
)
 
143,558

Maturities after one year through five years:
 
 
 
 
 
 
 
 
U.S. government obligations
 
291,751

 
695

 
(9
)
 
292,437

Municipal bonds
 
17,530

 
2

 
(7
)
 
17,525

 
 
309,281

 
697

 
(16
)
 
309,962

Maturities after five years through ten years:
 
 
 
 
 
 
 
 
Mortgage-backed securities
 
157

 

 
(66
)
 
91

 
 
452,896

 
799

 
(84
)
 
453,611

Restricted
 
 
 
 
 
 
 
 
Maturities within one year:
 
 
 
 
 
 
 
 
U.S. government obligations
 
4,248

 
4

 

 
4,252

 
 
 
 
 
 
 
 
 
Maturities after one year through five years:
 
 
 
 
 
 
 
 
U.S. government obligations
 
3,767

 
9

 

 
3,776

 
 
8,015

 
13

 

 
8,028

 
 
$
460,911

 
$
812

 
$
(84
)
 
$
461,639



10

Table of Contents
REGENERON PHARMACEUTICALS, INC.
Notes to Condensed Financial Statements (Unaudited)
(Unless otherwise noted, dollars in thousands, except per share data)

 
 
Amortized
 
Unrealized
 
Fair
At December 31, 2011
 
Cost Basis
 
Gains
 
(Losses)
 
Value
Unrestricted
 
 
 
 
 
 
 
 
Maturities within one year:
 
 
 
 
 
 
 
 
U.S. government obligations
 
$
12,025

 
$
42

 

 
$
12,067

U.S. government guaranteed corporate bonds
 
15,263

 
53

 

 
15,316

U.S. government guaranteed collateralized mortgage obligations
 
623

 

 
$
(1
)
 
622

Municipal bonds
 
15,314

 
13

 
(1
)
 
15,326

 
 
43,225

 
108

 
(2
)
 
43,331

Maturities after one year through five years:
 
 
 
 
 
 
 
 
U.S. government obligations
 
272,433

 
400

 
(81
)
 
272,752

Mortgage-backed securities
 
104

 

 
(76
)
 
28

 
 
272,537

 
400

 
(157
)
 
272,780

Maturities after five years through ten years:
 
 
 
 
 
 
 
 
Mortgage-backed securities
 
164

 

 
(77
)
 
87

 
 
315,926

 
508

 
(236
)
 
316,198

Restricted
 
 
 
 
 
 
 
 
Maturities within one year:
 
 
 
 
 
 
 
 
U.S. government obligations
 
3,347

 
10

 

 
3,357

 
 
 
 
 
 
 
 
 
Maturities after one year through five years:
 
 
 
 
 
 
 
 
U.S. government obligations
 
2,572

 
11

 

 
2,583

 
 
5,919

 
21

 

 
5,940

 
 
$
321,845

 
$
529

 
$
(236
)
 
$
322,138


     At September 30, 2012 and December 31, 2011, marketable securities included an additional unrealized loss of $1.5 million and $1.0 million, respectively, related to one equity security in the Company’s marketable securities portfolio.
     The following table shows the fair value of the Company’s marketable securities that have unrealized losses and that are deemed to be only temporarily impaired, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, at September 30, 2012 and December 31, 2011.


11

Table of Contents
REGENERON PHARMACEUTICALS, INC.
Notes to Condensed Financial Statements (Unaudited)
(Unless otherwise noted, dollars in thousands, except per share data)

 
Less than 12 Months
 
12 Months or Greater
 
Total
At September 30, 2012
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
Unrestricted
 
 
 
 
 
 
 
 
 
 
 
U.S. government obligations
$
27,033

 
$
(10
)
 

 

 
$
27,033

 
$
(10
)
U.S. government guaranteed corporate bonds
25,411

 
(1
)
 

 

 
25,411

 
(1
)
Municipal bonds
11,073

 
(7
)
 


 


 
11,073

 
(7
)
Equity security


 


 
$
2,543

 
$
(1,501
)
 
2,543

 
(1,501
)
Mortgage-backed securities

 

 
91

 
(66
)
 
91

 
(66
)
 
$
63,517

 
$
(18
)
 
$
2,634

 
$
(1,567
)
 
$
66,151

 
$
(1,585
)
 
 
 
 
 
 
 
 
 
 
 
 
At December 31, 2011
 
 
 
 
 
 
 
 
 
 
 
Unrestricted
 
 
 
 
 
 
 
 
 
 
 
U.S. government obligations
$
103,529

 
$
(81
)
 

 

 
$
103,529

 
$
(81
)
U.S. government guaranteed collateralized mortgage obligations
623

 
(1
)
 

 

 
623

 
(1
)
Municipal bonds
4,603

 
(1
)
 

 

 
4,603

 
(1
)
Equity security
3,019

 
(1,025
)
 

 

 
3,019

 
(1,025
)
Mortgage-backed securities

 

 
$
116

 
$
(152
)
 
116

 
(152
)
 
$
111,774

 
$
(1,108
)
 
$
116

 
$
(152
)
 
$
111,890

 
$
(1,260
)

     Realized gains and losses are included as a component of investment income. For the three and nine months ended September 30, 2012 and 2011, total realized gains and losses on sales of marketable securities were not material.



12

Table of Contents
REGENERON PHARMACEUTICALS, INC.
Notes to Condensed Financial Statements (Unaudited)
(Unless otherwise noted, dollars in thousands, except per share data)

6. Fair Value Measurements
     The Company’s assets that are measured at fair value on a recurring basis, at September 30, 2012 and December 31, 2011, consist of the following:
 
 
 
Fair Value Measurements at Reporting Date Using
At September 30, 2012
Fair Value
 
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Unrestricted
 
 
 
 
 
 
 
Available-for-sale marketable securities:
 
 
 
 
 
 
 
U.S. government obligations
$
368,963

 


 
$
368,963

 

U.S. government guaranteed corporate bonds
57,980

 


 
57,980

 

Municipal bonds
26,577

 


 
26,577

 

Mortgage-backed securities
91

 


 
91

 

Equity security
2,543

 
$
2,543

 

 

 
456,154

 
2,543

 
453,611

 

 
 
 
 
 
 
 
 
Restricted
 
 
 
 
 
 
 
Available-for-sale marketable securities:
 
 
 
 
 
 
 
U.S. government obligations
8,028

 


 
8,028

 

 
$
464,182

 
$
2,543

 
$
461,639

 

 
 
 
 
 
 
 
 
At December 31, 2011
 
 
 
 
 
 
 
Unrestricted
 
 
 
 
 
 
 
Available-for-sale marketable securities:
 
 
 
 
 
 
 
U.S. government obligations
$
284,819

 


 
$
284,819

 

U.S. government guaranteed corporate bonds
15,316

 


 
15,316

 

U.S. government guaranteed collateralized mortgage obligations
622

 


 
622

 

Municipal bonds
15,326

 


 
15,326

 

Mortgage-backed securities
115

 


 
115

 

Equity security
3,019

 
$
3,019

 


 

 
319,217

 
3,019

 
316,198

 

 
 
 
 
 
 
 
 
Restricted
 
 
 
 
 
 
 
Available-for-sale marketable securities:
 
 
 
 
 
 
 
U.S. government obligations
5,940

 


 
5,940

 

 
$
325,157

 
$
3,019

 
$
322,138

 



13

Table of Contents
REGENERON PHARMACEUTICALS, INC.
Notes to Condensed Financial Statements (Unaudited)
(Unless otherwise noted, dollars in thousands, except per share data)

     Marketable securities included in Level 2 were valued using a market approach utilizing prices and other relevant information, such as interest rates, yield curves, prepayment speeds, loss severities, credit risks and default rates, generated by market transactions involving identical or comparable assets. The Company considers market liquidity in determining the fair value for these securities. The Company did not record any charges for other-than-temporary impairment of its Level 2 marketable securities during the three and nine months ended September 30, 2012 and 2011.
     The Company holds one Level 3 marketable security, which had a fair value of $0 at September 30, 2012 and December 31, 2011. This Level 3 security was valued using information provided by the Company’s investment advisors and other sources, including quoted bid prices which took into consideration the security’s lack of liquidity. There were no purchases, sales, or maturities of Level 3 marketable securities and no unrealized gains or losses related to Level 3 marketable securities for the three and nine months ended September 30, 2012 and 2011. There were no transfers of marketable securities between Levels 1, 2, or 3 classifications during the three and nine months ended September 30, 2012 and 2011.
     As of September 30, 2012, the Company had $400.0 million in aggregate principal amount of 1.875% convertible senior notes that will mature on October 1, 2016 unless earlier converted or repurchased. The fair value of the outstanding convertible senior notes was estimated to be $763.9 million as of September 30, 2012, and was determined based on quoted market rates.

7. Inventory
     Inventories as of September 30, 2012 and December 31, 2011, which were included in prepaid expenses and other current assets in the Company's condensed balance sheets, consist of the following:
 
September 30,
2012
 
December 31,
2011
Raw materials
$
6,553

 
$
4,666

Work in process
18,580

 
10,806

Finished goods
4,437

 
1,142

 
$
29,570

 
$
16,614


     For the three and nine months ended September 30, 2012, cost of goods sold included inventory write-downs and reserves totaling $0.2 million and $8.6 million, respectively. For the three and nine months ended September 30, 2011, there were no inventory write-downs or reserves included in cost of goods sold.

8. Accounts Payable and Accrued Expenses
     Accounts payable and accrued expenses as of September 30, 2012 and December 31, 2011 consist of the following:
 
September 30,
2012
 
December 31,
2011
Accounts payable
$
21,943

 
$
27,736

Accrued payroll and related costs
46,620

 
42,835

Accrued clinical trial expense
11,502

 
9,850

Accrued sales-related deductions and royalties
21,961

 
3,947

Other accrued expenses and liabilities
22,198

 
11,257

 
$
124,224

 
$
95,625



14

Table of Contents

9. Income Taxes
     For the three and nine months ended September 30, 2012, income tax expense relating to the Company’s pre-tax income was fully offset by a reversal of a portion of the Company’s valuation allowance. The Company continues to recognize a full valuation allowance against its net operating loss carry-forward and other deferred tax assets since the Company has an extended history of losses. On a quarterly basis, the Company re-assesses the need for a valuation allowance against its deferred tax assets based upon various factors including its historical earnings trends to date, demonstration of sustained profitability, and forecasts of future operating results and utilization of net operating losses and tax credits prior to their expiration. Although objective and verifiable negative evidence continues to outweigh positive evidence, the Company is experiencing increased sales and profitability resulting from the approval of EYLEA. To the extent this trend continues, it is possible the Company's conclusion regarding the need for a full valuation allowance could change, resulting in the reversal of some or all of the valuation allowance in the near-term.
     For the three and nine months ended September 30, 2011, the Company incurred a net loss for tax purposes and recognized a full valuation allowance against deferred tax assets. For the three and nine months ended September 30, 2011, the Company recognized an income tax expense of $0.6 million and an income tax benefit of $0.5 million, respectively, in connection with the net tax effect of the change in the Company’s unrealized gain/(loss) on “available-for-sale” marketable securities, which is included in other comprehensive income (loss).

10. Legal Matters
     From time to time, the Company is a party to legal proceedings in the course of the Company’s business. The Company does not expect any such current ordinary course legal proceedings to have a material adverse effect on the Company’s business or financial condition. Costs associated with the Company’s involvement in legal proceedings are expensed as incurred.
     Genentech Patent Litigation
     The Company is aware of issued patents and pending patent applications owned by Genentech that claim certain chimeric VEGF receptors. The Company does not believe that ZALTRAP or EYLEA infringe any valid claim in these patents or patent applications. The Company is involved in five patent litigations with Genentech, two in the United States and three in Europe. In November 2010, the Company commenced a lawsuit against Genentech in the U.S. District Court for the Southern District of New York (the “Court”), seeking a declaratory judgment that no activities relating to the Company’s VEGF Trap infringe any valid claim of certain Genentech patents referred to as the Davis-Smyth patents (the “First Davis-Smyth Case”). Genentech answered the complaint and asserted counterclaims that the Company’s prior or planned activities relating to VEGF Trap have infringed or will infringe claims of four of the five Davis-Smyth patents and requested a judgment against the Company for damages, including for willful infringement, and other relief as the Court deems appropriate.
     On December 31, 2011, the Company entered into a Non-Exclusive License and Partial Settlement Agreement with Genentech (the “Genentech Agreement”) that covers making, using, and selling EYLEA in the United States for the prevention and treatment of human eye diseases and disorders in the United States, and ends the litigation relating to those matters. Under the Genentech Agreement, the Company received a non-exclusive license to the Davis-Smyth patents, and certain other technology patents owned or co-owned by Genentech. The Genentech Agreement does not cover any non-U.S. patent rights or non-U.S. patent disputes, and does not cover any use of aflibercept other than for prevention and treatment of human eye diseases and disorders in the United States. The First Davis-Smyth Case is continuing with respect to matters not covered by the Genentech Agreement. The Genentech Agreement provides for the Company to make payments to Genentech based on U.S. sales of EYLEA through May 7, 2016, the date the Davis-Smyth patents expire. As required by the Genentech Agreement, in the third quarter of 2012, the Company made a lump-sum payment of $60.0 million when cumulative U.S. sales of EYLEA reached $400 million. The Company will also pay royalties of 4.75% on cumulative U.S. sales of EYLEA between $400 million and $3 billion and 5.5% on any cumulative U.S. sales of EYLEA over $3 billion. As a result of the Genentech Agreement, on January 17, 2012, Genentech filed a second amended answer and counterclaim in the First Davis-Smyth Case, in which it amended its counterclaims alleging infringement of four of the five Davis-Smyth patents. On December 23, 2011, Genentech initiated a related case in the Court against Regeneron and Sanofi alleging infringement of four of the five Davis-Smyth Patents by activities relating to VEGF Trap (but excluding EYLEA) (the “Second Davis-Smyth Case”). As in the First Davis-Smyth Case, in the new complaint Genentech requests a judgment against the Company for damages, including for willful infringement, and other relief as the Court deems appropriate.

15

Table of Contents
REGENERON PHARMACEUTICALS, INC.
Notes to Condensed Financial Statements (Unaudited)
(Unless otherwise noted, dollars in thousands, except per share data)

     The Company believes Genentech's remaining claims in the First Davis Smyth Case and the Second Davis Smyth Case are without merit and intends to continue to defend against all of Genentech’s remaining claims vigorously. As this litigation is at an early stage, at this time the Company is not able to predict the probability of the outcome or an estimate of loss, if any, related to these matters.
     The Company has initiated patent-related actions against Genentech in Germany, the United Kingdom, and Italy relating in each case to a patent that expires on October 28, 2012. The Company may initiate other actions in other countries outside the United States, which could have similar or other adverse outcomes that would materially harm its business and which, irrespective of the outcomes, may also entail significant costs and expenses. In the United Kingdom, an adverse decision dated March 22, 2012 is under appeal. This decision found the designation of European patent EP 1 238 986 in the United Kingdom to be valid and potential acts relating to VEGF Trap-Eye in the United Kingdom before expiration of the patent on October 28, 2012 to infringe this patent.

11. Recently Issued Accounting Standards
Presentation of comprehensive income
     In June and December 2011, the Financial Accounting Standards Board (“FASB”) amended its authoritative guidance on the presentation of comprehensive income. Under the amendments, an entity has the option to present comprehensive income and net income either in a single continuous statement or in two separate but consecutive statements. This amendment, therefore, eliminated the option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. The amendment did not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The Company adopted this amended guidance for the fiscal year beginning January 1, 2012. As this guidance relates to presentation only, the adoption of this guidance did not have any other effect on the Company's financial statements.

16

Table of Contents

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
     The discussion below contains forward-looking statements that involve risks and uncertainties relating to future events and the future financial performance of Regeneron Pharmaceuticals, Inc., and actual events or results may differ materially from these forward-looking statements. These statements concern, and these risks and uncertainties include, among others, the nature, timing, and possible success and therapeutic applications of ARCALYST®, EYLEA®, and ZALTRAP® and our product candidates, potential new indications for marketed products, and research and clinical programs now underway or planned; the likelihood and timing of possible regulatory approval and commercial launch of our late-stage product candidates and new indications for marketed products; determinations by regulatory and administrative governmental authorities which may delay or restrict our ability to continue to develop or commercialize ARCALYST, EYLEA, and ZALTRAP and other product and drug candidates and possible new indications for marketed products; the ability for us to manufacture and manage supply chains for multiple products and product candidates; competing drugs that may be superior to ARCALYST, EYLEA, and ZALTRAP and our product and drug candidates and possible new indications for marketed products; uncertainty of market acceptance of ARCALYST, EYLEA, and ZALTRAP and our product and drug candidates and possible new indications for marketed products; coverage and reimbursement determinations by third-party payers, including Medicare and Medicaid; unforeseen safety issues resulting from the administration of products and product candidates in patients; unanticipated expenses; the costs of developing, producing, and selling products; the ability for us to meet any of our financial projections or guidance and changes to the assumptions underlying those projections or guidance; the potential for the reversal of tax valuation allowances; the potential for any license or collaboration agreement, including our agreements with Sanofi and Bayer HealthCare LLC, to be canceled or terminated without any further product success; and risks associated with third-party intellectual property and pending or future litigation relating thereto. These statements are made by us based on management's current beliefs and judgment. In evaluating such statements, shareholders and potential investors should specifically consider the various factors identified under the caption “Risk Factors” which could cause actual events and results to differ materially from those indicated by such forward-looking statements. We do not undertake any obligation to update publicly any forward-looking statement, whether as a result of new information, future events, or otherwise, except as required by law.
Overview
     Regeneron Pharmaceuticals, Inc. is a fully integrated biopharmaceutical company that discovers, invents, develops, manufactures, and commercializes medicines for the treatment of serious medical conditions. We currently have three marketed products in the United States:
EYLEA® (aflibercept) Injection, known in the scientific literature as VEGF Trap-Eye, which is available in the United States for the treatment of neovascular age-related macular degeneration (wet AMD) and macular edema following central retinal vein occlusion (CRVO).
ARCALYST® (rilonacept) Injection for Subcutaneous Use, which is available in the United States for the treatment of Cryopyrin-Associated Periodic Syndromes (CAPS), including Familial Cold Auto-inflammatory Syndrome (FCAS) and Muckle-Wells Syndrome (MWS), in adults and children 12 and older.
ZALTRAP® (ziv-aflibercept) Injection for Intravenous Infusion, known in the scientific literature as VEGF Trap, which is available in the United States for treatment, in combination with 5-fluorouracil, leucovorin, irinotecan (FOLFIRI), of patients with metastatic colorectal cancer (mCRC) that is resistant to or has progressed following an oxaliplatin-containing regimen. ZALTRAP is co-commercialized with Sanofi.
    Net product sales of EYLEA totaled $244.4 million in the third quarter and $561.9 million in the first nine months of 2012, and net product sales of ARCALYST totaled $4.8 million in the third quarter and $14.7 million in the first nine months of 2012. In addition, ZALTRAP product sales, which are recorded by Sanofi, commenced in the United States in August 2012 and for the third quarter of 2012, net product sales of ZALTRAP were $8.3 million.
In the third quarter of 2012, we earned a $50.0 million substantive milestone payment from Sanofi upon U.S. Food and Drug Administration (FDA) approval of ZALTRAP. In addition, we earned a $15.0 million substantive milestone payment from Bayer HealthCare in the third quarter of 2012 upon receipt of marketing approval in Japan for EYLEA for the treatment of wet AMD.
Net income was $191.5 million in the third quarter and $279.9 million in the first nine months of 2012. Our operating results over the next several years will be largely dependent upon our ability to continue to successfully commercialize EYLEA and the market penetration it achieves.
     

17

Table of Contents

We have 12 product candidates in clinical development, all of which were discovered in our research laboratories. Our Trap-based programs are:
EYLEA, which is in clinical trials for the treatment of diabetic macular edema (DME) and macular edema following branch retinal vein occlusion (BRVO), in collaboration with Bayer HealthCare; and
ZALTRAP, which is being studied in combination with our angiopoietin-2 inhibitor (REGN910) in oncology in collaboration with Sanofi.
     Our antibody-based clinical programs include ten fully human monoclonal antibodies. The following six are being developed in collaboration with Sanofi:
Sarilumab (REGN88), an antibody to the interleukin-6 receptor (IL-6R), which is being developed in rheumatoid arthritis;
REGN727, an antibody to Proprotein Convertase Subtilisin/Kexin type 9 (PCSK9), which is being developed for low-density lipoprotein (LDL) cholesterol reduction;
REGN668, an antibody to the interleukin-4 receptor (IL-4R), which is being developed in atopic dermatitis and eosinophilic asthma;
REGN421, an antibody to Delta-like ligand-4 (Dll4), a novel angiogenesis target, which is being developed in oncology;
REGN910, an antibody to Angiopoietin-2 (ANG2), another novel angiogenesis target, which is being developed in oncology; and
REGN1033, an antibody to myostatin (GDF8), which is in clinical development.
     In addition, we are developing the following four antibodies independently:
REGN475, an antibody to Nerve Growth Factor (NGF), which is being developed for the treatment of pain (currently on clinical hold);
REGN846, an antibody in clinical development against an undisclosed target, which is being developed in atopic dermatitis;
REGN1154, an antibody in clinical development against an undisclosed target; and
REGN1400, an antibody to ErbB3, which is being developed in oncology.
     Our core business strategy is to maintain a strong foundation in basic scientific research and discovery-enabling technologies, and to combine that foundation with our clinical development, manufacturing, and commercial capabilities. Our long-term objective is to build a successful, integrated, multi-product biopharmaceutical company that provides patients and medical professionals with innovative options for preventing and treating human diseases.
     We believe that our ability to develop product candidates is enhanced by the application of our VelociSuiteTM technology platforms. Our discovery platforms are designed to identify specific proteins of therapeutic interest for a particular disease or cell type and validate these targets through high-throughput production of genetically modified mice using our VelociGene® technology to understand the role of these proteins in normal physiology, as well as in models of disease. Our human monoclonal antibody technology (VelocImmune®) and cell line expression technologies (VelociMab®) may then be utilized to discover and produce new product candidates directed against the disease target. Our antibody product candidates currently in clinical trials were developed using VelocImmune. Under the terms of our antibody collaboration with Sanofi, which was expanded during 2009, we plan to advance a total of 20 to 30 candidates into clinical development over the life of the agreement. We continue to invest in the development of enabling technologies to assist in our efforts to identify, develop, manufacture, and commercialize new product candidates.
Commercial Products:
EYLEA (aflibercept) Injection – Ophthalmologic Diseases
     In November 2011, we received U.S. marketing approval from the FDA for EYLEA Injection for the treatment of patients with wet AMD. On September 21,2012, we received U.S. marketing approval from the FDA for EYLEA Injection for the treatment of macular edema following CRVO. Net product sales of EYLEA were $244.4 million in the third quarter and $561.9 million in the first nine months of 2012.

18

Table of Contents

Vascular Endothelial Growth Factor (VEGF) is a naturally occurring protein in the body. Its normal role in a healthy organism is to trigger formation of new blood vessels (angiogenesis) supporting the growth of the body's tissues and organs. However, in certain diseases, such as wet AMD, it is also associated with the growth of abnormal new blood vessels in the eye, which exhibit abnormal increased permeability that leads to edema. Scarring and loss of fine-resolution central vision often results. In CRVO, a blockage occurs in the main blood vessel that transports deoxygenated blood away from the retina. VEGF levels are elevated in response, contributing to macular edema.
EYLEA is a recombinant fusion protein, consisting of portions of human VEGF receptors 1 and 2 extracellular domains fused to the Fc portion of human IgG1 and formulated as an iso-osmotic solution for intravitreal administration. EYLEA acts as a soluble decoy receptor that binds VEGF-A and placental growth factor (PlGF) and thereby can inhibit the binding and activation of these cognate VEGF receptors. EYLEA is specially purified and contains iso-osmotic buffer concentrations, allowing for injection into the eye.
     We are collaborating with Bayer HealthCare on the global development of EYLEA outside the United States. In 2012, Bayer HealthCare has received marketing approval for EYLEA for the treatment of wet AMD in Australia in February, in Colombia in June, in Japan in September, and in Brazil in October. In September 2012, the European Committee for Medicinal Products for Human Use (CHMP) recommended approval of EYLEA for wet AMD to the European Medicines Agency (EMA) and final approval is anticipated by the end of the year. Bayer HealthCare expects to launch EYLEA in all these countries beginning later this year and continuing into 2013, and has additional regulatory applications pending in other countries.
Bayer HealthCare also plans to submit applications for marketing authorization for the treatment of macular edema following CRVO in Japan by the end of 2012 and in Europe shortly following receipt of approval in wet AMD.
Bayer HealthCare will market EYLEA outside the United States, where, for countries other than Japan, the companies will share equally the profits and losses from sales of EYLEA. In Japan, we are entitled to a royalty on sales of EYLEA, as described below. We maintain exclusive rights to EYLEA in the United States and are entitled to all profits from any such sales.
ZALTRAP (ziv-aflibercept) Injection for Intravenous Infusion - Oncology
In August 2012, the FDA approved ZALTRAP Injection for Intravenous Infusion in combination with 5-fluorouracil, leucovorin, irinotecan (FOLFIRI), for patients with mCRC that is resistant to or has progressed following an oxaliplatin-containing regimen. Net product sales for ZALTRAP recorded by Sanofi were $8.3 million in the third quarter of 2012, its first quarter on the market.
ZALTRAP is a fusion protein that is designed to bind all forms of VEGF-A, VEGF-B and P1GF, and prevent their interaction with cell surface receptors. VEGF-A (and to a lesser degree, P1GF) is required for the growth of new blood vessels (a process known as angiogenesis) that are needed for tumors to grow.
Regulatory applications for marketing authorization of ZALTRAP for the treatment of previously treated mCRC patients in the European Union and other countries have also been submitted and are currently under review by the respective regulatory agencies.

We and Sanofi globally collaborate on the development and commercialization of ZALTRAP, as described in the ZALTRAP "Clinical Programs" section below.

ARCALYST (rilonacept) Injection – CAPS
     Net product sales of ARCALYST (rilonacept) for the treatment of CAPS were $4.8 million in the third quarter of 2012, compared to $5.5 million in the same quarter of 2011. ARCALYST net product sales in the first nine months of 2012 were $14.7 million, compared to $14.9 million in the first nine months of 2011. We do not expect future net product sales of ARCALYST for the treatment of CAPS to be significant.
     ARCALYST is a protein-based product designed to bind the interleukin-1 (called IL-1) cytokine and prevent its interaction with cell surface receptors. ARCALYST is available by prescription in the United States for the treatment of CAPS, including FCAS and MWS in adults and children 12 and older. CAPS are a group of rare, inherited, auto-inflammatory conditions characterized by life-long, recurrent symptoms of rash, fever/chills, joint pain, eye redness/pain, and fatigue. Intermittent, disruptive exacerbations or flares can be triggered at any time by exposure to cooling temperatures, stress, exercise, or other unknown stimuli.



19

Table of Contents

Clinical Programs:
1. EYLEA – Ophthalmologic Diseases
     We, together with our ex-U.S. collaborator Bayer HealthCare, are evaluating EYLEA in Phase 3 programs in patients with DME, macular edema following BRVO, and choroidal neovascularisation (CNV) of the retina as a result of pathologic myopia. Wet AMD, diabetic retinopathy (which includes DME), and retinal vein occlusion are three of the leading causes of adult blindness in the developed world. In these conditions, severe visual loss is caused by neovascular proliferation and/or retinal edema.
In the second quarter of 2011, we and Bayer HealthCare initiated Phase 3 studies to evaluate the safety and efficacy of EYLEA in DME. We are conducting one of these studies, VISTA-DME, in the United States. Bayer HealthCare is conducting the second study, VIVID-DME, in Europe, Japan, and Australia. Both the VISTA-DME and VIVID-DME trials are fully enrolled. An additional Phase 3 safety study in Japan (VIVID-Japan) was initiated in the first quarter of 2012 and is required for approval in Japan.
     In the first quarter of 2011, we and Bayer HealthCare initiated a Phase 3 trial in Asia in collaboration with the Singapore Eye Research Institute (SERI) investigating the efficacy and safety of EYLEA in patients with CNV of the retina as a result of pathologic myopia. This study is fully enrolled.
     In the fourth quarter of 2011, we and Bayer HealthCare initiated a Phase 3 trial in China evaluating the efficacy and safety of EYLEA in wet AMD (SIGHT). The trial is expected to include approximately 300 patients.
     In the second quarter of 2012, we initiated a multinational study of EYLEA in patients with macular edema following BRVO (VIBRANT).
In the fourth quarter of 2012, we expect to initiate a study to fulfill a post-marketing requirement by the FDA. RE-VIEW (Rigorous Evaluation of Vision and safety with Intravitreal aflibercept injection dosed Every 8 Weeks over 2 years in wet AMD), will evaluate the effect of EYLEA on corneal endothelium.
Collaboration with Bayer HealthCare
     In October 2006, we entered into a license and collaboration agreement with Bayer HealthCare for the global development and commercialization outside the United States of EYLEA. Under the agreement, we and Bayer HealthCare collaborate on, and share the costs of, the development of EYLEA through an integrated global plan. Bayer HealthCare will market EYLEA outside the United States, where, for countries other than Japan, the companies will share equally in profits and losses from any future sales of EYLEA. In May 2012, Bayer HealthCare’s Japanese subsidiary, Bayer Yakuhin, Ltd., and Santen Pharmaceutical Co., Ltd. entered into an agreement to co-promote EYLEA in Japan. In conjunction with this agreement, we and Bayer HealthCare amended our existing global license and collaboration agreement for EYLEA to convert the 50/50 profit share for Japan into a royalty agreement under which we are entitled to receive a tiered royalty of between 33.5% and 40.0% of EYLEA annual net sales in Japan. In certain specified circumstances, the Japan royalty may revert to a profit share arrangement.
     Commencing on the first commercial sale of EYLEA in a major market country outside the United States, we will be obligated to reimburse Bayer HealthCare for 50% of the development costs that it has incurred under the agreement from our share of the collaboration profits. The reimbursement payment in any quarter will equal 5% of the then outstanding repayment obligation, but never more than our share of the collaboration profits in the quarter unless we elect to reimburse Bayer HealthCare at a faster rate. Within the United States, we retain exclusive commercialization rights to EYLEA and are entitled to all profits from any such sales. We have earned $75 million in development milestone payments, and can earn up to $35 million in future milestone payments related to marketing approvals of EYLEA in major market countries outside the United States. We can also earn up to $135 million in sales milestone payments if total annual sales of EYLEA outside the United States achieve certain specified levels starting at $200 million.
2. ZALTRAP (ziv-aflibercept) – Oncology
    During the third quarter of 2012, we and Sanofi initiated a phase 1b study of a combination of ZALTRAP and our angiopoietin-2 inhibitor (REGN910) in patients with advanced solid malignancies.
     In April 2012, we and Sanofi announced that the Phase 3 VENICE trial for metastatic androgen-independent prostate cancer in combination with docetaxel/prednisone did not meet its primary endpoint.



20

Table of Contents

ZALTRAP Collaboration with Sanofi
We and Sanofi globally collaborate on the development and commercialization of ZALTRAP. Under the terms of our September 2003 collaboration agreement, as amended, we and Sanofi will share co-promotion rights and share profits and losses from commercialization of ZALTRAP outside of Japan. In Japan, we are entitled to a royalty of approximately 35% on sales of ZALTRAP, subject to certain potential adjustments. We may also receive additional milestone payments upon receipt of additional specified marketing approvals.
Under the ZALTRAP collaboration agreement, as amended, agreed upon worldwide development expenses incurred by both companies during the term of the agreement are funded by Sanofi. If the collaboration becomes profitable, we will be obligated to reimburse Sanofi out of our share of ZALTRAP profits for 50% of the development expenses that they funded. The reimbursement payment in any quarter will equal 5% of the then outstanding repayment obligation, but never more than our share of the ZALTRAP profits in the quarter unless we elect to reimburse Sanofi at a faster rate. As a result, we expect that, initially, our share of any ZALTRAP profits will be diverted to reimburse Sanofi for this repayment obligation.
3. ARCALYST (rilonacept) – Inflammatory Diseases
     ARCALYST was being developed for the prevention of gout flares in patients initiating uric acid-lowering therapy. The Phase 3 program consisted of three studies: PRE-SURGE 1, PRE-SURGE 2, and RE-SURGE, as well as a long-term safety study (UPSURGE). Based on the positive results of these studies, we submitted a supplemental BLA (sBLA) in the fourth quarter of 2011 for U.S. regulatory approval of ARCALYST for the prevention of gout flares in patients initiating uric acid-lowering therapy. In July 2012, the FDA issued a Complete Response Letter for the sBLA, which stated that the FDA could not approve the application in its current form. The FDA requested additional clinical data, as well as additional Chemistry, Manufacturing, and Controls (CMC) information related to a proposed new dosage form. The FDA's action does not impact the approved indication of ARCALYST for the treatment of CAPS. We have discontinued development of ARCALYST in gout.
4. Sarilumab (REGN88; IL-6R Antibody) for inflammatory diseases
IL-6 is a key cytokine involved in the pathogenesis of rheumatoid arthritis, causing inflammation and joint destruction. A therapeutic antibody to IL-6R, ACTEMRA® (tocilizumab), a registered trademark of Chugai Seiyaku Kabushiki Kaisha, has been approved for the treatment of rheumatoid arthritis.
    Sarilumab is a fully human monoclonal antibody to IL-6R generated using our VelocImmune technology. In July 2011, we and Sanofi announced that in the Phase 2b stage of the SARIL-RA-MOBILITY trial in rheumatoid arthritis (RA), patients treated with sarilumab in combination with a standard RA treatment, methotrexate (MTX), achieved a significant and clinically meaningful improvement in signs and symptoms of moderate-to-severe RA compared to patients treated with MTX alone. The primary endpoint of the study was the proportion of patients achieving at least a 20% improvement in RA symptoms (ACR20) after 12 weeks.

During the third quarter of 2011, we and Sanofi initiated the Phase 3 stage of the Phase 2/3 SARIL-RA-MOBILITY study in patients with RA, which is now fully enrolled. This trial will assess the improvement in signs and symptoms at 24 weeks and sarilumab's effect on radiographic progression at one year. In addition, we and Sanofi have initiated a second Phase 3 study, SARIL-RA-TARGET. SARIL-RA-TARGET is a randomized, double-blind, placebo-controlled study evaluating sarilumab in combination with non-biologic, disease-modifying anti-rheumatic drugs (DMARDs) in moderate-to-severe active RA patients with inadequate response to, or intolerant of, one or more tumor necrosis factor alpha (TNF-alpha) inhibitors. Patients who complete SARIL-RA-MOBILITY and SARIL-RA-TARGET are offered enrollment into the ongoing SARIL-RA EXTEND, which is an open-label, long-term safety study of sarilumab.

We and Sanofi plan to initiate additional Phase 3 studies of sarilumab during 2013.
5. REGN727 (PCSK9 Antibody) for LDL cholesterol reduction
     Elevated LDL cholesterol (“bad cholesterol”) level is a validated risk factor leading to cardiovascular disease. Statins are a class of drugs that lower LDL cholesterol by up regulating the expression of the LDL receptor (LDLR), which removes LDL from circulation. PCSK9 is a naturally occurring secreted protein that also modulates LDL cholesterol levels through its interaction with the LDL receptor. In a landmark study published in the New England Journal of Medicine in March 2006, patients with lower than normal PCSK9 levels due to a genetic abnormality not only had significantly lower levels of LDL cholesterol, but also a significant reduction in the risk of coronary heart disease. We used our VelocImmune technology to generate a fully human monoclonal antibody inhibitor of PCSK9, called REGN727, that is intended to lower LDL cholesterol.

21

Table of Contents

REGN727 has been studied in three Phase 2 clinical studies, two in patients with primary hypercholesterolemia and one in patients with heterozygous familial hypercholesterolemia (heFH). In the Phase 2 studies, REGN727 significantly reduced LDL-cholesterol from baseline up to 72% on top of standard of care statin therapy. Consistent and robust reductions in other lipid parameters, including a reduction in lipoprotein-a were also observed. In the Phase 2 program, injection site reactions were the most common adverse events with REGN727. Rare cases of hypersensitivity reaction were also reported. Serious adverse events (SAEs) were reported in 1.8% of patients (5/275) in the active treatment arms and 2.6% of patients (2/77) in the placebo groups.
Data from two Phase 2 trials were presented at the American College of Cardiology (ACC) Annual Meeting in March 2012 and data from one trial was also published in The Journal of the American College of Cardiology. Data from the third Phase 2 trial were published online in The Lancet and also presented at the European Atherosclerosis Society Congress (EAS) in May 2012.
     We and Sanofi initiated a global Phase 3 program (ODYSSEY) for REGN727 in June 2012. The ODYSSEY program will enroll more than 22,000 patients. This includes over ten clinical trials evaluating the effect of REGN727 on lowering LDL cholesterol. The 18,000 patient ODYSSEY OUTCOMES trial, assessing reduction in serious cardiovascular events, and several other trials in the ODYSSEY program, are currently enrolling patients. LDL cholesterol is expected to be the primary efficacy endpoint for regulatory filings. The studies will be conducted in clinical centers around the world including the United States, Canada, Western and Eastern Europe, South America, Australia, and Asia. A Phase 3, long-term safety and tolerability study of REGN727 is ongoing in patients with hypercholesterolemia who are not adequately controlled with their current lipid-modifying therapy.
6. REGN668 (IL-4R Antibody) for allergic and immune conditions
     IL-4R is required for signaling by the cytokines IL-4 and IL-13. Both of these cytokines are critical mediators of immune response, which, in turn, drives the formation of Immunoglobulin E (IgE) antibodies and the development of allergic responses, as well as the atopic state that underlies atopic dermatitis and eosinophilic asthma.
     REGN668 is a fully human monoclonal antibody generated using our VelocImmune technology that is designed to bind to IL-4R. REGN668 is in Phase 2 studies in patients with atopic dermatitis and eosinophilic asthma.
7. REGN421 (Dll4 Antibody) for advanced malignancies
     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. VEGF was the first growth factor shown to be specific for blood vessels, by virtue of having its receptor primarily expressed on blood vessel cells. In the December 21, 2006 issue of the journal Nature, we reported data from a preclinical study demonstrating that blocking an important cell signaling molecule, known as Dll4, inhibited the growth of experimental tumors by interfering with their ability to produce a functional blood supply. The inhibition of tumor growth was seen in a variety of tumor types, including those that were resistant to blockade of VEGF, suggesting a novel anti-angiogenesis therapeutic approach. Moreover, inhibition of tumor growth is enhanced by the combination of Dll4 and VEGF blockade in many preclinical tumor models.
     REGN421 is a fully human monoclonal antibody to Dll4 generated using our VelocImmune technology, and is in Phase 1 clinical development.
8. REGN910 (ANG2 Antibody) for oncology
     The angiopoietins, which were discovered at Regeneron, are ligands for the endothelial cell receptor Tie2 and are essential for vascular development and angiogenesis. Unlike other family members, angiopoietin 2 (ANG2) is strongly upregulated by endothelial cells at sites of angiogenesis and vascular remodeling, including tumors.
     REGN910 is a fully human monoclonal antibody generated using our VelocImmune technology that is designed to block ANG2. REGN910 is in Phase 1 clinical development in oncology.

During the third quarter of 2012, we and Sanofi initiated a Phase 1b study of a combination of ZALTRAP and REGN910 in patients with advanced solid malignancies.
9. REGN1033 (GDF8 Antibody)
In January 2012, we initiated a Phase 1 clinical study for REGN1033, a fully human monoclonal antibody generated using our VelocImmune technology, against myostatin (GDF8).

22

Table of Contents

10. REGN475 (NGF Antibody) for pain
     REGN475 is a fully human monoclonal antibody to NGF, generated using our VelocImmune technology, which is designed to block pain sensitization in neurons. Preclinical experiments indicate that REGN475 specifically binds to and blocks NGF activity and does not bind to or block cell signaling for the closely related neurotrophins NT-3 and BDNF.
     In May 2010, we announced positive results from an interim analysis of a randomized, double-blind, four-arm, placebo-controlled Phase 2 trial in 217 patients with osteoarthritis of the knee. In July 2010, we presented additional results from this trial through 16 weeks.
     In December 2010, the FDA placed REGN475 and other investigational agents targeting NGF on clinical hold after a case of rapidly progressive osteoarthritis leading to joint replacement was seen in another company’s anti-NGF program. At that time, the FDA expressed concern that this case, which followed previously-reported cases of joint replacements in patients on an anti-NGF drug candidate being developed by a different pharmaceutical company, provided evidence to suggest a class effect.
     An FDA Arthritis Advisory Committee met on March 12, 2012 to discuss possible safety issues related to anti-NGF compounds and voted unanimously in favor of continued development of anti-NGF agents in osteoarthritis. The Arthritis Advisory Committee also voted twenty to one in favor for continued development of anti-NGF agents to manage the pain associated with conditions for which there are no agents with demonstrated analgesic efficacy. While the committee's recommendation will be considered by the FDA, it is not binding on the FDA.
     There are currently no ongoing trials with REGN475 that are either enrolling or treating patients, but we are finalizing plans to initiate new trials, subject to FDA approval.
     In February 2012, Sanofi elected not to continue co-development of REGN475, and Regeneron now has sole global rights to REGN475. Under the terms of our agreement, Sanofi remains obligated to fund agreed-upon REGN475 development costs through the end of 2012 and is entitled to receive a mid-single digit royalty on any future sales of REGN475.
11. REGN846
     REGN846 is a fully human monoclonal antibody generated using our VelocImmune technology, against an undisclosed target, and is being evaluated in a Phase 1b study in patients with atopic dermatitis. In July 2011, Sanofi elected not to continue co-development of REGN846, and Regeneron now has sole global rights to REGN846. Under the terms of our agreement, Sanofi remains obligated to fund agreed-upon REGN846 clinical costs through conclusion of a planned proof-of-concept trial and is entitled to receive a mid-single digit royalty on any future sales of REGN846.
12. REGN1154
     REGN1154 is a fully human monoclonal antibody generated using our VelocImmune technology, against an undisclosed target. In March 2012, we initiated a Phase 1 clinical study in Australia. Sanofi decided not to opt-in to the REGN1154 program and we have sole global rights. Under the terms of our agreement, Sanofi is entitled to receive a mid-single digit royalty on any future sales of REGN1154.

13. REGN1400 (ErbB3 Antibody) for oncology

REGN1400 is a fully human monoclonal antibody generated using our VelocImmune technology, against ErbB3. REGN1400 is in Phase 1 clinical development in oncology.

14. REGN728
Development of REGN728, which completed a Phase 1 study against an undisclosed target, has been discontinued.

23

Table of Contents

Research and Development Technologies:
Many proteins that are either on the surface of or secreted by cells play important roles in biology and disease. One way that a cell communicates with other cells is by releasing specific signaling proteins, either locally or into the bloodstream. These proteins have distinct functions and are classified into different “families” of molecules, such as peptide hormones, growth factors, and cytokines. All of these secreted (or signaling) proteins travel to and are recognized by another set of proteins, called “receptors,” which reside on the surface of responding cells. These secreted proteins impact many critical cellular and biological processes, causing diverse effects ranging from the regulation of growth of particular cell types to inflammation mediated by white blood cells. Secreted proteins can at times be overactive and thus result in a variety of diseases. In these disease settings, blocking the action of specific secreted proteins can have clinical benefit. In other cases, proteins on the cell-surface can mediate the interaction between cells, such as the processes that give rise to inflammation and autoimmunity.
     Our scientists have developed two different technologies to design protein therapeutics to block the action of specific cell surface or secreted proteins. The first technology, termed the “Trap” technology, was used to generate our three approved products, ARCALYST, EYLEA, and ZALTRAP. These novel “Traps” are composed of fusions between two distinct receptor components and the constant region of an antibody molecule called the “Fc region,” resulting in high affinity product candidates. VelociSuite is our second technology platform; it is used for discovering, developing, and producing fully human monoclonal antibodies that can address both secreted and cell-surface targets.
VelociSuite
     VelociSuite consists of VelocImmune, VelociGene, VelociMouse®, and VelociMab. The VelocImmune mouse platform is utilized to produce fully human monoclonal antibodies. VelocImmune was generated by exploiting our VelociGene technology (see below), in a process in which six megabases of mouse immune gene loci were replaced, or “humanized,” with corresponding human immune gene loci. VelocImmune mice can be used to generate efficiently fully human monoclonal antibodies to targets of therapeutic interest. VelocImmune and our entire VelociSuite offer the potential to increase the speed and efficiency through which human monoclonal antibody therapeutics may be discovered and validated, thereby improving the overall efficiency of our early stage drug development activities. We are utilizing the VelocImmune technology to produce our next generation of drug candidates for preclinical and clinical development.
     Our VelociGene platform allows custom and precise manipulation of very large sequences of DNA to produce highly customized alterations of a specified target gene, or genes, and accelerates the production of knock-out and transgenic expression models without using either positive/negative selection or isogenic DNA. In producing knock-out models, a color or fluorescent marker may be substituted in place of the actual gene sequence, allowing for high-resolution visualization of precisely where the gene is active in the body during normal body functioning as well as in disease processes. For the optimization of preclinical development and pharmacology programs, VelociGene offers the opportunity to humanize targets by replacing the mouse gene with the human homolog. Thus, VelociGene allows scientists to rapidly identify the physical and biological effects of deleting or over-expressing the target gene, as well as to characterize and test potential therapeutic molecules.
     Our VelociMouse technology platform allows for the direct and immediate generation of genetically altered mice from embryonic stem cells (ES cells), thereby avoiding the lengthy process involved in generating and breeding knockout mice from chimeras. Mice generated through this method are normal and healthy and exhibit a 100% germ-line transmission. Furthermore, mice developed using our VelociMouse technology are suitable for direct phenotyping or other studies. We have also developed our VelociMab platform for the rapid screening of antibodies and rapid generation of expression cell lines for our Traps and our VelocImmune human monoclonal antibodies.
Antibody Collaboration and License Agreements
     Sanofi. In November 2007, we and Sanofi entered into a global, strategic collaboration to discover, develop, and commercialize fully human monoclonal antibodies. The collaboration is governed by a Discovery and Preclinical Development Agreement and a License and Collaboration Agreement. In connection with the execution of the discovery agreement in 2007, we received a non-refundable, up-front payment of $85.0 million from Sanofi. Pursuant to the collaboration, Sanofi is funding our research to identify and validate potential drug discovery targets and develop fully human monoclonal antibodies against these targets. We lead the design and conduct of research activities under the collaboration, including target identification and validation, antibody development, research and preclinical activities through filing of an Investigational New Drug Application (IND) or its equivalent, toxicology studies, and manufacture of preclinical and clinical supplies. 
For each drug candidate identified through discovery research under the discovery agreement, Sanofi has the option to license rights to the candidate under the license agreement. If it elects to do so, Sanofi will co-develop the drug candidate with us through product approval. Development costs for the drug candidate are shared between the companies, with Sanofi generally funding

24

Table of Contents

these costs up front, except that following receipt of the first positive Phase 3 trial results for a co-developed drug candidate, subsequent Phase 3 trial-related costs for that drug candidate are shared 80% by Sanofi and 20% by us. We are generally responsible for reimbursing Sanofi for half of the total development costs for all collaboration antibody products from our share of profits from commercialization of collaboration products to the extent they are sufficient for this purpose. However, we are not required to apply more than 10% of our share of the profits from collaboration products in any calendar quarter towards reimbursing Sanofi for these development costs.
     Sanofi will lead commercialization activities for products developed under the license agreement, subject to our right to co-promote such products. The parties will equally share profits and losses from sales within the United States. The parties will share profits outside the United States on a sliding scale based on sales starting at 65% (Sanofi)/35% (us) and ending at 55% (Sanofi)/45% (us), and will share losses outside the United States at 55% (Sanofi)/45% (us). In addition to profit sharing, we are entitled to receive up to $250 million in sales milestone payments, with milestone payments commencing after aggregate annual sales outside the United States exceed $1.0 billion on a rolling 12-month basis.
     In November 2009, we and Sanofi amended these agreements to expand and extend our antibody collaboration. The goal of the expanded collaboration is to advance a total of 20 to 30 new antibody product candidates into clinical development from 2010 through 2017.
Under the amended discovery agreement, Sanofi agreed to fund up to $160 million per year of our antibody discovery activities over the period from 2010-2017, subject to a one-time option for Sanofi to adjust the maximum reimbursement amount down to $120 million per year commencing in 2014 if, over the prior two years, certain specified criteria were not satisfied. Sanofi has an option to extend the discovery program for up to an additional three years after 2017 for further antibody development and preclinical activities. Pursuant to the collaboration, Sanofi funded $30 million of agreed-upon costs we incurred to expand our manufacturing capacity at our Rensselaer, New York facilities.
     From the collaboration's inception in November 2007 through September 30, 2012, Sanofi has funded a total of $615.3 million of our costs under the discovery agreement and a total of $523.2 million of our development costs under the license agreement, or a total of $1.1 billion in funding for our antibody research and development activities during this period.
     In August 2008, we entered into an agreement with Sanofi to use our VelociGene platform to supply Sanofi with genetically modified mammalian models of gene function and disease. Under this agreement, Sanofi is required to pay us a minimum of $21.5 million for the term of the agreement, which extends through December 2012, for knock-out and transgenic models of gene function for target genes identified by Sanofi. Sanofi will use these models for its internal research programs that are outside of the scope of our antibody collaboration.
     Astellas Pharma Inc. In March 2007, we entered into a six-year, non-exclusive license agreement with Astellas Pharma Inc. to allow Astellas to utilize our VelocImmune technology in its internal research programs to discover human monoclonal antibodies. Under the terms of the agreement, Astellas made a $20.0 million annual, non-refundable payment to us in each of the second quarters of 2007, 2008, 2009, and 2010. In July 2010, the license agreement with Astellas was amended and extended through June 2023. Under the terms of the amended agreement, Astellas made a $165.0 million up-front payment to us in August 2010. In addition, Astellas will make a $130.0 million second payment to us in June 2018 unless the license agreement has been terminated prior to that date. Astellas has the right to terminate the agreement at any time by providing 90 days’ advance written notice. Under certain limited circumstances, such as our material breach of the agreement, Astellas may terminate the agreement and receive a refund of a portion of its up-front payment or, if such termination occurs after June 2018, a portion of its second payment, to us under the July 2010 amendment to the agreement. We are entitled to receive a mid-single digit royalty on any future sales of antibody products discovered by Astellas using our VelocImmune technology.
Royalty Agreement with Novartis Pharma AG
Under a June 2009 agreement with Novartis (that replaced a previous collaboration and license agreement), we receive royalties on worldwide sales of Novartis’ canakinumab, a fully human anti-interleukin-IL1ß antibody. The royalty rates in the agreement start at 4% and reach 15% when annual sales exceed $1.5 billion. Canakinumab is marketed for the treatment of CAPS, has completed Phase 3 development for gout, and is in earlier stage development for atherosclerosis and other inflammatory diseases. We are unable to predict whether canakinumab will be approved for gout or any other indication in addition to CAPS, or whether, even if approved, canakinumab for such indication(s) will be successfully commercialized. Accordingly, we are unable to predict whether these royalties will ever contribute materially to our results of operations or financial condition. To date these royalties have been minimal.
Research Programs
     Our preclinical research programs are in the areas of oncology and angiogenesis, ophthalmology, metabolic and related diseases,

25

Table of Contents

muscle diseases and disorders, inflammation and immune diseases, bone and cartilage, pain, cardiovascular diseases, and infectious diseases.
General:
     Developing and commercializing new medicines entails significant risk and expense. Before significant revenues from the commercialization of our antibody candidates or new indications for our marketed products can be realized, we (or our collaborators) must overcome a number of hurdles which include successfully completing research and development and obtaining regulatory approval from the FDA and regulatory authorities in other countries. In addition, the biotechnology and pharmaceutical industries are rapidly evolving and highly competitive, and new developments may render our products and technologies uncompetitive or obsolete.
     We expect to incur substantial costs to prepare for potential international commercialization of EYLEA and ZALTRAP and other late-stage product candidates and, if one or more of these product candidates receives regulatory approvals, to fund the launch of the product(s).    
From our inception in 1988 through 2011, we generally incurred net losses. In addition, since our inception in 1988, we have generally incurred negative cash flows from operations. Beginning in the first quarter of 2012, we reported profitability. Our ability to continue to generate profits and to generate positive cash flow from operations over the next several years depends significantly on our success in commercializing EYLEA. We expect to continue to incur substantial expenses related to our research and development activities, a significant portion of which we expect to be reimbursed by our collaborators. Also, our research and development activities outside our collaborations, the costs of which are not reimbursed, will expand and require additional resources. Our operating results may fluctuate from quarter to quarter and will depend on, among other factors, the net sales of our marketed products, as well as the scope and progress of our research and development efforts, the timing of certain expenses, the continuation of our collaborations with Sanofi and Bayer HealthCare, and the amount of reimbursement that we receive from collaborators. We cannot predict whether or when new products or new indications for our marketed products will receive regulatory approval or, if any such approval is received, whether we will be able to successfully commercialize such product(s) and whether or when they may become profitable.

26

Table of Contents

     The planning, execution, and results of our clinical programs are significant factors that can affect our operating and financial results. In our clinical programs, key events in 2012 to date were, and plans for the next 12 months are, as follows:   
 Trap-based Clinical Programs:
 
 
 
2012-13 Plans
 
2012 Events to Date
 
(next 12 months)
      
EYLEA
     
 
Ÿ
FDA approved EYLEA for the treatment of macular edema following CRVO in the United States
Ÿ
EMA and other regulatory agency decisions on applications for the treatment of wet AMD
Ÿ
Bayer HealthCare received regulatory approval for EYLEA in Australia, Colombia, Japan, and Brazil for the treatment of patients with wet AMD
Ÿ
Launch of EYLEA in Australia, Colombia, Japan, Brazil, and Europe
Ÿ
CHMP recommended approval for EYLEA for the treatment of patients with wet AMD to the EMA
Ÿ
Bayer HealthCare to submit regulatory applications for macular edema following CRVO in Europe, Japan, and other countries
Ÿ
Bayer HealthCare continued to pursue regulatory applications for marketing approval for EYLEA for the treatment of wet AMD in various countries
Ÿ
Completion of patient enrollment in VIBRANT study
Ÿ
Initiated Phase 3 VIBRANT study in macular edema following BRVO
 
 
Ÿ
Completed enrollment of VISTA-DME and VIVID-DME studies 
 
 
 
 
ZALTRAP
 
 
Ÿ
FDA approved ZALTRAP for patients with mCRC that is resistant to or has progressed following an oxaliplatin-containing regimen
Ÿ
EMA decision on regulatory applications for ZALTRAP in the treatment of previously treated mCRC patients
Ÿ
Reported final results in the Phase 3 VENICE trial in prostate cancer
 
 
Ÿ
Initiated Phase 1b study of combination of ZALTRAP and REGN910 in patients with advanced solid malignancies
 
 
 
ARCALYST
 
 
Ÿ
FDA issued complete response letter to our sBLA for the prevention of gout flares in patients initiating uric acid-lowering treatment. Development in gout discontinued.
 
 
 


27

Table of Contents

     Antibody-based Clinical Programs:
 
 
 
 
2012-13 Plans
 
     
2012 Events to Date
     
(next 12 months)
Sarilumab
Ÿ
Completed patient enrollment in Phase 3 SARIL-RA-MOBILITY study
Ÿ
Initiate additional Phase 3 studies
(IL-6R Antibody)
Ÿ
Initiated Phase 3 SARIL-RA-TARGET study
 
 
REGN727
Ÿ
Initiated long-term safety study
Ÿ
Initiate additional Phase 3 ODYSSEY trials
(PCSK9 Antibody)
Ÿ
Phase 1 data published in New England Journal of Medicine
 
 
 
Ÿ
Reported positive final data from three Phase 2 studies for LDL cholesterol reduction
 
 
 
Ÿ
Initiated Phase 3 ODYSSEY program for LDL cholesterol reduction
 
 
 
Ÿ
Initiated Phase 3 studies in patients with familial hypercholesterolemia or elevated cardiovascular risk
 
 
 
Ÿ
Initiated Phase 3 ODYSSEY OUTCOMES cardiovascular trial
 
 
REGN668
Ÿ
Initiated Phase 2 studies in atopic dermatitis
Ÿ
Report initial results for Phase 1b study in atopic dermatitis
(IL-4R Antibody)
 
 
Ÿ
Report initial results for Phase 2 study in eosinophilic asthma
REGN421
(Dll4 Antibody)
Ÿ
Continued patient enrollment in Phase 1 program
Ÿ
Initiate expansion of the Phase 1 program
REGN910
Ÿ
Continued patient enrollment in Phase 1 program
 Ÿ
Initiate a Phase 1b program in advanced malignancies
(ANG2 Antibody)
Ÿ
Initiated Phase 1b study of combination of ZALTRAP and REGN910 in patients with advanced solid malignancies
 
 
REGN1033
(GDF8 Antibody)
Ÿ
Initiated Phase 1 program
 Ÿ
Initiate expansion of the Phase 1 program
REGN475
 Ÿ
Anti-NGF class of antibodies is on clinical hold
Ÿ
Determine future development plan
(NGF Antibody)
Ÿ
FDA Advisory Committee voted unanimously in favor of a role for the ongoing development of anti-NGF agents in osteoarthritis
 
 
 
Ÿ
Sanofi elected not to co-develop REGN475
 
 
REGN846
(target not disclosed)
Ÿ
Continued patient enrollment in Phase 1b program in atopic dermatitis
 
 
REGN1154
(target not disclosed)
Ÿ
Initiated Phase 1 program
 
 
REGN1400
(ErbB3 Antibody)
Ÿ
Initiated Phase 1 program in oncology
 
 
REGN728
(target not disclosed)
Ÿ
Development was discontinued
 
 


28

Table of Contents

Results of Operations
Three Months Ended September 30, 2012 and 2011
Net Income (Loss)
     We reported net income of $191.5 million, or $1.72 per diluted share, for the third quarter of 2012, compared to a net loss of $62.4 million, or $0.68 per diluted share, for the third quarter of 2011. Our net income in the third quarter of 2012 resulted primarily from net product sales of EYLEA, which we launched in November 2011. In addition, in the third quarter of 2012, we earned a $50.0 million substantive milestone payment from Sanofi upon FDA approval of ZALTRAP and a $15.0 million substantive milestone payment from Bayer HealthCare upon receipt of marketing approval in Japan for EYLEA for the treatment of wet AMD.
Revenues
     Revenues for the three months ended September 30, 2012 and 2011 consist of the following:
(In millions)
2012
 
2011
Net product sales
$
249.2

 
$
5.5

Collaboration revenue:
 
 
 
Sanofi
145.0

 
79.8

Bayer HealthCare
26.7

 
10.1

Total collaboration revenue
171.7

 
89.9

Technology licensing revenue
5.9

 
5.9

Contract research and other revenue
0.9

 
1.5

Total revenue
$
427.7

 
$
102.8


Net Product Sales
     Net product sales consist of U.S. sales of our two marketed products, EYLEA and ARCALYST. In November 2011, we received marketing approval from the FDA for EYLEA for the treatment of wet AMD, at which time product sales commenced. In addition, in September 2012, we received marketing approval from the FDA for EYLEA for the treatment of macular edema following CRVO. For the three months ended September 30, 2012, we recognized $244.4 million of EYLEA net product sales. For the three months ended September 30, 2012 and 2011, we also recognized ARCALYST net product sales of $4.8 million and $5.5 million, respectively.
     We sell EYLEA in the United States to three distributors and several specialty pharmacies. We sell ARCALYST in the United States to two specialty pharmacies. Under these distribution agreements, the distributors and specialty pharmacies (collectively, our customers) generally take physical delivery of product. For EYLEA, the distributors and specialty pharmacies generally sell the product directly to healthcare providers; whereas for ARCALYST, the specialty pharmacies sell the product directly to patients. We record revenue from product sales upon delivery to our customers. For the three months ended September 30, 2012, we recorded 79% of our gross product revenue from sales to our distributor, Besse Medical, a subsidiary of AmerisourceBergen Corporation.
     We record product sales net of allowances and accruals for prompt pay discounts, rebates and chargebacks under governmental programs (including Medicaid), product returns, and distribution-related fees. The following table summarizes the provisions, and credits/payments, for government rebates and chargebacks, distribution-related fees, and other sales-related deductions; such amounts were not significant for the three months ended September 30, 2011.

29

Table of Contents

(In millions)
Rebates & Chargebacks
 
Distribution-
Related Fees
 
Other Sales-
Related Deductions
 
Total
Balance as of June 30, 2012
$
4.8

 
$
11.1

 
$
1.5

 
$
17.4

Provision related to current period sales
3.8

 
13.6

 
0.5

 
17.9

Credits/payments
(5.2
)
 
(8.5
)
 
(0.1
)
 
(13.8
)
Balance as of September 30, 2012
$
3.4

 
$
16.2

 
$
1.9

 
$
21.5


Sanofi Collaboration Revenue
     The collaboration revenue we earned from Sanofi, as detailed below, consisted primarily of reimbursement for research and development expenses that we incurred, recognition of our share of losses from Sanofi's commercialization of ZALTRAP, recognition of a substantive milestone payment, and recognition of revenue related to non-refundable up-front payments of $105.0 million related to the ZALTRAP collaboration and $85.0 million related to the antibody collaboration.
Sanofi Collaboration Revenue
 
Three months ended
September 30,
(In millions)
 
2012
 
2011
ZALTRAP:
 
 
 
 
Regeneron's share of losses in connection with commercialization of ZALTRAP
 
$
(7.4
)
 
$
(2.7
)
Substantive milestone payment
 
50.0

 
 
Reimbursement of Regeneron research and development expenses
 
2.0

 
2.9

Recognition of deferred revenue related to up-front payments
 
2.9

 
2.5

Total ZALTRAP
 
47.5

 
2.7

Antibody:
 
 
 
 
Reimbursement of Regeneron research and development expenses
 
94.9

 
74.7

Recognition of deferred revenue related to up-front and other payments
 
2.2

 
2.0

Recognition of revenue related to VelociGene agreement
 
0.4

 
0.4

Total antibody
 
97.5

 
77.1

Total Sanofi collaboration revenue
 
$
145.0

 
$
79.8


     In August 2012, the FDA approved ZALTRAP for patients with mCRC that is resistant to or has progressed following an oxaliplatin-containing regimen. Regeneron's share of the loss from commercialization of ZALTRAP represents our 50% share of ZALTRAP net product sales less cost of goods sold and collaboration commercialization expenses. Our share of losses increased in the third quarter of 2012, compared to the same period in 2011, due to an increase in commercialization activities in preparation for potential regulatory approvals. In the third quarter of 2012, we earned a $50.0 million substantive milestone payment from Sanofi upon FDA approval of ZALTRAP. Sanofi’s reimbursement of our research and development expenses primarily consists of reimbursements for research and development activities and for manufacturing ZALTRAP supplies. In connection with recognition of deferred revenue related to ZALTRAP, as of September 30, 2012, $14.4 million of the original $105.0 million of up-front payments was deferred and will be recognized as revenue in future periods.

30

Table of Contents

     In the third quarter of 2012, Sanofi’s reimbursement of our antibody expenses consisted of $49.6 million under our discovery agreement and $45.3 million of development costs under our license agreement, compared to $39.8 million and $34.9 million, respectively, in the third quarter of 2011. The higher reimbursement amount under the discovery agreement in the third quarter of 2012, compared to the same period in 2011, was primarily due to an increase in our antibody discovery activities. The higher reimbursement of development costs in the third quarter of 2012, compared to the same period in 2011, was primarily due to increased development activities for REGN727.
     In connection with recognition of deferred revenue related to our antibody collaboration, as of September 30, 2012, $71.3 million of the original $85.0 million up-front payment and other payments was deferred and will be recognized as revenue in future periods. In connection with the November 2009 amendment of the discovery agreement, Sanofi has funded $30 million of agreed-upon costs incurred by us to expand our manufacturing capacity at our Rensselaer, New York facilities. Revenue related to such funding from Sanofi was deferred and is being recognized as collaboration revenue prospectively over the related performance period in conjunction with the recognition of the original $85.0 million up-front payment.
Bayer HealthCare Collaboration Revenue
     The collaboration revenue we earned from Bayer HealthCare, as detailed below, consisted primarily of cost sharing of Regeneron EYLEA development expenses, recognition of a substantive milestone payment, and recognition of revenue related to a non-refundable $75.0 million up-front payment received in October 2006, and a $20.0 million milestone payment received in August 2007 (which, for the purpose of revenue recognition, was not considered substantive).
Bayer HealthCare Collaboration Revenue
 
Three months ended
September 30,
(In millions)
 
2012
 
2011
Cost-sharing of Regeneron EYLEA development expenses
 
$
9.7

 
$
7.6

Substantive milestone payment
 
15.0

 
 
Recognition of deferred revenue related to up-front and other milestone payments
 
2.0

 
2.5

Total Bayer HealthCare collaboration revenue
 
$
26.7

 
$
10.1


     Cost-sharing of our global EYLEA development expenses with Bayer HealthCare increased in the third quarter of 2012 compared to the same period in 2011, due primarily to costs related to regulatory and other development activities. This was partly offset by lower costs in connection with our Phase 3 VIEW 1 study in wet AMD, which has concluded. In the third quarter of 2012, we earned a $15.0 million substantive milestone payment from Bayer HealthCare upon receipt of marketing approval in Japan for EYLEA for the treatment of wet AMD. Recognition of deferred revenue related to the up-front and August 2007 milestone payments from Bayer HealthCare decreased in the third quarter of 2012 from the same quarter in 2011 due to an extension in the estimated performance period over which this deferred revenue is being recognized, effective in the fourth quarter of 2011. As of September 30, 2012, $38.6 million of these up-front and milestone payments was deferred and will be recognized as revenue in future periods.
Technology Licensing Revenue
     In connection with the amendment and extension of our VelocImmune license agreement with Astellas, in August 2010, we received a $165.0 million up-front payment, which was deferred upon receipt and is being recognized as revenue ratably over a seven-year period beginning in June 2011. In the third quarter of both 2012 and 2011, we recognized $5.9 million of technology licensing revenue related to this agreement. As of September 30, 2012, $134.0 million of the August 2010 technology licensing payment received from Astellas was deferred and will be recognized as revenue in future periods.
Contract Research and Other Revenue
     Contract research and other revenue for the three months ended September 30, 2011 included $1.0 million recognized in connection with our five-year grant from the National Institutes of Health (NIH), which we were awarded in September 2006 as part of the NIH’s Knockout Mouse Project. As of the end of 2011, no further revenue has been recognized by us in connection with this NIH Grant. In addition, under a June 2009 agreement with Novartis, we receive royalties on worldwide sales of Novartis’ canakinumab. For the three months ended September 30, 2012 and 2011, contract research and other revenue included $0.8 million and $0.5 million, respectively, of royalties from Novartis.

31

Table of Contents

Expenses
     Total operating expenses increased to $225.3 million in the third quarter of 20