雷傑納榮製藥 (REGN) 2012 Q3 法說會逐字稿

Good morning ladies and gentlemen, and welcome to the Regeneron Pharmaceuticals conference call to discuss the third quarter 2012 financial results.

My name is Kevin and I will be your coordinator today.

At this time, all participants are in a listen-only mode.

We will conduct a question and answer session towards the end of this call.

As a reminder, this conference is being recorded for replay purposes.

I will now turn the call over to Dr. Michael Aberman, Vice President of Strategy and Investor Relations for Regeneron.

Please proceed Dr. Aberman.

Thank you Kevin.

Good morning, and welcome to Regeneron Pharmaceuticals third quarter 2012 conference call.

An archive of this webcast will be available on our website in the News Room page for at least the next 30 days.

Joining me on the call today are Dr. Leonard Schleifer, Founder, President, and Chief Executive Officer, George Yancopoulos, Founding Science President of Regeneron Labs and Chief Scientific Officer, Murray Goldberg, Chief Financial Officer, and Bob Terifay, Senior Vice President, Commercial.

After our prepared remarks we will open the call for Q&A.

I would also like to remind you that remarks made on this call not historical in nature may be forward-looking statements about Regeneron, and are subject to a number of risks and uncertainties.

Actual events and our actual results may differ materially.

Such remarks may include but are not limited to do, those related to Regeneron its products and businesses, development programs, collaborations, finances, taxes, regulatory matters, intellectual property and competition, all of which involve a number of risks and uncertainties.

A more complete description of these and other material risks can be found in Regeneron's filing with United States Securities and Exchange Commission, or SEC, including its Form 10-K for the year ended December 31, 2011, and Form 10-Q for the quarter ended September 30th, 2012, which were filed this morning.

Regeneron does not undertake any obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise unless required by law.

GAAP and non-GAAP measures will be discussed on today's call, information regarding our use of non-GAAP financial measures, and a reconciliation of these measures to GAAP is available in our third quarter 2012 financial results press release which can be accessed on our website.

Once our call concludes, the IR team will be available to answer further questions.

With that, let me turn the call over to our President and Chief Executive Officer, Dr. Leonard Schleifer.

Thanks Michael.

Good morning to everybody, and thanks for joining us.

I am happy to report another successful quarter for Regeneron, both in terms of our financial performance, as well as our progress in our pipeline.

Starting with EYLEA we reported US EYLEA net sales of $244 million this quarter, representing a 26% growth over the second quarter of this year.

Given the EYLEA results and current market trends, we are increasing our full-year US EYLEA net sales guidance from our previous range of $700 million to $750 million, to our new guidance of $790 million to $815 million.

Our guidance takes into consideration that the combination of the Thanksgiving and end of year holidays could lead to as much as one less week of potential sales.

The strong US EYLEA sales help deliver our third consecutive profitable quarter with non-GAAP net income of $217 million, which translates into non-GAAP fully diluted earnings per share of $1.89.

Murray Goldberg will provide color on our financial performance later in the call.

In the meantime, please note that this quarter's profits included two one-time milestone payments, a $15 million milestone from Sanofi for the US FDA approval of ZALTRAP, also known as Ziv-aflibercept, in combination with FOLFIRI for patients with metastatic colorectal cancer that is resistant to or has progressed following an oxaliplatin containing regimen.

And a $15 million milestone from Bayer HealthCare for the approval of EYLEA in wet AMD in Japan.

With the strong results reported today, we can expect our first profitable full year since our inception.

It has also been a busy quarter in both the regulatory and clinical development fronts.

In addition to ZALTRAP approval in the US, we received US FDA approval for EYLEA for the treatment of macular edema following central retinal vein occlusion, or CRVO.

We are pleased to be able to provide another treatment option for the physicians and patients that are impacted by this condition.

This is also an important step towards our goal of driving long term growth for EYLEA through new indications.

Outside the United States, our partner Bayer HealthCare has received several regulatory approvals for EYLEA, including Japan, Australia, Columbia, and most recently Brazil.

In addition in Europe, the Committee for Medicinal Products for Human use, also known as the CHMP, recommended that EYLEA be approved for wet AMD, and we expect marketing amortization by year end.

Bayer HealthCare plans to launch EYLEA in Japan, the EU, Australia, and other countries beginning later this year, and continuing into 2013.

Turning to our antibody pipeline we initiation of a broad Phase 3 program for our PCSK9 antibody REGN727 for lowering LDL cholesterol.

We also announced the full enrollment of our first Phase 3 trial MOBILITY, for Sarilulmab, our antibody targeting the IL-6 receptor in rheumatoid arthritis, and have also initiated a second trial in the broad SARIL-RA program for sarilumab, that we call the TARGET trial.

Our earlier stage programs continue to move forward with new antibodies entering the clinic, such as our novel oncology antibody targeting ErbB3, and we have started a combination trial with our Ang2 antibody and ZALTRAP.

Let me now hand the call over to our Chief Scientific Officer, George Yancopoulos, to give more details on the developments in our pipeline.

Following George, we will hear a commercial update from Bob Terifay, a financial update from Murray Goldberg, and finally I will come back to make some concluding remarks before turning the call over to questions and answers.

George?

Thank you, Len.

The third quarter has been another busy one for us.

This quarter was particularly gratifying with the two FDA approvals Len mentioned in the United States.

Although we have enjoyed numerous regulatory approvals over the past year, we certainly appreciate that in this industry drug approvals are not commonplace.

We are extremely proud of the accomplishments of all of the groups at Regeneron who contributed to the success.

ZALTRAP also known as ziv-aflibercept was approved in combination with FOLFIRI for patients with metastatic colorectal cancer that is resistant to or has progressed following an oxaliplatin containing regimen.

ZALTRAP is the only anti-VEGF agent approved in this setting.

We received approval for EYLEA in the setting of macular edema following central retinal vein occlusion, or CRVO.

While the commercial opportunity for CRVO is not as large as wet AMD or diabetic macular edema, where we have two fully-enrolled Phase 3 trials, the vision loss associate with CRVO can be catastrophic to patients.

EYLEA demonstrated significant efficacy in our Copernicus and Galileo trials in CRVO patients, with 56% and 60% three line gainers for the EYLEA arm, versus 12% and 22% for the sham control arms of these trials at week 24,compared with baseline.

Mean change in visual acuity improved by 17.3 and 18.2 letters with EYLEA, as compared to a four letter loss in Copernicus, and a 3.3 letter gain in Galileo with the sham control arm over the first 24 weeks of the study.

The most common adverse reactions, 5% or more, reported in patients receiving EYLEA were conjunctival hemorrhage, eye pain, cataract, vitreous detachment, vitreous floaters, and increased intraocular pressure.

We believe that EYLEA offers an important new treatment option for patients with this potentially blinding disease.

Turning to our late stage R&D pipeline as we reported in our last conference call, early in the third quarter Sanofi and Regeneron announced the launch of the 22,000 patient global Phase 3 program for Regeneron 727, our PCFK9 antibody for lowering LDL cholesterol.

This program called ODYSSEY consists of more than 10 clinical trials to evaluate the safety and efficacy of Regeneron 727 in a broad range of patients.

At the upcoming American Heart Association meeting in Los Angeles, we will present some novel analysis from our Phase 2 program for Regeneron 727, we along with our partner Sanofi will be hosting a webcast and teleconference for investors on Monday November 5th from the American Heart Association Annual Meeting to provide some additional prospective on our Phase 3 program.

Details on that event will follow shortly and will be posted on the Investor Relations section of our website.

I am also very pleased to announce today that the global Phase 3 MOBILITY trial for sarilumab, our subcutaneous IL-6 receptor antibody for rheumatoid arthritis is now fully enrolled.

The MOBILITY trial which is part of the global SARIL-RA Phase 3 program is evaluating sarilumab in combination with methotrexate in adults who have moderate to severe active rheumatoid arthritis with an inadequate response to methotrexate.

With enrollment now complete, we expect results from this study in 2014.

In addition, we have now initiated another Phase 3 study in the SIRIL-RA program called the TARGET trial.

TARGET is now recruiting and will evaluate sarilumab in combination with nonbiological disease modifying anti rheumatic drugs, also known as DMAD, in adult patients with moderate to severe RA who have an inadequate response to, or are intolerant of one or more TNF-alpha inhibitors.

Patients who complete the MOBILITY or TARGET studies will be eligible to enroll in the EXTEND trial, which is a Phase 3 long term safety and efficacy study.

We will be announcing additional phase 3 study of sarilumab in 2013.

Another pipeline that is in advanced development is our NGF antibody, Regeneron 475, earlier this year and FDA advisory committee voted unanimously in favor of providing a clinical path forward for developing anti-NGFs for pain associated with osteoarthritis, which we believe represents a significant market opportunity.

We are working with the FDA to define the next steps.

Turning to our earlier stage programs, we are particularly excited about developments in our oncology pipeline.

During the third quarter, we initiated with Sanofi, the first clinical trial combining one of our novel anti-angiogenic antibodies with ZALTRAP.

In this case it is our antibody to angiopoietin-2 called Regeneron 910.

While this is clearly an early first step, we are strong believers in the need to combine different anti-angeogenic modalities to improve the impact of anti-angiogenic agents for the treatment of cancer, and we are looking forward to testing this and other novel combinations.

We also advanced into clinical development in another novel oncology antibody that falls outside of the Sanofi collaboration.

Regeneron 1400 targets ErbB3 an emerging important target in the epidermal growth factor family.

In addition to ongoing trials with EYLEA and ZALTRAP, we now have ten antibodies in the clinic, of which six are partnered with Sanofi.

We also have an additional earlier stage projects that are advancing towards the clinic, and we look forward to updating you as they move forward in development.

I would like to now turn the call over to Bob Terifay, who will provide an update on EYLEA.

Thank you George.

We continue to be proud of the successful launch to-date of EYLEA, or aflibercept injection.

And the third quarter was no exception, as evidenced by $244 million in sales.

The overall penetration of EYLEA into the wet AMD market continued to grow during the third quarter, both in terms of newly-treated patients, as well as patients switching from bevacizumab and ranibizumab, importantly, much of this growth came from new retinal practices that appear to have been bevacizumab-only practices in the past.

There are two reasons why physicians report that they are adopting EYLEA.

First the convenience of the dosing regimen, and secondly, efficacy.

Retinal specialists satisfaction with the efficacy of EYLEA was underscored at the recent Annual Scientific Meeting of the American Society of Retinal Surgeons, or ASRS, which took place in August.

At this meeting, there were nine independently-prepared presentations from retinal practices around the country, they reported their positive initial experiences with EYLEA, specifically in patients switched from ranibizumab or bevacizumab.

These data provided additional insight into the differentiated product reception of EYLEA in this specific switch population.

Turning now to reimbursement, remember that EYLEA is a buy and build product, and as such successful reimbursement is key.

We continue to witness successful reimbursement in wet AMD from all of the regional Medicare carriers,secondary and supplemental insurers and commercial and private payors, all targeted commercial payors are now covering EYLEA, with many of them now having published coverage policies.

As I mentioned last quarter as of July 1st we were give a temporary Q-code, which will be followed by a permanent J code, which we expect in January 2013.

As you know, the Q-code facilitates an automated reimbursement.

In our experience so far, there has been a streamlining of the reimbursement process following the Q-code.

Since the Q-code is issued, physicians indicate that the average time for reimbursement of Medicare claims has improved.

We remain very pleased with the growth of EYLEA in wet AMD to date.

As you know, another avenue of growth for EYLEA is expansion into other indications, and we are happy to report that in the third quarter, EYLEA received approval for the treatment of macular edema following CRVO in the US.

Given that EYLEA was only approved for five working days in the third quarter it is too early in the launch of the macular edema following CRVO indication to gauge impact on sales.

But what I can share with you is as of today, all Medicare carriers have reported that they are reimbursing for EYLEA in this new indication.

Turning to our guidance, for EYLEA net sales for the remainder of the year.

We are cognizant of a couple of important factors.

As you know, we have now penetrated the vast majority of accounts that have been identified as ranibizumab accounts.

We also have several hundred accounts now purchasing EYLEA that were not identified as ranibizumab accounts.

The number of accounts that treat wet AMD and have not yet purchased EYLEA are limited.

Second, we see the patients continuing on EYLEA therapy are moving towards less frequent dosing.

Importantly for the coming quarter, we also expect some seasonality with the Thanksgiving and Christmas holidays in the quarter.

As we expect many practices to be closed for the last week of the year, and some patients will likely delay injections until after the holidays.

Beyond the US, we see tremendous opportunity for EYLEA.

The X-US wet AMD market is just as big if not bigger than the US market.

In the third quarter, we along with our X-US partner Bayer HealthCare, announced that EYLEA had received a positive opinion from the Committee for Medicinal Products for Human Use in the EU.

Bayer will launch EYLEA for the treatment of wet AMD in various European territories following approval, which is expected later this year.

EYLEA has also been approved for the treatment of wet AMD in Australia, Japan, Columbia, and Brazil, with launches anticipated beginning late this year.

I would now like to turn from ophthalmology to oncology.

Where we made our first foray in the third quarter with the approval of ZALTRAP, also known as ziv-aflibercept.

We co-commercialized ZALTRAP with our partner Sanofi.

Interest in the use of ZALTRAP in its approved medical setting, where historically there was no therapy demonstrated to do approval overall survival in combination with the standard of care chemotherapy regimen FOLFIRI is highlighted by the $8.3 million in net sales recorded by Sanofi in the United States from August 20th to September 30th.

With that, let me turn the call over to Murray Goldberg.

Thank you Bob, and good morning to everyone.

I am very pleased to discuss our financial results for the third quarter of 2012, which was the third consecutive quarter of profitability for Regeneron.

Total revenue this quarter was $428 million, which included EYLEA net sales of $244 million, and ARCALYST net sales of $5 million.

As Len already mentioned, revenue for the quarter already included a $50 million milestone from Sanofi, and a $15 million milestone from Bayer, which I will discuss in a moment.

In terms of EYLEA, net sales have now grown from $124 million in the first quarter, to $194 million in the second quarter, to $244 million this past quarter.

We now forecast full year US EYLEA net sales of $790 million to $815 million.

EYLEA inventory held by distributors in the third quarter was consistent with prior quarters, at about one to two weeks of sales.

Sanofi collaboration revenue for the third quarter was $145 million, and has a number of components, including reimbursement of our R&D expenses for preclinical and clinical research within our antibody collaboration, as well as our share of the loss associated with preparing for commercialization of ZALTRAP and then launch in August, plus the ZALTRAP milestone payment.

As you heard from Bob we are pleased with the $8 million of ZALTRAP net sales in the third quarter, representing about six weeks of initial sales.

During the initial launch period we expect ZALTRAP to operate at a loss, and this quarter our share of that loss was about $7.5 million.

Looking forward we expect this loss to increase as Sanofi launches ZALTRAP around the world, following approval in each country.

The cash impact of these early losses on us is mitigated by the $50 million approval milestone that we received in the third quarter.

Note also that even after ZALTRAP turns profitable, we are obligated to begin to repay Sanofi for our share of development costs.

So we do not expect to show profits from ZALTRAP on our income statement for at least the next couple of years.

For the third quarter, Bayer HealthCare collaboration revenue was $27 million, and represents Bayer's reimbursement for their share of EYLEA development expenses that we incurred.

It also includes the $15 million milestone that we received for the approval of EYLEA in Japan.

As Bayer launches EYLEA in each country outside of the US, we will start to share commercialization expenses and profits and losses from commercialization in these countries, except for Japan where we receive a royalty on sales.

We also expect a $10 million milestone in the fourth quarter from Bayer HealthCare upon pricing approval of commercialization of EYLEA outside of the US.

Cost of goods sold in the third quarter was $20 million, or 8.1%of total net product sales, consistent with our prior guidance of cost of goods sold averaging less than 10%.

As a reminder, this includes royalty expense in connection with our agreement with Genentech relating to opthalmic sales of EYLEA in the US.

Turning to R&D, non-GAAP R&D expense was $145 million, compared to $120 million in the third quarter last year.

If we net out R&D reimbursements from our collaborators from our R&D expense line, our net non-GAAP unreimbursed R&D expense for the third quarter 2012 was $38 million, similar to the $37 million in the second quarter this year.

We expect total unreimbursed non-GAAP R&D expense for the full year to range between $160 million and $200 million, which implies a fourth quarter unreimbursed non-GAAP R&D expense of $50 million to $90 million.

This potential substantial increase in the fourth quarter is primarily due to the fact that we expect full-year discovery preclinical spending under the Sanofi antibody agreement, to exceed the amount that Sanofi is obligated to reimburse.

The difference will all fall into the fourth quarter.

Therefore, fourth quarter unreimbursed R&D expenses should not be extrapolated as a run rate for 2013.

With respect to SG&A, our non-GAAP SG&A expense for the third quarter was approximately $40 million, compared to $28 million in the same quarter of 2011.

We now expect our full year 2012 non-GAAP SG&A expense to be in the $160 million to $180 million range, below our prior guidance of $180 million to $210 million.

As a reminder, non-GAAP R&D and non-GAAP SG&A expenses exclude noncash share-based compensation expense.

Turning now to the bottom line, we reported non-GAAP net income of $217 million for the third quarter, which translates into non-GAAP fully diluted EPS of $1.89.

Non-GAAP EPS excludes noncash share-based compensation expense and noncash interest expense related to our senior convertible notes.

On a GAAP basis, we reported net income of $191 million, and fully diluted EPS of $1.72.

Included in both the GAAP and non-GAAP EPS are the two one-time milestones totaling $65 million that went directly to the bottom line.

Now that we have reported three consecutive quarters of profitability, it seems appropriate to begin discussing and looking ahead to booked and cash income taxes.

We currently have significant net operating loss carry forwards, and tax credit carry forwards available to offset future taxable income.

In fact, given the magnitude of our existing NOL and tax credit carry forwards, plus significant additional tax deductions we expect in connection with future employee exercises of stock options, we do not expect to pay any significant cash income taxes through at least 2014.

On a book basis, things are more complicated.

Even though we have a large amount of NOLs and tax credits that are available to offset future taxable income, under GAAP we are not allowed to show a deferred tax asset on our balance sheet, due to our expended history of operating losses prior to 2012.

Rather, we fully offset our deferred tax assets with what is called a valuation allowance.

In each of the past three quarters when we reported net income consistent with GAAP, we released enough of this valuation allowance to offset that net income so that there was no need to provide for any book taxes on that income.

Once we have a sustained history of quarterly profitability, we will be required to release a significant portion or all of the valuation allowance.

In that quarter, we will recognize a large one-time noncash income tax benefit on our income statement.

Since this is a one-time noncash benefit, we expect to exclude it from our non-GAAP earnings in that quarter.

From then on, consistent with GAAP we will provide from book taxes on our net income each quarter using our estimated corporate tax rate, which we expect to initially be around 40%.

As our business continues to grow and we optimize business and financial management strategies, we anticipate that this tax rate will decline over time.

It bears repeating that even though we may begin to record book income taxes on our financial statements, we do not expect to pay any significant cash income taxes in the near future.

We have not yet determined whether to include cash taxes or book taxes in our non-GAAP earnings calculation at the time we begin to record book taxes.

Our non-GAAP fully diluted shares in the third quarter were approximately 116 million, and include 16 million shares attributable to stock options, restrictive stock, and warrants, and 4.7 million shares attributable to our convertible notes accounted for using the if-converted method.

At September 30th, we had $583 million of cash, restricted cash, and marketable securities.

In addition, our trade receivables continue to increase, and were $507 million at the end of the quarter, which is a reflection of our growing EYLEA sales and long commercial terms.

Thank you , and with that I will turn the call over to Len.

Thanks, Murray, Bob, George, the rest of the Regeneron team for delivering a great quarter.

This marks our third quarter of profitability in a row, as well as a strong quarter of revenue and earnings growth.

We hope this is indicative of what we strive to deliver over the long term,strong top and bottom line growth.

In order for us to fulfill this promise, we have to continue to invest in R&D, and deliver with our pipeline.

As always, we thank the patients and their families who use our medicines and enroll in our clinical trials.

Let me close by saying that we have always believed that Regeneron's success is due to its outstanding group of talented and dedicated employees.

Thus we are particularly proud that during this quarter, these employees and others recognized Regeneron as the Best Place to Work in the Industry, as reflected by Science Magazine's recent ranking of Regeneron as the world's number 1 biopharmaceutical employer.

With that, let me turn the call back over to Michael, and open up the call for questions and answers.

Thank you Len.

Kevin, if you could now open the call for Q&A period.

(Operator Instructions) Our first question comes from Robyn Karnauskas with Deutsche Bank.

Congratulations on a good quarter.

I guess first question, you have given in the past the percentage of sales in new patients versus previously treated, could you update that?

And second, on PCSK9, what would be the first trial you think to enroll and starting to enroll and read out, and how do we think about time lines for data read-outs for PCSK9?

Thanks.

Okay.

So let me take the second question first.

As far as PCSK9 goes, we are going to have an event at the American Heart Association with Sanofi, so that is probably a better forum to give you guidance on the various aspects of the program.

It is coming up in not too long, Robyn, so if you can hold on until early part of next month you will get your answers, I hope.

As far as the specific movement of whether the patients are coming from switches, how many switches, whether they are Avastin, whether they're Lucentis, we really aren't going to get into that much detail.

Bob, can you give some general color on where we stand on market share and reiterate that?

Sure.

In the past, we have given you information from physician surveys.

We would like to try to get more focus on the actual numbers.

So I think what we can tell you is that Avastin has about 50% of the overall market at the present time.

Among the two products that are specifically approved for use in retinal diseases, total sales were $636 million.

Our share of those sales is about 40%.

So overall what you can look at is in the marketplace for anti-VEGF therapies used in the eye, we have about a 20% market share.

Now I reminds that Lucentis is approved for BRBO, CRBO and VME, so part of those sales are for other uses, so at least our share is at least 40%, or 20% of the AMD fleet market.

The other thing I can tell you from our surveys with retinal specialists, which is a good indicator of where things are going is that our share of new patients is currently similar to that for Lucentis.

So we are gaining ground, and things look very good for the future.

Thanks, Bob.

Thanks, Robyn.

Thank you.

Our next question comes from Chris Raymond with Robert Baird & Company.

Just one of the dynamics that kind of hit the news since the quarter closed was this issue around the meningitis outbreak with compounding pharmacies.

Understanding that you don't want to perhaps give too much color on the quarter, I know you talked about the holidays being hit, but can you maybe talk about the initial reaction you are hearing from docs, in terms of this news item as it relates to Avastin use, and is there anything we should know about there?

So thanks for that question, Chris.

Of course, at Regeneron like most ethical pharmaceutical companies, our concern for patients is always paramount, and obviously our thoughts go out to all who are affected by this tragedy, and it really is a tragedy, it is a bit of a black mark on the US drug supply system, which heretofore we have had a really I would say excellent track record.

It is worth noting that when all of us think about FDA approvals, that it is tempting to think only in terms of the safety and efficacy of the product as measured in clinical trials.

But there is much more to it.

An important part of the approval process includes an inspection of the facilities where the drug will be manufactured, and therefore, it covers not just the drug, but the entire supply chain including manufacture and distribution.

In addition, the FDA also has well specified guidelines and recommendations on the ongoing role of pharmaco vigilance risk management.

So this has not been the case based on the newspaper reports in the compounding pharmacy industry.

So I think that there is value to using an FDA approved product.

We recognize that there are cost differentials between the off-label use of Avastin and the branded products, but nevertheless, we do think that the branded products have important attributes to offer.

As to whether or not there will be a structural change in the use of Avastin based on any regulatory or new regulations or laws that may emerge, I think it is just too early to tell whether there will be a psychological change over from Avastin to people wanting to use an FDA product, we think that is possible.

People give you all sorts of opinions on that.

But we just don't have any data yet, but I think over the next quarter or two, we should be able to give you a little bit more information.

Obviously, we are going to monitor very carefully what is going on in Washington, and what is going on in the marketplace.

Next question, please.

Our next question comes from Joseph Schwartz with Leerink Swann.

Congratulations on all of the progress.

I was wondering regarding the compounded Avastin, how much Avastin use is for patients that might have good insurance coverage for EYLEA, but lining up that reimbursement takes time, so physicians might start the patient on Avastin, while they wait for payors to approve the patients, is there anything you can do to encourage more uptake of EYLEA, now that your reps have a good story to tell versus just fear of the unknown?

Bob, do you want to comment on that?

So we do have a program in place that will cover practices if they do use EYLEA in a patient, and then the patient turns out not to have insurance coverage.

So that has not deterred physicians from using EYLEA at the initial dosing.

Most of the Avastin use quite frankly is in patients who do have insurance, who could benefit from both EYLEA and Lucentis, but the physicians have chosen to use Avastin because of its price.

So that is the surprising point.

We might have thought that prior to going into this that Avastin was being reserved only for patients who can't afford a branded product, but that is clearly not the case.

So there is an opportunity to be able to convert patients.

And we are seeing and we have been even before this episode, switching from Avastin to our product.

Great, thank you

Okay.

Next question operator.

Our next question comes from Jim Birchenough with BMO Capital.

Congratulations on the strong performance.

A couple questions, just following up on the line of inquiry on Avastin, when you look at Avastin practices that have this concern about financial risk, do you have a sense of what proportion are just not set up, in terms of having sophisticated reimbursement people on site, and what proportion do have the sophistication to be able to bill for EYLEA?

So that is the first question.

Second question, just on dose frequency, any sense what the trends are there in terms of whether we are starting to see dosing extend having some impact, some of the headwinds you have talked about before?

And then a quick question for Murray.

At the point where we I guess exhaust the NOLs, Murray, and you actually start paying cash income taxes, where do you think that 40% rate will have fallen to?

Thanks

So, Bob, do you want to deal with the issue of whether these practices can and cannot set up for reimbursement and the issue on dosing?

So, Jim, that was a good observation.

We are actually picking up these practices that were all Avastin who are smaller practices, who just didn't have the infrastructure to ensure that they had the reimbursement to stay profitable.

And early on with the launch of Lucentis they had actually lost money, so we do have our reimbursement people spending time with the smaller practices to make them comfortable with how to manage their inventory so that they don't lose money on the Anti-VEGF agents.

However, there are some practices, some larger practices that historically for one reason or another chose to be Avastin-only practices, that do have the capabilities, but again, we are starting to make inroads in those practices, and we have picked up quite a bit of our business from Avastin.

Dosing?

In terms of the dosing again, I don't want to give specifics of physician surveys, but I can tell you that dosing, the dosing interval is increasing over time as physicians move from the three loading doses, and we are seeing more and more that physicians are moving towards the every eight week dosing interval.

Okay.

Great.

Murray, do you want to handle--?

Sure.

On the tax side, Jim, it is really too early to be able to forecast that.

Firstly, we don't really know when we will start paying cash taxes, part of that depends on how quickly we generate profits, cumulative profits, and what additional NOLs that we generate going forward, so we don't know the timing of when that is and therefore, we don't really know at that point how far we will have advanced and what we will have been able to do in order to bring our tax rate down, but certainly it is an important goal for us to bring our book tax rate down from that, and our cash tax rate down from that 40% level.

Murray, you meant generate not NOLs in the future, but income tax credits, right?

Both, both.

Both.

Alright.

Good.

Next question.

Our next question comes from Terence Flynn with Goldman Sachs.

Thanks for taking the question.

Congrats on the quarter.

I guess one additional follow-up on the injection frequency, I was wondering if you have any survey data regarding injection frequency in the refractory patients?

I know at ASRS it seemed like the physician reports were kind of variable in terms of the dosing frequency and schedule they are using in those patients, I was just wondering what your surveys have picked up out there in the market?

And then a second question on the SG&A front, I was impressed again with the leverage this quarter and was wondering if this is the level we should think about as we go into the outyears here?

Murray, do you want to deal with the SG&A, the leverage at this point?

I mean I don't think there is much new here.

We know this is an efficient product to sell, and it is not going to change.

The leverage we get is because we are basically the same sales force, six sales force pretty much, and as Bob indicated we are covering just about all of the retinal specialists and their practices, so that we can expand sales even both in wet AMD and additional indications, without having to significantly expand our commercial expenses.

In terms of the refractory patients, if you go back to some of those presentations at ASRS, the physicians have reported that they were frequently dosing Lucentis or Avastin even on less than a monthly dosing interval.

Some of them were dosing every two weeks for example.

What we see with EYLEA is their first goal is to try to alleviate the ongoing retinal edema that existed in those patients, and then they do try to increase the interval over time.

And we are seeing that they are able to move the interval off and out from two weeks to four weeks, or from four weeks to six weeks.

And over time, they are trying to stretch that.

So we do see that there is a longer interval in the refractory patients with EYLEA, but again, the more important factor the doctors are focused on, is to alleviate that retinal edema and hopefully improve vision

Next question.

Next question comes from Steve Byrne with Bank of America.

Bob I wanted to do ask you a little bit more about the switchers.

In general, for those physicians that switch a patient from either Avastin or Lucentis over to EYLEA, do they in general move right into the every other month dosing, dose frequency or do they go to the loading dose?

So again, this ties back to part of what we were talking about in refractory patients.

Many of the switches are people that were inadequately controlled with Avastin or Lucentis, so most of those patients are given loading doses to start.

There are some patients who have asked to be switched to EYLEA because of living far away from the retinal practice, or because of their travel schedules.

In some of those patients, they get the three loads, in some cases they switch over to every eight weeks.

But the majority of our switches currently do get three loading doses.

And are you finding physicians moving to an as-needed or PRN dosing with EYLEA, to the same level they were with Lucentis or Avastin?

It is a mixed bag.

There are some physicians who have chosen to go to a more predictable dosing schedule.

So we actually have practices that have moved all their patients to every eight week dosing on a schedule, and feel that they are getting very good results, and that really is the strength of the product.

If you can get to a predictable schedule where you don't have to bring them in for monitoring in between, that saves the practice money, saves the healthcare system money, and it is much more convenient for the patient.

There are other physicians who I wouldn't call it a PRN dosing schedule, but they using a treat and extend dosing schedule, which is they try to extend out the dosing interval by checking on the patient's vision on a regular schedule, and then move it out in two-week increments over time.

And we do see that interval increasing as we go out in time.

And one more for you, Bob.

If a physician were to treat a patient with DME, with EYLEA for DME, is it your observation that they can get reimbursement coverage for it?

So first of all, we do not promote EYLEA for any use other than the labeled indications of wet AMD and macular edema following CRVO.

For the most part, payors are reimbursing specifically for those two indications.

On a select basis, if a physician selects to go to a payor and try to get reimbursement for a DME, it may be possible.

But But again, we are focused on our labeled indications.

Thank you.

Great.

Thanks, Steve.

Next question.

The next question comes from Yaron Werber with Citigroup

Nice quarter.

So question for Bob and question for Murray.

Just Bob, in terms of CRVO, maybe help us understand a little bit the market, how it is different from AMD, is it still very much, it is more of a fixed number of injections market.

I am just trying to get a sense.

How do you kind of think about the rapidity of the uptake, or is this kind of more of a new patient market, i.e.

maybe even a faster penetration, and then I have a follow-up for Murray.

Sure.

So the CRVO market, first of all, is relatively small compared to the AMD market.

About 10% in terms of the patients.

In terms of its management, historically, people looked at CRVO as a disease that they managed for six months to a year, and then well, first of all, there were no therapies historically, so they did watchful waiting, and unfortunately some people lost their vision permanently.

But they did think of it as an acute condition that once the clot resolved, that they wouldn't need therapy anymore, what we have seen in some of the longer term follow-up studies from the Lucentis trials, specifically the Horizon RVO trial, is that CRVO is a chronic disease, patients may need anti-VEGF therapy for several years, and we do see the duration of therapy increasing for CRVO.

I also think CRVO has been undermanaged in the past.

Because watchful waiting was the norm, we saw people delaying therapy.

What we could tell you from our own trial, is that patients who delay treatment for more than two months after they experience the initial incident of CRVO did not do as well as those who received immediate anti-VEGF therapy, so we think there is an educational opportunity on RVO, we are focusing our medical specialists on working with physicians to identify more CRVO patients, and treat them early, aggressively, and chronically.

So it may end up being a larger market than 10% over time, and it may follow more the AMD dynamics.

Okay.

Great.

And then just Murray, for you, when I look at your SG&A currently, I mean you're running around, Q1 was high and you have been pretty stable in Q2 and Q3.

I am just trying to get a sense is that kind of a good run rate as we think about your base spending from now on?

And then R&D aside from this one-time pop, I guess my question, is this going to be a one-time pop, or is this going to be something that recurs at the end of every year, as you might just decide to spend more than Sanofi is reimbursing?

Two good questions.

In terms of the SG&A, I think as I mentioned earlier, we don't see a need around the EYLEA program for there to be a big increment in commercial expenses in and of itself.

I think in terms of G&A, you will see some secular trends obviously as the company is growing, a lot of those expenses grow with it, and the infrastructure necessary to support it, not only the commercial operations, but the expansion of our R&D efforts also grows.

I think you will see some small increases consistent with what you have seen in the past, aside from the big jump in commercial expenses related to EYLEA.

In terms of your other question on R&D, we focused on the fourth quarter and the fact of the mechanics of how this will work in terms of the Sanofi reimbursement.

So whether that will happen in each fourth quarter will depend as you point out, how much we spend in terms of our discovery research, how that compares to what is reimbursed, so it is hard to predict that, but we will try to give you a heads-up as we did in this third quarter.

But beyond that, in terms of the total amount aside of this quirkiness of the Sanofi expense spending and reimbursement, the overall amount of what is going to happen unreimbursed R&D will also depend on other things, like the progress of our NGF program, which is not partnered, if and when that gets up and running, those expenses will be unreimbursed R&D, some of our investment in other antibodies that are not part of the Sanofi collaborations such as George talked about ErbB3, which is first coming on board, and other antibodies that are already advancing in Phase 1. So we may see some additional spending for those and for as we pursue new technology opportunities also coming out of our own expense.

So the overall level of what the unreimbursed R&D will depend on some of these other factors, NGF perhaps being a large one of them, so it is a little early until we get some feedback from the FDA to talk about when and how much that might be.

So it is almost like we should think of Q4 as a 120 base, which was one Q3 plus the additional 50 to 90?

120 plus the 50 in the fourth, is that we gave you our full year guidance of 160 to 200.

We know that is a relatively large range.

But we would take that fourth quarter rate of 50 to 90 and just automatically assume that is going to be the same thing in the first quarter of next year.

No, no, of course, but if you kind of back into a fourth quarter 170 to 210 would be the range for the fourth quarter in R&D, just trying to bracket that a little bit all-in?

We can certainly help you with this if it is still confusing or following our conference call.

And we will update this guidance as we get greater clarity in terms of what we will be doing with some of the non-Sanofi programs as we move into 2013.

Great.

Thank you

Great, next question.

Our next question comes from Jason Kantor with Credit Suisse.

Thank you, and congratulations on another great quarter.

Most of my questions have been asked and answered.

But I was wondering if you could talk about the potential for the X-US launch of EYLEA, what you have learned from the US launch, and how you think about how that drug could be taken up in other countries, what are the factors that could make it move more or less quickly than the US?

Right.

So I think that those kind of detailed questions are better left for Bayer, who has got the rowing oar on this one.

But you can look at the uptake of our product relative to Lucentis' first four years in the US, and you can look at the first four years of Lucentis outside of the US, and then make your own relative guesses on how we will do, but if you want more details, I would suggest you talk with our colleagues at Bayer at this point.

Just caution to remember, of course, it is not a monolith outside of the United States.

You don't get reimbursement in every jurisdiction.

These are multiple rollouts so it is not like the United States where we rolled out.

Even though the market size is probably as large outside of the United States as it is in the United States, it is not as easy to address that market as quickly.

And then if I could ask another question on the US market, the people that are still using Lucentis predominantly, why are they still doing that, and what are you learning and how can you continue to penetrate those people who maybe were not early adopters, what is the reason for their sticking with Lucentis versus switching?

So I will let Bob deal with that question.

Go ahead, Bob.

So first of all, if somebody is doing well on Lucentis, unless they want to be switched for convenience, the physician is not going to switch them off of a therapy that is working.

And remember, AMD is a chronic disease, so there are a number of patients on continuing Lucentis therapy that aren't going to be moved.

In terms of new patients, Lucentis does offer a rebate to high-volume accounts, and that does influence the decision making in certain accounts.

Next question.

Operator, next question.

Our next question comes from Adnan Butt with RBC Capital Markets.

Thanks for beating and raising, and trying to save the [lav] uptake, along with the other big cap biotechs.

High level question for you.

The standard sales were pretty stable this quarter in EYLEA, can you tell us a bit more about market dynamics that you are seeing out there, and if you can then specifically, is there still a bolus of patients that are hard to treat that you think are working through, and then in terms of future development terms for EYLEA, would you do a formal study yourself for the investigator-sponsored study in that particular setting, are those good enough?

And then trials in combination with other agents, and for dose?

Thanks.

I just didn't hear the last question.

The second part was that if you can't talk big picture then specifically if there still a bolus of patients that has been worked through that are hard to treat, would you do a hard to treat study yourself, or are the ISTs good enough, and lastly combination studies, if there are any with EYLEA?

I think we are going to look at whether or not it makes sense to do a registration study, based upon what it would cost, how much it would influence the market, what the end points would be.

George, do you want to add anything to that?

Well, certainly we have already heard a lot of emerging data on these hard to treat patients, and we are certainly seeing how that data matures over time, and taking that into consideration as Len said in terms of going forward.

In terms of the first part of your question, I would remind you that Lucentis is relatively stable in sales but they do have two indications beyond, or three indications beyond what AMD, beyond CRVO which we share in common with them.

They are proof for macular edema following branch retinal vein occlusion, which is a market that is about one-third of the AMD market size, and they also are the only product approved for the treatment of diabetic macular edema, where there is significant unmet medical need, and so there are part of those Lucentis sales are those uses, which have offset the decline in the AMD.

And then if I can just ask on the bolus piece, if there is still a bolus?

There are constantly patients who the physician determines are refractory or inadequately controlled with other therapies.

Not everyone gets to a dry retina, especially on a predictable dosing schedule.

So we continue to see switches.

But the number of switches or the number of switch available patients is lower than when we first launched.

So remember this will constantly be sort of a very dynamic and cycling market.

Your patients who stop therapy, these are the elderly patients, right now we are only getting approximately half of the branded market going in, and therefore, a quarter of the overall market and therefore, there is 75% of the market that are potential bolus patients, if you will, that will accumulate as they continue to go.

If we gather more and more of the front-end new patients, then obviously that would go down.

So it's very hard to model per se to take if you have got a great model, send it along to us.

Can I one in on serial MS, since nobody seems to ask on that?

Is data collected?

We have to go on, we are getting late in time, and we have a few more questions, sorry, so we are going to take two more questions, Operator.

Okay.

Next question from Mark Hassenberg with Nottingham Capital.

Sorry.

I pushed the star two.

My question has been answered.

Thank you very much.

Thank you.

Our next question comes from Phil Nadeau with Cowen and Company.

Thanks for taking my question, just two.

First just looking for update on your PDGF efforts, when could that enter the clinic and when could we see data, and second on ZALTRAP pricing, there was a prominent cancer institution here in New York City that recently made some noise about ZALTRAP's pricing.

It has not really been clear to me how many refractory patients use low dose Avastin versus high dose, could you give us some sense of how you think ZALTRAP is actually priced relative to the actual Avastin dose that is being used in refractory patients?

Thanks.

Thanks for those questions.

As far as the pricing and all of that issue, we should really have only one spokesperson for that, and that is Sanofi's people are more than happy to discuss those issues with you, if you need a contact, we will give you a contact there.

In terms of PDGF, George, do you want to do make any comments about that?

Yes.

We certainly find the very preliminary data very interesting.

We recognize that it is very hard to understand that the magnitude of the benefit in these small studies where we have certainly seen with our experiences, that you can get differences that are due to chance, and it is hard to know what the exact benefit is.

We certainly think that it is going to be a very interesting but very complicated development path going forward, how to incorporate another agent, another series of injections, how many are going to be needed, what is the benefit that is going to be required, and so forth.

So it is going to be a very competitive clinical development path and very interesting, and we are certainly not going to give guidance on what our approach is going to be right now, other than that it is going to be very interesting, as I said, it is going to be very complicated, how to incorporate another injection into the process.

And we will be hopefully entering very soon to the clinic and giving you more information about our program.

So we hope next year to be in the clinic.

Good.

Michael turn it back over to you.

We have one more?

Actually, given the time it is already 9.30, I think we will wrap it up here.

I apologize to anybody who didn't make it on the call, obviously we will be available immediately following this call to answer any further questions.

So again, Operator, this concludes our third quarter call.

Thank you everybody for participating.

Ladies and gentlemen this does conclude today's presentation.

You may disconnect, and have a wonderful day.