UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-19034
REGENERON PHARMACEUTICALS, INC.
---------------------------------------------
(Exact name of registrant as specified in its charter)
New York 13-3444607
------------------------------------------ -----------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
777 Old Saw Mill River Road
Tarrytown, New York 10591-6707
- ---------------------------------------------- -------------------------------------------
(Address of principal executive offices) (Zip code)
(914) 347-7000
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of August 3, 2000:
Class of Common Stock Number of Shares
--------------------- ----------------
Class A Stock, $0.001 par value 2,766,095
Common Stock, $0.001 par value 33,853,210
REGENERON PHARMACEUTICALS, INC.
Table of Contents
June 30, 2000
Page Numbers
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PART I FINANCIAL INFORMATION
Item 1 Financial Statements
- ------ --------------------
Condensed balance sheets (unaudited) at June 30, 2000 and
December 31, 1999 3
Condensed statements of operations (unaudited) for the three
months and six months ended June 30, 2000 and 1999 4
Condensed statement of stockholders' equity (unaudited) for the
six months ended June 30, 2000 5
Condensed statements of cash flows (unaudited) for the
six months ended June 30, 2000 and 1999 6
Notes to condensed financial statements 7-13
Item 2 Management's Discussion and Analysis of Financial Condition
- ------ ------------------------------------------------------------
and Results of Operations 14-25
-------------------------
Item 3 Quantitative & Qualitative Disclosure About Market Risk 25
- ------ -------------------------------------------------------
PART II OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Security Holders 26
- ------ ---------------------------------------------------
Item 6 Exhibits and Reports on Form 8-K 27
- ------ --------------------------------
SIGNATURE PAGE 28
Exhibit 27 Financial data schedule
- ---------- -----------------------
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REGENERON PHARMACEUTICALS, INC.
CONDENSED BALANCE SHEETS AT JUNE 30, 2000 AND DECEMBER 31, 1999 (Unaudited)
(In thousands, except share data)
June 30, December 31,
ASSETS 2000 1999
---------------- ----------------
Current assets
Cash and cash equivalents $81,751 $23,697
Marketable securities 36,110 42,463
Receivable due from The Procter & Gamble Company 7,263
Receivable due from Amgen-Regeneron Partners 2,002 473
Receivable due from Sumitomo Pharmaceuticals Company, Ltd. 303 151
Prepaid expenses and other current assets 2,104 1,708
Inventory 7,931 4,552
--------- ---------
Total current assets 137,464 73,044
Marketable securities 27,058 27,439
Property, plant, and equipment, at cost, net of accumulated depreciation
and amortization 37,434 36,298
Other assets 161 218
--------- ---------
Total assets $202,117 $136,999
========= =========
LIABILITIES and STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $7,637 $6,551
Deferred revenue, current portion 4,252 4,686
Due to Merck & Co., Inc. 13 334
Due to Amgen-Regeneron Partners 19 300
Capital lease obligations, current portion 1,039 1,380
Note payable, current portion 67 68
--------- ---------
Total current liabilities 13,027 13,319
Deferred revenue 10,491 11,130
Capital lease obligations 836 1,204
Note payable 1,500 1,527
Other liabilities 292 287
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;
2,766,095 shares issued and outstanding in 2000
3,605,133 shares issued and outstanding in 1999 3 4
Common Stock, $.001 par value; 60,000,000 shares authorized;
32,317,425 shares issued and outstanding in 2000
27,817,636 shares issued and outstanding in 1999 32 28
Additional paid-in capital 386,925 310,296
Accumulated deficit (210,568) (200,303)
Accumulated other comprehensive loss (421) (493)
--------- ---------
Total stockholders' equity 175,971 109,532
--------- ---------
Total liabilities and stockholders' equity $202,117 $136,999
========= =========
The accompanying notes are an integral part of the financial statements.
3
REGENERON PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands, except per share data)
Three months ended June 30, Six months ended June 30,
2000 1999 2000 1999
-------- -------- -------- --------
Revenues
Contract research and development $9,138 $3,397 $18,260 $6,741
Research progress payments 2,700 2,700
Contract manufacturing 2,618 2,454 3,994 4,569
Investment income 2,211 1,319 3,437 2,778
-------- -------- -------- --------
16,667 7,170 28,391 14,088
-------- -------- -------- --------
Expenses
Research and development 14,410 10,818 26,385 22,039
Loss in Amgen-Regeneron Partners 1,080 591 2,351 1,557
General and administrative 1,711 1,520 3,466 3,113
Depreciation and amortization 1,045 829 1,971 1,554
Contract manufacturing 1,265 1,164 4,316 2,418
Interest 103 81 167 170
-------- -------- -------- --------
19,614 15,003 38,656 30,851
-------- -------- -------- --------
Net loss ($2,947) ($7,833) ($10,265) ($16,763)
======== ======== ======== ========
Net loss per share, basic and diluted ($0.08) ($0.25) ($0.31) ($0.54)
======== ======== ======== ========
The accompanying notes are an integral part of the financial statements.
4
REGENERON PHARMACEUTICALS, INC.
CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY (Unaudited)
For the six months ended June 30, 2000
(In thousands)
Class A Stock Common Stock
------------------------- ------------------------
Shares Amount Shares Amount
------ ------ ------ ------
Balance, December 31, 1999 3,605 $4 27,818 $28
Issuance of Common Stock in a public offering
at $29.75 per share 2,600 3
Cost associated with issuance of equity securities
Issuance of Common Stock in connection with
exercise of stock options 528
Net issuance of Common Stock to Amgen in
connection with a cashless exercise of
warrants 478
Issuance of Common Stock in connection with
Company 401(k) Savings Plan contribution 54
Conversion of Class A Stock to Common Stock (839) (1) 839 1
Net loss
Change in net unrealized loss on marketable
securities
---------- ------------ ---------- -----------
Balance, June 30, 2000 2,766 $3 32,317 $32
========== ============ ========== ===========
Accumulated
Additional Other
Paid-in Accumulated Comprehensive
Capital Deficit Loss
------------- ------------------ ----------------------
Balance, December 31, 1999 $310,296 ($200,303) ($493)
Issuance of Common Stock in a public offering
at $29.75 per share 77,347
Cost associated with issuance of equity securities (4,470)
Issuance of Common Stock in connection with
exercise of stock options 3,331
Net issuance of Common Stock to Amgen in
connection with a cashless exercise of
warrants
Issuance of Common Stock in connection with
Company 401(k) Savings Plan contribution 421
Conversion of Class A Stock to Common Stock
Net loss (10,265)
Change in net unrealized loss on marketable
securities 72
------------- ------------------ ----------------------
Balance, June 30, 2000 $386,925 ($210,568) ($421)
============= ================== ======================
Total
Stockholders' Comprehensive
Equity Loss
------------- -------------
Balance, December 31, 1999 $109,532
Issuance of Common Stock in a public offering
at $29.75 per share 77,350
Cost associated with issuance of equity securities (4,470)
Issuance of Common Stock in connection with
exercise of stock options 3,331
Net issuance of Common Stock to Amgen in
connection with a cashless exercise of
warrants
Issuance of Common Stock in connection with
Company 401(k) Savings Plan contribution 421
Conversion of Class A Stock to Common Stock
Net loss (10,265) ($10,265)
Change in net unrealized loss on marketable
securities 72 72
------------- -------------
Balance, June 30, 2000 $175,971 ($10,193)
============= =============
The accompanying notes are an integral part of the financial statements.
5
REGENERON PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
Six months ended June 30,
2000 1999
-------- --------
Cash flows from operating activities
Net loss ($10,265) ($16,763)
-------- --------
Adjustments to reconcile net loss to net cash
used in operating activities
Loss in Amgen-Regeneron Partners 2,351 1,557
Depreciation and amortization 1,971 1,554
Stock issued in consideration for services rendered 180
Changes in assets and liabilities
(Increase) decrease in amounts due from The Procter & Gamble Company (7,263) 166
Increase in amounts due from/decrease in amounts due to Merck & Co., Inc. (321) (9)
(Increase) decrease in amounts due from Amgen-Regeneron Partners (1,529) 514
(Increase) decrease in amounts due from Sumitomo Pharmaceuticals Co., Ltd. (152) 73
Increase in investment in Amgen-Regeneron Partners (2,632)
Increase in prepaid expenses and other assets (339) (27)
Increase in inventory (2,598)
Decrease in deferred revenue (1,073)
Increase (decrease) in accounts payable, accrued expenses,
and other liabilities 1,914 (364)
-------- --------
Total adjustments (9,671) 3,644
-------- --------
Net cash used in operating activities (19,936) (13,119)
-------- --------
Cash flows from investing activities
Purchases of marketable securities (28,300) (42,225)
Sales of marketable securities 35,106 59,503
Capital expenditures (4,289) (3,728)
-------- --------
Net cash provided by investing activities 2,517 13,550
-------- --------
Cash flows from financing activities
Net proceeds from the issuance of stock 76,211 931
Principal payments on note payable (28) (32)
Capital lease payments (710) (527)
-------- --------
Net cash provided by financing activities 75,473 372
-------- --------
Net increase in cash and cash equivalents 58,054 803
-------- --------
Cash and cash equivalents at beginning of period 23,697 19,757
-------- --------
Cash and cash equivalents at end of period $ 81,751 $ 20,560
======== ========
The accompanying notes are an integral part of the financial statements.
6
REGENERON PHARMACEUTICALS, INC.
Notes to Condensed Financial Statements
(Dollars in thousands, except per share data)
1. Interim Financial Statements
The interim Condensed Financial Statements of Regeneron Pharmaceuticals,
Inc. (the "Company") have been prepared in accordance with the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all information and disclosures necessary for a presentation of the
Company's financial position, results of operations, and cash flows in
conformity with generally accepted accounting principles. In the opinion of
management, these financial statements reflect all adjustments, consisting
only of normal recurring accruals, necessary for a fair presentation of the
Company's financial position, results of 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,
1999 Condensed Balance Sheet data was derived from audited financial
statements, but does not include all disclosures required by generally
accepted accounting principles. 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,
1999.
2. Statement of Cash Flows
Supplemental disclosure of noncash investing and financing activities:
Included in accounts payable and accrued expenses at June 30, 2000 and
December 31, 1999 are $295 and $697, respectively, of accrued capital
expenditures. Included in accounts payable and accrued expenses at June 30,
1999 and December 31, 1998 are $455 and $469, respectively, of accrued
capital expenditures.
Included in accounts payable and accrued expenses at December 31, 1999 and
1998 are $421 and $308, respectively, of accrued Company 401(k) Savings
Plan contribution expense. During January 2000 and January 1999, the
Company contributed 54,003 and 37,653 shares, respectively, of Common Stock
to the 401(k) Savings Plan in satisfaction of these obligations.
3. Inventories
Inventories consist of raw materials and other direct and indirect costs
associated with the production of brain-derived neurotrophic factor
("BDNF") for Sumitomo Pharmaceuticals Company, Ltd. under a research and
development agreement and the production of an intermediate for a Merck &
Co., Inc. pediatric vaccine under a long-term manufacturing agreement.
Inventories as of June 30, 2000 and December 31, 1999 consist of the
following:
June 30, December 31,
2000 1999
------ ------
Raw materials $ 964 $1,042
Work-in-process 780(1) 165(3)
Finished products 6,187(2) 3,345
------ ------
$7,931 $4,552
====== ======
(1) Net of reserves of $657.
(2) Net of reserves of $365.
(3) Net of reserves of $675.
7
REGENERON PHARMACEUTICALS, INC.
Notes to Condensed Financial Statements
(Dollars in thousands, except per share data)
4. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses as of June 30, 2000 and December 31,
1999 consist of the following:
June 30, December 31,
2000 1999
------ ------
Accounts payable $2,300 $2,642
Accrued payroll and related costs 1,804 1,977
Accrued clinical trial expense 1,964 1,005
Accrued expenses, other 1,335 643
Deferred compensation 234 284
------ ------
$7,637 $6,551
====== ======
5. Amgen-Regeneron Partners Research Collaboration Agreement
In August 1990, the Company entered into a collaboration with Amgen Inc.
("Amgen") to develop and commercialize BDNF and neurotrophin-3 ("NT-3").
Pursuant to that agreement, the Company and Amgen formed a partnership,
Amgen-Regeneron Partners (the "Partnership"), whereby the revenues earned
and expenses incurred by the Partnership for the research and development
of BDNF and NT-3 are shared equally. The Company accounts for its
investment in the Partnership in accordance with the equity method of
accounting.
Selected operating statement data of the Partnership for the three and six
months ended June 30, 2000 and 1999 is as follows:
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- ---------------------------
2000 1999 2000 1999
------- ------- ------- -------
Total revenues $ 86 $ 90 $ 164 $ 206
Total expenses (2,246) (1,272) (4,865) (3,320)
------- ------- ------- -------
Net loss ($2,160) ($1,182) ($4,701) ($3,114)
======= ======= ======= =======
6. Comprehensive Loss
Comprehensive loss represents the change in net assets of a business
enterprise during a period from transactions and other events and
circumstances from non-owner sources. Comprehensive loss of the Company
includes net loss adjusted for the change in net unrealized gain or loss on
marketable securities. The net effect of income taxes on comprehensive loss
is immaterial. For the six months ended June 30, 2000 and 1999, the
components of comprehensive loss are:
2000 1999
-------- --------
Net loss ($10,265) ($16,763)
Change in net unrealized gain/loss on marketable securities 72 (487)
-------- --------
Total comprehensive loss ($10,193) ($17,250)
======== ========
8
REGENERON PHARMACEUTICALS, INC.
Notes to Condensed Financial Statements
(Dollars in thousands, except per share data)
7. Equity Transactions
On March 2, 2000, in accordance with the terms of their warrant agreement,
as amended, Amgen exercised 700,000 warrants with an exercise price of
$16.00 per share. As consideration for the exercise price, Amgen tendered
221,958 shares of the Company's Common Stock which had an aggregate fair
market value at the time of exercise equal to the aggregate exercise price
of the warrants. The shares of Common Stock delivered to the Company by
Amgen were retired upon receipt.
On April 4, 2000, the Company completed a public offering of 2.6 million
shares of Common Stock at a price of $29.75 per share for net proceeds,
after commissions and expenses, of $72.9 million.
8. Per Share Data
The Company's basic net loss per share amounts have been computed by
dividing net loss by the weighted average number of Common and Class A
shares outstanding. For the three and six months ended June 30, 2000 and
1999, the Company reported net losses; therefore, no common stock
equivalents were included in the computation of diluted net loss per share,
since such inclusion would have been antidilutive. The calculations of
basic and diluted net loss per share are as follows:
Three Months Ended June 30,
-----------------------------------------------------------------------------------------------------
Shares, in
Net Loss thousands Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
2000:
Basic and Diluted ($2,947) 34,971 ($0.08)
1999:
Basic and Diluted ($7,833) 31,303 ($0.25)
-----------------------------------------------------------------------------------------------------
Options and warrants which have been excluded from the diluted per share
amounts because their effect would have been antidilutive include the
following:
Three Months Ended June 30,
---------------------------------------------------------------------------------------------------------------
2000 1999
---------------------------------- -------------------------------------
Weighted Weighted
Average Weighted Average Weighted
Number, Average Number, Average
in thousands Exercise Price in thousands Exercise Price
------------ -------------- ------------ --------------
Options and warrants with exercise
prices below the average fair market
value of the Company's common stock
for the respective period 7,227 $8.52 1,567 $4.76
Options and warrants with exercise
prices above the average fair market
value of the Company's common stock
for the respective period 467 $36.05 5,538 $10.82
----- -----
Total 7,694 7,105
===== =====
-------------------------------------- ---------------- ----------------- ------------------- -----------------
9
REGENERON PHARMACEUTICALS, INC.
Notes to Condensed Financial Statements
(Dollars in thousands, except per share data)
Six Months Ended June 30,
---------------------------------------------------------------------------------------------------------------
Shares, in
Net Loss thousands Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
2000:
Basic and Diluted ($10,265) 33,449 ($0.31)
1999:
Basic and Diluted ($16,763) 31,289 ($0.54)
-------------------------------------------- ---------------------- --------------------- ---------------------
Options and warrants which have been excluded from the diluted per share amounts
because their effect would have been antidilutive include the following:
Six Months Ended June 30,
---------------------------------------------------------------------------------------------------------------
2000 1999
---------------------------------- -------------------------------------
Weighted Weighted
Average Weighted Average Weighted
Number, Average Number, Average
in thousands Exercise Price in thousands Exercise Price
------------ -------------- ------------ --------------
Options and warrants with exercise
prices below the average fair market
value of the Company's common stock
for the respective period 7,625 $8.74 1,570 $4.81
Options and warrants with exercise
prices above the average fair market
value of the Company's common stock
for the respective period 285 $36.05 5,479 $10.85
----- -----
Total 7,910 7,049
===== =====
-------------------------------------- ---------------- ----------------- ------------------- -----------------
9. Long-Term Incentive Plan
In April 2000, the Company adopted the Regeneron Pharmaceuticals, Inc. 2000
Long-Term Incentive Plan ("2000 Incentive Plan"). The 2000 Incentive Plan
provides for the issuance of up to 6,000,000 shares of Common Stock in
respect of awards. Employees of the Company, including officers, and
nonemployees, including consultants and nonemployee members of the Board of
Directors, (collectively, "Participants") may receive awards as determined
by a committee of independent directors ("Committee"). The awards that may
be made under the Incentive Plan include: (a) Incentive Stock Options
("ISOs") and Nonqualified Stock Options, (b) shares of Restricted Stock,(c)
shares of Phantom Stock, (d) Stock Bonuses, and (e) Other Awards.
Stock Options are awards in which Participants receive the right to
purchase shares of Common Stock at prices determined by the Committee;
however, in the case of an ISO, the option exercise price will not be less
than the fair market value of a share of Common Stock on the date the
Option is granted. Options vest over a period of time determined by the
Committee, generally on a pro rata basis over a three or five year period.
The Committee also determines the expiration date of each Option; however,
no ISO is exercisable more than ten years after the date of grant.
10
REGENERON PHARMACEUTICALS, INC.
Notes to Condensed Financial Statements
(Dollars in thousands, except per share data)
Shares of Restricted Stock may be awarded to Participants at a price
determined by the Committee. Such shares are nontransferable for a period
determined by the Committee ("vesting period"). The holder of the
Restricted Shares has the right to vote and receive dividends during the
vesting period. Should employment terminate, as defined by the 2000
Incentive Plan, the ownership of the shares will be transferred to the
Company, except under defined circumstances with Committee approval, in
consideration of amounts paid by the Participant to acquire such shares. In
addition, if the Company requires a return of the Restricted Shares, it
also has the right to require a return of all dividends paid on such
shares.
Shares of Phantom Stock provide the Participant the right to receive,
within 30 days of the date on which the share vests, an amount, in cash
and/or shares of the Company's Common Stock as determined by the Committee,
equal to the sum of the fair market value of a share of Common Stock on the
date such share of Phantom Stock vests and the aggregate amount of cash
dividends paid with respect to a share of Common Stock during the period
from the grant date of the share of Phantom Stock to the date on which the
share vests.
Stock Bonuses are bonuses payable in shares of Common Stock which are
granted at the discretion of the Committee.
Other Awards are other forms of awards which are valued based on the
Company's Common Stock. Subject to the provisions of the 2000 Incentive
Plan, the terms and provisions of such Other Awards are determined solely
on the authority of the Committee.
The 2000 Incentive Plan allows the Committee to provide for immediate
vesting of awards upon a change in control of the Company, as defined.
The Company may incur charges to operations in connection with these
awards.
10. Segment Reporting
For the period ended June 30, 2000, the Company's operations were
principally managed in two business segments: research and development, and
contract manufacturing.
Research and development: Includes all activities related to the discovery
of potential therapeutics for human medical conditions, and the development
and commercialization of these discoveries. Also includes revenues and
expenses related to the development of manufacturing processes prior to
commencing commercial production of a product.
Contract manufacturing: Includes all revenues and expenses related to the
commercial production of products under contract manufacturing
arrangements. The Company produces BDNF for Sumitomo Pharmaceuticals
Company, Ltd. under a research and development agreement and an
intermediate for a Merck & Co., Inc. pediatric vaccine under a long-term
manufacturing agreement.
11
REGENERON PHARMACEUTICALS, INC.
Notes to Condensed Financial Statements
(Dollars in thousands, except per share data)
Prior to 2000, the Company's operations were all conducted under the
research and development business segment. The table below presents
information about reported segments for the three and six months ended June
30, 2000:
Three Months Ended June 30, 2000
--------------------------------
Research & Contract Reconciling
Development Manufacturing Items Total
----------- ------------- ----- -----
Revenues $11,838 $2,618 $2,211(1) $16,667
Loss in Amgen-
Regeneron Partners 1,080 - - 1,080
Depreciation and
amortization 1,045 - (2) - 1,045
Interest expense 78 25 - 103
Net (loss) income (6,486) 1,328 2,211 (2,947)
Six Months Ended June 30, 2000
------------------------------
Research & Contract Reconciling
Development Manufacturing Items Total
----------- ------------- ----- -----
Revenues $20,960 $3,994 $3,437(1) $28,391
Loss in Amgen-
Regeneron Partners 2,351 - - 2,351
Depreciation and
amortization 1,971 - (2) - 1,971
Interest expense 111 56 - 167
Net (loss) income (13,324) (378) 3,437 (10,265)
Total assets 17,690 37,243 147,184(3) 202,117
(1) Represents investment income.
(2) Depreciation and amortization related to contract manufacturing is
capitalized into inventory.
(3) Includes cash and cash equivalents, marketable securities, prepaid
expenses and other current assets, and other assets.
11. Impact of the Adoption of Recently Issued Accounting Standards
In December 1999, the staff of the Securities and Exchange Commission
("SEC") issued Staff Accounting Bulletin 101, Revenue Recognition, ("SAB
101"). SAB 101 requires companies who receive license and milestone
payments, whether refundable or non-refundable, to recognize them ratably
over the period that the related services are rendered.
In the period of adoption, companies will be required to report the
cumulative effect of this change in accounting principle as a separate
component in net income (or loss). Regeneron is required to adopt SAB 101
during the quarter ended December 31, 2000, and is currently evaluating how
to apply SAB 101 and the impact that it will have on the Company's
financial statements. Although the effects of SAB 101 cannot be fully
determined at this time, the Company estimates that, if SAB 101 had been
adopted as of June 30, 2000, the cumulative charge to earnings, and
corresponding increase in deferred revenue which will be recognized in
future periods, would have been less than $7 million.
12
REGENERON PHARMACEUTICALS, INC.
Notes to Condensed Financial Statements
(Dollars in thousands, except per share data)
12. Subsequent Events
On August 3, 2000, the Company sold 573,630 shares of Common Stock to The
Procter & Gamble Company ("P&G") at a price of $29.75 per share for total
proceeds of $17.1 million in cash. The $29.75 price is the same price per
share as in Regeneron's public offering of 2.6 million shares of Common
Stock in April 2000. The sale of stock was made pursuant to a 1997
agreement between Regeneron and P&G. In addition, in accordance with the
terms of their warrant agreement, as amended, P&G exercised 1,450,000
warrants with an exercise price of $9.87 per share. As consideration for
the exercise price, P&G tendered 511,125 shares of the Company's Common
Stock which had an aggregate value at the time of exercise, based upon the
average market price of the Company's Common Stock over approximately the
prior 30 trading days, equal to the aggregate exercise price of the
warrants. The shares of Common Stock delivered to the Company by P&G were
retired upon receipt.
On August 3, 2000, the Company and P&G agreed through a binding memorandum
of understanding to enter into a new collaboration agreement, replacing
their 1997 agreement. The new agreement will extend P&G's obligation to
fund Regeneron research through December 2005, with no further research
obligations by either party thereafter, and focus their collaborative
research on therapeutic areas that are of particular interest to P&G,
including muscle atrophy and muscle diseases, fibrotic diseases, and
certain G-protein coupled receptors. Under the new agreement, P&G's
research funding from July 2000 through December 2005 is expected to total
approximately $64 million (before adjustments for future inflation). Any
drugs that result from the collaboration will continue to be jointly
developed and marketed worldwide, with the companies equally sharing
development costs and profits. P&G and the Company have agreed to divide
rights to the programs that are no longer part of their collaboration.
13
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
Overview. The discussion below contains forward-looking statements that
involve risks and uncertainties relating to the future financial performance of
Regeneron Pharmaceuticals, Inc. and actual events or results may differ
materially. These statements concern, among other things, the possible
therapeutic applications of Regeneron's product candidates and research
programs, the timing and nature of the clinical and research programs now
underway or planned, a variety of items described herein and in the footnotes to
Regeneron's financial statements (including the useful life of assets, the
anticipated length of agreements, and other matters), and the future uses of
capital and financial needs of Regeneron. These statements are made by Regeneron
based on management's current beliefs and judgment. In evaluating such
statements, stockholders and potential investors should specifically consider
the various factors identified under the caption "Factors That May Affect Future
Operating Results" which could cause actual results to differ materially from
those indicated by such forward-looking statements.
Regeneron Pharmaceuticals, Inc. (Regeneron or the Company) is a
biopharmaceutical company that discovers, develops, and intends to commercialize
therapeutic drugs for the treatment of serious medical conditions. Expanding
from our initial focus on degenerative neurologic diseases, we have more
recently broadened our product pipeline to include drug candidates for the
treatment of obesity, rheumatoid arthritis, cancer, allergies, asthma, ischemia,
and other diseases and disorders.
Our ability to discover and develop product candidates for such a wide
variety of serious medical conditions results from the leveraging of several
powerful technology platforms, many of which were developed or enhanced by us.
In contrast to basic genomics approaches, which attempt to identify every gene
in a cell or genome, we use Targeted Genomics(TM) and Functionomics(TM)
(functional cloning) technology platforms that are designed to discover specific
genes of therapeutic interest for a particular disease or cell type. Using these
approaches, we have discovered many new families of growth factors and
receptors, many of which are already protected by issued patents, and which have
led to several product candidates. If the natural protein itself is not a
product candidate, we utilize our Designer Protein Therapeutics(TM) platform to
genetically engineer product candidates with the desired properties. This
technology platform has already produced more than 10 patented proteins, several
of which are in preclinical development.
The sophisticated application of all of these technology platforms,
coupled with our biologic expertise in preclinical models of disease, has
allowed us to discover drug candidates that address a wide variety of important
medical needs. We have three products in ongoing clinical trials and several
product candidates are expected to enter clinical trials over the next one to
two years, including:
o AXOKINE(R) second generation ciliary neurotrophic factor: Acts on the
brain region regulating food intake and energy expenditure. AXOKINE is
being developed for the treatment of obesity and complications of
obesity such as Type II diabetes, and is in clinical trials. We are
also developing a modified form of
14
AXOKINE (pegylated) that in preclinical studies is substantially longer
acting than unmodified AXOKINE. This may allow less frequent and lower
dosing in patients.
o Cytokine Traps: Protein-based antagonists for cytokines such as
interleukin-1 (called IL-1), interleukin-4 (IL-4), interleukin-6
(IL-6), and a single antagonist that blocks both IL-4 and
interleukin-13 (IL-13). These cytokines are thought to play a major
role in diseases such as rheumatoid arthritis and other inflammatory
diseases, asthma, allergic disorders, and cancer. Cytokine Traps are
potential treatments for these diseases, and at least one Cytokine Trap
is expected to enter clinical trials by 2001.
o VEGF Trap: An antagonist to Vascular Endothelial Growth Factor (called
VEGF), which is required for the growth of blood vessels that are
needed for tumors to grow. In a preclinical model of cancer, the VEGF
Trap blocked the growth of tumors by an anti-angiogenesis mechanism.
VEGF Trap is a potential treatment for cancer and is expected to enter
clinical trials in 2001.
o Angiopoietins: A new family of growth factors, discovered by us, that
are specific for blood vessels and early hemopoietic stem cells. The
Angiopoietins, and engineered forms of these growth factors that can
act as activators and blockers, are in preclinical testing for
promoting blood vessel growth (to provide blood flow in diseased hearts
and other tissues that have lost their original blood supplies), for
blocking blood vessel growth (for the treatment of cancers), for fixing
leaky blood vessels (that cause swelling and edema in many different
diseases such as stroke, diabetic retinopathy, and inflammatory
diseases), and for promoting the growth and mobilization of certain
hemopoietic cells such as stem cells and platelets.
o Brain-derived neurotrophic factor, or BDNF: Promotes survival of the
spinal cord neurons that die in amyotropic lateral sclerosis (or ALS,
commonly known as Lou Gehrig's Disease) in preclinical models. BDNF is
in clinical trials for ALS using two routes of administration; one of
these trials is based on the results of a prior Phase III clinical
trial.
o Neurotrophin-3, or NT-3: Acts on the neurons of the intestinal tract,
and is in clinical trial for the treatment of constipating disorders
associated with spinal cord injury and other neurologic diseases.
Discussion of Second Quarter 2000 Activities. In the second quarter of
2000, Regeneron continued its Phase II dose-ranging trial to study the safety
and efficacy of AXOKINE in obese patients. AXOKINE is being developed for the
treatment of obesity and complications of obesity such as Type II diabetes. The
double-blind, placebo-controlled multicenter clinical trial, which is now fully
enrolled, is being conducted in approximately 175 severely obese patients who
will be treated for 90 days at doses up to 2 micrograms per kilogram per day
administered subcutaneously. The Phase II study follows a two-week Phase I
study, completed in late 1999, in which mildly to moderately obese subjects
treated with AXOKINE lost weight and had reduced food intake compared to those
on placebo. In the Phase I study, some patients who received higher doses of
AXOKINE and who had previously contracted herpes simplex virus (HSV) experienced
"cold sores" related to reactivation of their HSV infection. Increased cold
sores caused
15
by HSV were also reported in previous clinical studies of ciliary neurotrophic
factor (also called CNTF), AXOKINE's parent molecule. In addition, some patients
in the study experienced a reversible and generally asymptomatic increase in
pulse rate in a dose-related fashion. The Phase II study of AXOKINE is being
conducted at doses that were associated with weight loss, generally well
tolerated, and not associated with herpes cold sores in the Phase I study; there
are no restrictions as to a subject's prior history of herpes cold sores. The
Phase II study is designed to confirm the weight loss observed in the Phase I
study in a trial of longer duration and to determine the lowest effective
well-tolerated dose. The Company also plans to collect additional data in the
study about the relationship of AXOKINE and reactivation of HSV, about the
effect of AXOKINE on pulse rate, and about the possible development of
neutralizing antibodies when AXOKINE is administered for a longer time.
No assurance can be made regarding the timing or final result of the
Phase II study or the timing or result of any further clinical trial of AXOKINE.
Previous clinical studies of AXOKINE and CNTF, in addition to weight loss,
resulted in the creation of neutralizing antibodies and adverse events (side
effects) in patients, including cough, nausea, malaise, and increased herpes
simplex cold sores. While certain aspects of the development of AXOKINE have
focused on attempting to avoid or minimize antibody production or adverse
events, no assurance may be given that these problems will be avoided or
minimized or that they will not lead to the failure, delay, or additional
difficulty in conducting AXOKINE clinical trials. We discuss the risks
associated with antibody development and adverse side effects in the section of
this report titled "Factors That May Affect Future Operating Results."
During the second quarter of 2000, Regeneron and The Procter & Gamble
Company continued to collaborate in research and development in the fields of
angiogenesis, cancer, bone growth and related areas, muscle injury and atrophy,
and small molecule (orally active) drugs. On August 3, 2000, Procter & Gamble
made two research progress payments to Regeneron totaling $3.5 million related
to preclinical development of the VEGF Trap, an antagonist to Vascular
Endothelial Growth Factor, that is being developed as a potential treatment for
cancer. In addition, on August 3, 2000, Procter & Gamble and Regeneron agreed
through a binding memorandum of understanding to enter into a new collaboration
agreement, replacing their 1997 agreement. The new agreement will extend Procter
& Gamble's obligation to fund Regeneron research through December 2005, with no
further research obligations by either party thereafter, and focus their
collaborative research on therapeutic areas that are of particular interest to
Procter & Gamble, including muscle atrophy and muscle diseases, fibrotic
diseases, and certain G-protein coupled receptors. Under the new agreement,
Procter & Gamble's research funding from July 2000 through December 2005 is
expected to total approximately $64 million (before adjustments for future
inflation). Any drugs that result from the collaboration will continue to be
jointly developed and marketed worldwide, with the companies equally sharing
development costs and profits.
Procter & Gamble and Regeneron have agreed to divide rights to the
programs that are no longer part of their collaboration. Procter & Gamble has
obtained rights to certain specified research programs. Regeneron has rights to
all other research programs, including exclusive rights to the VEGF Trap, the
Angiopoietins, and the RORs. Regeneron expects to begin clinical trials of the
VEGF Trap as a potential treatment for cancer in 2001. Regeneron is conducting
research on the Angiopoietins, and engineered forms of these growth factors, for
promoting the growth of blood vessels (to provide blood flow in diseased hearts
and other tissues that have lost their original blood supplies), for the
blocking of blood vessel growth (for the treatment of cancers), for
16
fixing leaky blood vessels (that cause swelling and edema in diseases such as
stroke, diabetic retinopathy, and inflammatory diseases), and for promoting the
growth and mobilization of certain hemopoietic cells (such as stem cells and
platelets). The Company is conducting research on the RORs, a growth factor
receptor system discovered by Regeneron scientists that is selectively expressed
by cartilage cells, for potential use in cartilage diseases such as
osteoarthritis.
Regeneron continues to develop, independent of any corporate
collaboration, its proprietary Cytokine Traps for the potential treatment of
rheumatoid arthritis and other inflammatory diseases, asthma, and allergic
disorders.
During the second quarter of 2000, Amgen-Regeneron Partners, the
partnership equally owned by Regeneron and Amgen Inc., continued to develop BDNF
and NT-3. BDNF is currently being developed by Amgen-Regeneron Partners for
potential use in treating ALS through two routes of administration: intrathecal
(infusion into the spinal fluid through an implanted pump, supplied by
Medtronic, Inc.) and subcutaneous (injection under the skin). In the fourth
quarter of 1998, Amgen, on behalf of the partnership began an intrathecal study
in more than 200 patients with ALS. Subcutaneous studies conducted by Regeneron
on behalf of the partnership began in the first quarter of 1998. The
subcutaneous studies are based on an analysis of the Amgen-Regeneron Partners
Phase III trial of BDNF for ALS that was completed in 1996. That trial failed to
achieve its predetermined end points, but subsequent analyses indicated that a
retrospectively-defined subset of ALS patients in the trial may have received a
survival benefit from BDNF treatment. A multi-center study of more than 300 ALS
patients who will receive BDNF subcutaneously began in August 1999 and is fully
enrolled.
Regeneron and Sumitomo Pharmaceuticals Co., Ltd. are collaborating in
the development of BDNF in Japan, initially for the treatment of ALS. In March
1998, Sumitomo Pharmaceuticals commenced a Phase I safety assessment of BDNF
delivered subcutaneously to normal volunteers and signed a license agreement for
the development of BDNF in Japan. Pursuant to the license agreement, Sumitomo
Pharmaceuticals made research progress payments to Regeneron of $5.0 million
(reduced by $0.5 million of Japanese withholding tax) in August 1998 and $3.0
million (reduced by $0.3 million of Japanese withholding tax) in April 2000, and
will be required to make additional payments upon the achievement of specified
milestones. Sumitomo Pharmaceuticals will also pay a royalty on sales of BDNF in
Japan.
Amgen-Regeneron Partners' clinical development of NT-3 is currently
focused on constipating conditions. In 1998, Regeneron, on behalf of
Amgen-Regeneron Partners, completed a small clinical study that included healthy
volunteers and patients suffering from severe idiopathic constipation, and began
additional small studies that are continuing in 2000 in patients who suffer from
constipation associated with conditions such as spinal cord injury and the use
of narcotic analgesics. In February 2000, Regeneron initiated a double-blind,
placebo-controlled Phase II study in more than 100 patients with functional
constipation.
No assurance can be given that extended administration of BDNF or NT-3
will be safe or effective. The treatment of ALS has been shown, in a number of
clinical settings using a variety of treatment modalities (including
Amgen-Regeneron Partners' earlier clinical studies), to present significant
difficulties. The design of an ALS clinical study presents special difficulties
and risks, as do the facts that ALS is a progressive disease that afflicts
individual patients differently and other ALS treatments are approved or have
been or are currently being tested, creating the possibility that patients in
any BDNF
17
study may also receive other therapeutics during all or part of the BDNF trial.
The treatment of constipating conditions may present additional clinical trial
risks in light of the complex and not wholly understood mechanisms of action
that lead to the conditions, the concurrent use of other drugs to treat the
underlying illnesses as well as the gastrointestinal condition, the potential
difficulty of designing and achieving significant clinical end points, and other
factors. No assurance can be given that these or any other studies of BDNF or
NT-3 will be successful or that BDNF or NT-3 will be commercialized.
A minority of all research and development programs ultimately result
in commercially successful drugs; it is not possible to predict whether any
program will succeed until it actually produces a drug that is commercially
marketed for a significant period of time. In addition, in each of the areas of
Regeneron's independent and collaborative activities, other companies and
entities are actively pursuing competitive paths toward similar objectives. The
results of the Company's and its collaborators' past activities in connection
with the research and development of AXOKINE, Cytokine Traps, Angiopoietins,
cancer, abnormal bone growth, muscle atrophy, small molecules, BDNF, NT-3, and
other programs or areas of research or development do not necessarily predict
the results or success of current or future activities including, but not
limited to, any additional preclinical or clinical studies. Regeneron cannot
predict whether, when, or under what conditions any of its research or product
candidates, including without limitation AXOKINE, BDNF, or NT-3, will be shown
to be safe or effective to treat any human condition or be approved for
marketing by any regulatory agency. The delay or failure of current or future
studies to demonstrate the safety or efficacy of its product candidates to treat
human conditions or to be approved for marketing could have a material adverse
impact on Regeneron.
Regeneron has not received any revenues from the commercial sale of
products and may never receive such revenues. Before such revenues can be
realized, Regeneron (or its collaborators) must overcome a number of hurdles
which include successfully completing its research and development efforts and
obtaining regulatory approval from the FDA or regulatory authorities in other
countries. The Company is attempting to develop drugs for human therapeutic use
and no assurance can be made that any of the Company's research and development
activities will be successful or that any of the Company's current or future
potential product candidates will be commercialized. In addition, the
biotechnology and pharmaceutical industries are rapidly evolving and highly
competitive, and new developments may render Regeneron's products and
technologies noncompetitive or obsolete.
From inception on January 8, 1988 through June 30, 2000, Regeneron had
a cumulative loss of $210.6 million. In the absence of revenues from commercial
product sales or other sources (the amount, timing, nature, or source of which
cannot be predicted), Regeneron's losses will continue as it conducts its
research and development activities. The Company's activities may expand over
time and may require additional resources, and the Company's operating losses
may be substantial over at least the next several years. Regeneron's losses may
fluctuate from quarter to quarter and will depend, among other factors, on the
timing of certain expenses and on the progress of its research and development
efforts.
18
Results of Operations
Three months ended June 30, 2000 and 1999. The Company's total revenue
increased to $16.7 million for the second quarter of 2000 from $7.2 million for
the same period in 1999. Contract research and development revenue increased to
$9.1 million for the second quarter of 2000 from $3.4 million for the same
period in 1999, as revenue from Procter & Gamble increased to $7.5 million for
the second quarter of 2000 from $2.9 million for the same period in 1999.
Effective in the third quarter of 1999, research support under the Company's
collaboration agreement with Procter & Gamble increased from $1.1 million per
quarter to $7.0 million per quarter. However, Procter & Gamble payments related
to AXOKINE research stopped in the third quarter of 1999 after Procter & Gamble
returned the product rights to AXOKINE to the Company. Revenue from
Amgen-Regeneron Partners increased to $1.4 million in the second quarter of 2000
from $0.4 million for the same period in 1999 due to increased clinical trial
activity on BDNF and NT-3. In the second quarter of 2000, research progress
payments consist of a payment of $3.0 million from Sumitomo Pharmaceuticals
related to the development of BDNF in Japan (reduced by $0.3 million of Japanese
withholding tax). Contract manufacturing revenue, related primarily to a
long-term agreement with Merck & Co., Inc. to manufacture a vaccine
intermediate, was $2.6 million in the second quarter of 2000 and $2.5 million
for the same period in 1999. In the second quarter of 1999, Merck revenue was
primarily compensation for services rendered related to preparing for commercial
production, which began in the fourth quarter of 1999. In the second quarter of
2000, Merck revenue was primarily payments related to commercial production.
Investment income increased to $2.2 million in the second quarter of 2000 from
$1.3 million for the same period in 1999 due to interest earned on the proceeds
of the Company's public offering, which was completed on April 4, 2000.
The Company's total operating expenses increased to $19.6 million in
the second quarter of 2000 from $15.0 million for the same period in 1999.
Research and development expenses increased to $14.4 million in the second
quarter of 2000 from $10.8 million for the same period in 1999, primarily as a
result of higher staffing and increased activity in the Company's preclinical
and clinical research programs. The loss in Amgen-Regeneron Partners increased
to $1.1 million in the second quarter of 2000 from $0.6 million for the same
period in 1999 due to the partnership's increased clinical trial activity on
BDNF and NT-3. Research and development expenses (including loss in
Amgen-Regeneron Partners) were approximately 79% of total operating expenses in
the second quarter of 2000, compared to 76% for the same period in 1999.
General and administrative expenses increased to $1.7 million in the
second quarter of 2000 from $1.5 million for the same period of 1999, due
primarily to higher administrative staffing and related occupancy costs.
Depreciation and amortization expense increased to $1.0 million in the second
quarter of 2000 from $0.8 million in the second quarter of 1999, resulting from
improvements made to the Company's leased facilities in Tarrytown, New York, as
well as purchases of new research equipment. Contract manufacturing expenses,
related primarily to the long-term Merck agreement to manufacture a vaccine
intermediate at the Company's Rensselaer, New York facility, were $1.3 million
in the second quarter of 2000 and $1.2 million for the same period in 1999. In
the second quarter of 1999, Merck expenses related to preparing for commercial
production of the vaccine intermediate, which began in the fourth quarter of
1999. In the second quarter of 2000, Merck expenses related primarily to the
cost of vaccine intermediate produced and shipped. Interest expense was $0.1
million for the second quarter of both 2000 and 1999.
19
The Company's net loss for the second quarter of 2000 was $2.9 million,
or $0.08 per share (basic and diluted), compared to a net loss of $7.8 million,
or $0.25 per share (basic and diluted), for the same period in 1999.
Six months ended June 30, 2000 and 1999. The Company's total revenue
increased to $28.4 million for the six months ended June 30, 2000 from $14.1
million for the same period in 1999. Contract research and development revenue
increased to $18.3 million for the six months ended June 30, 2000 from $6.7
million for the same period in 1999, as revenue from Procter & Gamble increased
to $14.6 million for the first half of 2000 from $5.8 million for the same
period in 1999. Effective in the third quarter of 1999, research support under
the Company's collaboration agreement with Procter & Gamble increased from $1.1
million per quarter to $7.0 million per quarter. However, Procter & Gamble
payments related to AXOKINE research stopped in the third quarter of 1999 after
Procter & Gamble returned the product rights to AXOKINE to the Company. Revenue
from Amgen-Regeneron Partners increased to $3.3 million for the six months ended
June 30, 2000 from $0.8 million for the same period in 1999 due to increased
clinical trial activity on BDNF and NT-3. In the first half of 2000, research
progress payments consist of a payment of $3.0 million from Sumitomo
Pharmaceuticals related to the development of BDNF in Japan (reduced by $0.3
million of Japanese withholding tax). Contract manufacturing revenue, related
primarily to the Merck Agreement, decreased to $4.0 million for the six months
ended June 30, 2000, compared to $4.6 million for the same period in 1999. In
the first half of 1999, Merck revenue was primarily compensation for services
rendered related to preparing for commercial production, which began in the
fourth quarter of 1999. In the first half of 2000, Merck revenue was primarily
payments related to commercial production. Investment income for the six months
ended June 30, 2000 increased to $3.4 million from $2.8 million for the same
period in 1999 due to interest earned on the proceeds of the Company's public
offering, which was completed on April 4, 2000.
The Company's total operating expenses increased to $38.7 million for
the six months ended June 30, 2000 from $30.9 million for the same period in
1999. Research and development expenses increased to $26.4 million in the first
six months of 2000 from $22.0 million for the same period in 1999, primarily as
a result of higher staffing and increased activity in the Company's preclinical
and clinical research programs. The loss in Amgen-Regeneron Partners increased
to $2.4 million in the first half of 2000 from $1.6 million for the same period
in 1999 due to the partnership's increased clinical trial activity on BDNF and
NT-3. Research and development expenses (including loss in Amgen-Regeneron
Partners) were approximately 74% of total operating expenses in the first six
months of 2000, compared to 76% for the same period in 1999.
General and administrative expenses increased to $3.5 million for the
six months ended June 30, 2000 from $3.1 million for the same period in 1999 due
primarily to higher administrative staffing and related occupancy costs.
Depreciation and amortization expense increased to $2.0 million for the six
months ended June 30, 2000 from $1.6 million for the same period in 1999 as a
result of improvements made to the Company's leased facilities in Tarrytown as
well as purchases of new research equipment. Contract manufacturing expenses
increased to $4.3 million in the first half of 2000 from $2.4 million in the
same period of 1999, due primarily to first quarter costs associated with
initiating commercial production at the Company's Rensselaer facility of both
vaccine intermediate for Merck and BDNF for Sumitomo Pharmaceuticals for
clinical use. Interest expense was $0.2 million for both the first six months of
2000 and 1999.
20
The Company's net loss for the six months ended June 30, 2000 was $10.3
million, or $0.31 per share (basic and diluted), compared to a net loss of $16.8
million, or $0.54 per share (basic and diluted), for the same period in 1999.
Liquidity and Capital Resources
Since its inception in 1988, the Company has financed its operations
primarily through private placements and public offerings of its equity
securities, revenue earned under the agreements between the Company and Amgen,
Sumitomo Chemical Company, Ltd., Sumitomo Pharmaceuticals, Merck, and Procter &
Gamble, and investment income.
In May 1997, Regeneron and Procter & Gamble entered into the P&G
Agreement. Procter & Gamble agreed over the first five years of the P&G
Agreement to purchase up to $60.0 million in Regeneron equity (of which $42.9
million was purchased in June 1997 and $17.1 million was purchased in August
2000) and provide funding in support of Regeneron's research efforts related to
the collaboration (of which $31.0 million had been received through June 30,
2000). In August 2000, Procter & Gamble made two research progress payments to
Regeneron totaling $3.5 million related to preclinical development of the VEGF
Trap. In addition, in August 2000, Procter & Gamble and Regeneron agreed through
a binding memorandum of understanding to enter into a new collaboration
agreement, replacing their 1997 agreement. The new agreement will extend Procter
& Gamble's obligation to fund Regeneron research through December 2005, with no
further research obligations by either party thereafter, and focus their
collaborative research on therapeutic areas that are of particular interest to
Procter & Gamble, including muscle atrophy and muscle diseases, fibrotic
diseases, and certain G-protein coupled receptors. Any drugs that result from
the collaboration will continue to be jointly developed and marketed worldwide,
with the companies equally sharing development costs and profits. Under the
original P&G Agreement, research support from Procter & Gamble would have been
$6.8 million per quarter (before adjustments for future inflation) from July
2000 through June 2002. Under the new agreement, beginning in the first quarter
of 2001, research support from Procter & Gamble will be $2.5 million per quarter
(before adjustments for future inflation) through December 2005 and total
funding from July 2000 through December 2005 will be approximately $64 million.
In connection with Regeneron's agreement to collaborate with Sumitomo
Pharmaceuticals in the research and development of BDNF in Japan, Sumitomo
Pharmaceuticals paid the Company $25.0 million through December 1997. The
Company also received research progress payments from Sumitomo Pharmaceuticals
of $5.0 million (reduced by $0.5 million of Japanese withholding tax) in August
1998 and $3.0 million (reduced by $0.3 million of Japanese withholding tax) in
April 2000. In addition, Sumitomo Pharmaceuticals has paid the Company $27.6
million through June 30, 2000 in connection with supplying BDNF for preclinical
and clinical use. Regeneron did not supply any BDNF to Sumitomo Pharmaceuticals
in 1999. During the fourth quarter of 1999, Regeneron commenced production of
BDNF and began capitalizing manufacturing costs into inventory. The Company
expects to resume supplying BDNF to Sumitomo Pharmaceuticals for clinical use in
2000.
The Company's activities relating to BDNF and NT-3, as agreed upon by
Amgen and Regeneron, are being compensated by Amgen-Regeneron Partners for
services rendered, and the Company recognizes such amounts as revenue. The
funding of Amgen-Regeneron Partners is through capital contributions from Amgen
and Regeneron, who must make equal payments in order to maintain equal ownership
and equal sharing
21
of any profits or losses from the partnership. The Company has made capital
contributions totaling $53.7 million to Amgen-Regeneron Partners from the
partnership's inception in June 1993 through June 30, 2000. These contributions
could increase or decrease, depending upon (among other things) the nature and
cost of BDNF and NT-3 studies that Amgen-Regeneron Partners may conduct and the
outcomes of those studies.
From its inception in January 1988 through June 30, 2000, the Company
invested approximately $70.5 million in property, plant, and equipment. This
includes $18.0 million to acquire and renovate the Rensselaer facility and an
additional $14.1 million to complete construction at the facility pursuant to
the Merck manufacturing agreement. In connection with the purchase and initial
renovation of the Rensselaer facility, the Company obtained financing of $2.0
million from the New York State Urban Development Corporation, of which $1.6
million is outstanding. Under the terms of this UDC financing, the Company is
not permitted to declare or pay dividends on its equity securities.
The Company expects that expenses related to the filing, prosecution,
defense, and enforcement of patent and other intellectual property claims will
continue to be substantial as a result of patent filings and prosecutions in the
United States and foreign countries. The Company is currently involved in
interference proceedings in the Patent and Trademark Office between Regeneron's
patent applications and patents relating to CNTF issued to Synergen, Inc. Amgen
acquired all outstanding shares of Synergen in 1994. In March 1998, the Company
and Amgen entered into a covenant not to sue each other which, among other
things, provided a simple mechanism for resolving their patent interference and
related patent proceedings relating to CNTF and AXOKINE without protracted
litigation. The Company also granted Amgen a license to use CNTF and second
generation CNTFs other than AXOKINE to treat retinal degenerative conditions.
Regeneron will not pay royalties or make other payments to the other party in
consideration of this agreement.
As of June 30, 2000, the Company had no established banking
arrangements through which it could obtain short-term financing or a line of
credit. Additional funds may be raised through, among other things, the issuance
of additional securities, other financing arrangements, and future collaboration
agreements. No assurance can be given that additional financing will be
available or, if available, that it will be available on acceptable terms. On
April 4, 2000, Regeneron completed a public offering of 2.6 million shares of
Common Stock at a price of $29.75 per share for proceeds to the Company, after
commissions and expenses, of $72.9 million.
At June 30, 2000, the Company had $144.9 million in cash, cash
equivalents, and marketable securities. On August 3, 2000, Regeneron sold
573,630 shares of Common Stock to Procter & Gamble at a price of $29.75 per
share for total proceeds to the Company of $17.1 million. The sale of stock was
made pursuant to the 1997 P&G Agreement. The Company expects to incur
substantial funding requirements for, among other things, research and
development activities (including preclinical and clinical testing), validation
of manufacturing facilities, and the acquisition of equipment. The Company
expects to incur ongoing funding requirements for capital contributions to
Amgen-Regeneron Partners to support the continued development and clinical
trials of BDNF and NT-3. Through 2000, the Company expects further increases in
the level of quarterly research and development expenses as the Company
continues to add staff and increases its clinical activity. The amount needed to
fund operations will also depend on other factors, including the status of
competitive products, the success of the Company's research and development
programs, the status of patents and other intellectual property
22
rights developments, and the continuation, extent, and success of any
collaborative research programs (including those with Amgen and Procter &
Gamble). The Company believes that under its current strategy its existing
capital resources will enable it to meet operating needs for at least two years.
No assurance can be given that there will be no change in projected revenues or
expenses that would lead to the Company's capital being consumed significantly
before such time.
Impact of the Adoption of Recently Issued Accounting Standards
In December 1999, the staff of the Securities and Exchange Commission
("SEC") issued Staff Accounting Bulletin 101, Revenue Recognition, ("SAB 101").
SAB 101 requires companies who receive license and milestone payments, whether
refundable or non-refundable, to recognize them ratably over the period that the
related services are rendered.
In the period of adoption, companies will be required to report the
cumulative effect of this change in accounting principle as a separate component
in net income (or loss). Regeneron is required to adopt SAB 101 during the
quarter ended December 31, 2000, and is currently evaluating how to apply SAB
101 and the impact that it will have on the Company's financial statements.
Although the effects of SAB 101 cannot be fully determined at this time, the
Company estimates that, if SAB 101 had been adopted as of June 30, 2000, the
cumulative charge to earnings, and corresponding increase in deferred revenue
which will be recognized in future periods, would have been less than $7
million.
Factors That May Affect Future Operating Results
Regeneron cautions stockholders and potential investors that the
following important factors, among others, in some cases have affected, and in
the future could affect, Regeneron's actual results and could cause Regeneron's
actual results to differ materially from those expressed in any forward-looking
statements made by, or on behalf of, Regeneron. The statements under this
caption are intended to serve as cautionary statements within the meaning of the
Private Securities Litigation Reform Act of 1995. The following information is
not intended to limit in any way the characterization of other statements or
information under other captions as cautionary statements for such purpose:
o Delay, difficulty, or failure of the Company's research and development
programs to produce product candidates that are scientifically or
commercially appropriate for further development by the Company or
others.
o Cancellation or termination of material collaborative or licensing
agreements (including in particular, but not limited to, those with
Procter & Gamble and Amgen) and the resulting loss of research or other
funding could have a material adverse effect on the Company and its
operations. A change of control of one or more of the Company's
material collaborators or licensees could also have a material adverse
effect on the Company.
o Delay, difficulty, or failure of a clinical trial of any of the
Company's product candidates. A clinical trial can fail or be delayed
as a result of many causes, including, among others, failure of the
product candidate to demonstrate safety or
23
efficacy, the development of serious or life-threatening adverse events
(side effects) caused by or connected with exposure to the product
candidate, and the failure of clinical investigators, trial monitors
and other consultants, or trial subjects to comply with the trial plan
or protocol.
o In addition to the safety, efficacy, manufacturing, and regulatory
hurdles faced by Regeneron's drug candidates, the administration of
recombinant proteins frequently causes an immune response, resulting in
the creation of antibodies against the therapeutic protein. The
antibodies can have no effect or can totally neutralize the
effectiveness of the protein, or require that higher doses be used to
obtain a therapeutic effect. In some cases, the antibody can
cross-react with the patient's own proteins, resulting in an
"auto-immune type" disease. Whether antibodies will be created can
often not be predicted from preclinical experiments and their
appearance is often delayed, so that there can be no assurance that
neutralizing antibodies will not be created at a later date -- in some
cases even after pivotal clinical trials have been successfully
completed. Patients who have been treated with AXOKINE, BDNF, and NT-3
have developed antibodies, though we have no information that indicates
that these antibodies are neutralizing antibodies.
o Delay, difficulty, or failure in obtaining regulatory approval
(including approval of its facilities for production) for the Company's
products, including delays or difficulties in development because of
insufficient proof of safety or efficacy.
o Increased and irregular costs of development, manufacture, regulatory
approval, sales, and marketing associated with the introduction of
products in the late stage of development.
o Competitive or market factors that may cause use of the Company's
products to be limited or otherwise fail to achieve broad acceptance.
o The ability to obtain, maintain, and prosecute intellectual property
rights and the cost of acquiring in-process technology and other
intellectual property rights, either by license, collaboration, or
purchase of another entity.
o Difficulties or high costs of obtaining adequate financing to meet the
Company's obligations under its collaboration and licensing agreements
or to fund 50 percent of the cost of developing product candidates in
order to retain 50 percent of the commercialization rights.
o Amount and rate of growth of Regeneron's general and administrative
expenses, and the impact of unusual charges resulting from Regeneron's
ongoing evaluation of its business strategies and organizational
structure.
o Failure of corporate partners to develop or commercialize successfully
the Company's products or to retain and expand the markets served by
the commercial collaborations; conflicts of interest, priorities, and
commercial strategies which may arise between Regeneron and its
corporate partners.
24
o Delays or difficulties in developing and acquiring production
technology and technical and managerial personnel to manufacture novel
biotechnology product in commercial quantities at reasonable costs and
in compliance with applicable quality assurance and environmental
regulations and governmental permitting requirements.
o Difficulties in obtaining key raw materials and supplies for the
manufacture of the Company's product candidates.
o The costs and other effects of legal and administrative cases and
proceedings (whether civil, such as product- or employment-related, or
environmental, or criminal); settlements and investigations;
developments or assertions by or against Regeneron relating to
intellectual property rights and licenses; the issuance and use of
patents and proprietary technology by Regeneron and its competitors,
including the possible negative effect on the Company's ability to
develop, manufacture, and sell its products in circumstances where it
is unable to obtain licenses to patents which may be required for such
products.
o Underutilization of the Company's existing or new manufacturing
facilities or of any facility expansions, resulting in inefficiencies
and higher costs; start-up costs, inefficiencies, delays, and increased
depreciation costs in connection with the start of production in new
plants and expansions.
o Health care reform, including reductions or changes in reimbursement
available for prescription medications or other reforms.
o The ability to attract and retain key personnel.
As Regeneron's scientific efforts lead to potentially promising new
directions, both outside of recombinant protein therapies and into conditions or
diseases outside of Regeneron's current areas of experience and expertise, the
Company will require additional internal expertise or external collaborations in
areas in which it currently does not have substantial resources and personnel.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
The Company's earnings and cash flows are subject to fluctuations due
to changes in interest rates primarily from its investment of available cash
balances in investment grade corporate and U.S. government securities. The
Company does not believe it is materially exposed to changes in interest rates.
Under its current policies the Company does not use interest rate derivative
instruments to manage exposure to interest rate changes.
25
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On June 9, 2000, the Company conducted its Annual Meeting of
Shareholders pursuant to due notice. A quorum being present either in person or
by proxy, the shareholders voted on the following matters:
1. To elect three Directors to hold office for a three-year term as
Class III directors, and until their successors are duly elected and qualified.
2. To approve the Regeneron Pharmaceuticals, Inc. 2000 Long-Term
Incentive Plan.
3. To approve the selection of PricewaterhouseCoopers LLP as
independent accountants for the Company's fiscal year ending December 31, 2000.
No other matters were voted on. The number of votes cast was:
Withheld
For Authority
---------- ---------
1. Election of Class III Directors
Charles A. Baker 51,392,589 1,692,449
Michael S. Brown, M.D. 51,392,589 1,692,449
George L. Sing 51,392,589 1,692,449
The terms of office of Leonard S. Schleifer, M.D., Ph.D., Eric M.
Shooter, Ph.D., Fred A. Middleton, Alfred G. Gilman, M.D., Ph.D., Joseph L.
Goldstein, M.D., and P. Roy Vagelos, M.D. continued after the meeting.
For Against Abstain
--- ------- -------
2. Approval of 2000 Long-Term
Incentive Plan 39,188,122 6,291,924 41,734
For Against Abstain
--- ------- -------
3. Approval of accountants 52,029,438 15,058 8,310
26
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports
On April 4, 2000, the Company filed a report on Form 8-K
covering the filing of the underwriting agreement related to the sale
by the Company of 2.6 million shares of Common Stock with total
proceeds to the registrant after commissions but before expenses of
$73.5 million.
27
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Regeneron Pharmaceuticals, Inc.
Date: August 11, 2000 By: /s/ Murray A. Goldberg
--------------------------------------
Murray A. Goldberg
Vice President, Finance & Administration,
Chief Financial Officer, Treasurer and
Assistant Secretary
5
1000
6-MOS
DEC-31-2000
JAN-01-2000
JUN-30-2000
81,751
63,168
9,568
0
7,931
137,464
70,549
33,115
202,117
13,027
0
0
0
32
175,939
202,117
0
28,391
0
38,489
0
0
167
(10,265)
0
(10,265)
0
0
0
(10,265)
(0.31)
(0.31)
