雷傑納榮製藥 (REGN) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your Regeneron Pharmaceuticals Q3 2014 earnings conference call.

(Operator Instructions)

As a reminder this conference is being recorded.

I would like to now introduce your host for today's conference, Dr. Michael Aberman, Vice President of Strategy and Investor Relations for Regeneron.

Sir, you may begin.

Thank you, operator.

Good morning, and welcome to Regeneron Pharmaceuticals' third-quarter 2014 conference call.

An archive of this webcast will be available on our website, under Events and Presentations, for 30 days.

Joining on the call today is Dr. Leonard Schleifer, Founder, President, and Chief Executive Officer; George Yancopoulos, Managing Scientist, President of Regeneron Laboratories, and Chief Scientific Officer; Bob Terifay, Senior Vice President Commercial; and Bob Landry, Chief Financial Officer.

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

I would also like to remind you that remarks made on this call include forward-looking statements about Regeneron.

Such statements may include, but are not limited to, those related to Regeneron and its products and business, sales and expense forecasts, financial forecasts, development programs, collaborations, finances, regulatory matters, intellectual property, and competition.

Each forward-looking statement is subject to risks and uncertainties that could cause actual results and events to differ materially from those projected in such statements.

A more complete description of these and other material risks can be found in Regeneron's filings with the United States Securities and Exchange Commission, or SEC, including its Form 10-K for the year ended December 31, 2013, and our Form 10-Q for the quarter ended September 30, 2014, which was filed with the SEC earlier this morning.

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

In addition, please note that 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 those measures to GAAP are available on our financial results press release, which can be accessed on our website at www.Regeneron.com.

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

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

Thank you, Michael, and a very good morning to everyone who has joined us on the call and webcast today.

The third quarter was another successful quarter for Regeneron.

EYLEA sales continued to expand, with a 23% growth in the US compared to third quarter of 2013, and a more than twofold increase in sales outside the United States.

Total global sales of EYLEA were approximately $725 million during the quarter.

Importantly, in the third quarter, we received approval for EYLEA in the US for the treatment of diabetic macular edema, or DME.

And, in October, we announced top-line results from the Diabetic Retinopathy Clinical Research Network comparative effectiveness study of EYLEA, Lucentis, also known as ranibizumab, and Avastin, also known as bevacizumab, in patients with DME.

In this independent, NIH-sponsored study, EYLEA had significantly greater efficacy than both Avastin and Lucentis, with a good safety profile.

Patients receiving EYLEA also achieved this outcome with fewer injections and less rescue laser therapy.

While these data have positive implications for the long-term growth of EYLEA, we are constrained about how much we can say about the detailed results of this study until the full data are published or presented by the DRCR.

Beyond EYLEA, our Company is in the midst of an evolution into a multi-product company with the potential for multiple significant revenue streams across a variety of therapeutic areas.

We expect this evolution to drive our future as a company and to enhance value to our shareholders.

With our collaborator Sanofi, we will soon submit regulatory applications in the United States and EU for alirocumab for lowering LDL cholesterol, and we expect to receive priority review by the FDA, based on the use of a priority-review voucher we purchased during the quarter.

We expect additional Phase 3 data for sarilumab, our IL-6 receptor antibody, next year, and regulatory submission by the end of 2015.

Dupilumab, our IL-4/IL-13 blocking antibody, continues to show very encouraging data in multiple indications.

Last quarter, we reported positive dupilumab data in chronic sinusitis with nasal polyps.

And, earlier in the fourth quarter, we presented additional positive data in atopic dermatitis.

We also recently announced that we have started the atopic dermatitis Phase 3 program.

We expect additional Phase 2b data in asthma this quarter.

Our early-stage programs are also humming along.

George will share with you important progress with our earlier-stage pipeline, as well as with our Regeneron genetics center and landmark genomics effort that has already exceeded our initial expectations in terms of productivity.

Turning to our earnings, non-GAAP net income for the quarter was $295 million, and diluted non-GAAP earnings per share was $2.52.

This included a $34-million, or $0.29 per share, charge that we incurred for the purchase of the priority-review voucher.

Bob Landry will discuss our financial performance in more detail.

As we are all acutely aware, the recent Ebola virus outbreak is a serious worldwide public health emergency.

Regeneron has an active infectious disease research group and is working on establishing a rapid response approach to address new and serious infectious disease outbreaks as they emerge.

With respect to Ebola, we already have an effort there and are consulting with various government agencies to see if our fully human monoclonal antibody technologies can be applied to combat the virus.

This is still a very early initiative, but we hope that our leading antibody science and technologies will be part of the solution for Ebola and other emerging infectious diseases.

A recent honor that George and I are especially proud of is Regeneron being ranked as the number one employer in the biopharmaceutical industry by Science magazine for the third consecutive year -- a three-peat, so to speak.

We are very proud of this recognition since it is a testament to our science-driven, innovative culture and our incredibly talented employees.

As we grow and evolve, we are focused on sustaining this culture in order to maintain our edge as the leading scientific innovator and employer of choice for talented scientists.

Before I turn the call over to George, let me briefly address the recent management change at Sanofi.

As I'm sure you all know, last week the Sanofi Board of Directors removed their CEO, Chris Viehbacher, and announced the initiation of a search for a new CEO.

We had a close and productive working relationship with Chris for many years, and we wish him well in his future endeavors.

But our relationship with Sanofi began before Chris's tenure and extends deeply through both companies' research development and commercial organizations.

We expect the relationship to continue without interruption and unabated as we advance our joint pipeline, including three Phase 3 antibodies, through clinical trials and into commercialization.

I spoke with Serge Weinberg, Sanofi's Chairman and acting CEO, on the day of their announcement and will meet with him this week.

Sanofi and Regeneron are committed to bringing our late-stage drug candidates to patients as quickly as possible.

With that, let me turn the call over to George Yancopoulos, Regeneron's Chief Scientific Officer, who will discuss our pipeline, and our clinical and research progress, in greater detail.

He will be followed by Bob Terifay, Senior Vice President of Commercial, and then by Bob Landry, our Chief Financial Officer.

George?

Thank you, Len.

And a very good morning to everyone who has joined us today.

I echo Len's sentiments that we are at a transformational stage in our evolution.

From an R&D perspective, we had a very successful third quarter and we are poised to make significant strides in a variety of therapeutic areas.

We have three antibodies in Phase 3 clinical development, and our pipeline of more than a dozen antibodies is advancing well.

I'd like to begin with EYLEA.

In the third quarter, EYLEA was approved in the US in diabetic macular edema, or DME.

And, just last month, EYLEA received FDA approval for yet another indication -- macular edema following retinal vein inclusion, which now includes both central and branch retinal vein inclusion.

Outside the United States, our collaborator, Bayer HealthCare, has received approval for EYLEA in DME in the European Union and for myopic choroidal neovascularization, or mCNV, in Japan.

Len mentioned the results from an NIH-sponsored study called Protocol T that looked at the comparative safety and efficacy of EYLEA versus ranibizumab and bevacizumab in patients with DME.

We are very encouraged by these top-line data and look forward to the full day of publication by the DRCR and presentation at an upcoming medical conference.

We continue to invest in R&D that could bolster and protect our EYLEA franchise.

Specifically, we're exploring combinations of EYLEA with other antibodies -- our PDGF receptor antibody and our Ang2 antibody.

Our combination trial of EYLEA with our PDGF receptor antibody is ongoing, and we expect to report initial data in early 2015.

We have identified two doses from the Phase 1 study that we plan to move into Phase 2, both in combination with the approved EYLEA 2-milligram dose formulated in a single intravitreal injection.

Our combination study of EYLEA co-formulated with our Ang2 antibody, also in a single intravitreal interjection, in ophthalmology, is on track to enter clinical development later this year.

In the third quarter, we received breakthrough therapy designation for EYLEA from the FDA for diabetic retinopathy in patients with DME.

This designation was based on the positive data from two Phase 3 studies in DME -- VIVID and VISTA -- which demonstrated statistically significant improvements in pre-specified measures of diabetic retinopathy in patients with DME after two years of treatment.

Turning now to the three antibody programs we have in Phase 3: alirocumab, for lowering LDL cholesterol; sarilumab, for rheumatoid arthritis; and dupilumab, which is currently in Phase 3 for atopic dermatitis and also being studied in a variety of other allergic and atopic conditions.

In the third quarter, we reported detailed positive data from four pivotal Phase 3 studies of alirocumab, our PCSK9 antibody for lowering LDL cholesterol in people with hypercholesterolemia.

These data were presented at the annual meeting of the European Society of Cardiology.

Across all these trials, alirocumab showed significant and sustained reduction in LDL cholesterol over one year, on top of standard-of-care statin therapy across different patient types.

As a reminder, a post hoc safety analysis from the ODYSSEY LONG TERM study showed that there was a lower rate of adjudicated major cardiovascular events, including cardiac death, myocardial infarction, stroke, and unstable angina requiring hospitalization, in the alirocumab group compared to placebo -- 1.4% compared to 3%, with a nominal P value of less than 0.01.

These represent the first preliminary evidence that this class may potentially lower the risk of cardiovascular events.

However, definitive conclusions on cardiovascular risk lowering of alirocumab await the results of the ongoing 18,000-patient ODYSSEY outcomes trial, which is prospectively evaluating the potential of alirocumab to demonstrate cardiovascular benefits.

We will be reporting data from five additional studies of alirocumab at the upcoming annual meeting of the American Heart Association.

Turning to sarilumab, our IL-6 receptor antibody, which is in Phase 3 development for rheumatoid arthritis.

We will be presenting additional data from positive Phase 3 sarilumab RA mobility study at the upcoming annual meeting of the American College of Rheumatology.

Let me remind you that the Phase 3 data we have already shown demonstrated an inhibition of progression of structural damage at week 52 as measured by the change in the modified [Durheidy] total shock score.

In the mobility study, the group receiving the 200-milligram dose of sarilumab plus methotrexate had a reduction of approximately 90% in the rate of graphic progression assessed by the modified total Sharp score compared to the radiographic progression with placebo plus methotrexate at week 52.

The safety findings in the mobility study were consistent with those observed in prior investigational studies with sarilumab.

We have also initiated a new Phase 3 study, MONARCH, which is a head-to-head study of sarilumab monotherapy compared to a TNF inhibitor, adalimumab, or HUMIRA, also as monotherapy, in patients who are inadequate responders to methotrexate.

We expect to report data from the ongoing Phase 3 trials and plan on regulatory submissions in 2015.

Dupilumab, our antibody that blocks both IL-4 and IL-13 signaling, is one of the most exciting antibodies in our pipeline and continued to make significant progress in the third quarter.

We now have positive Phase 2 data in three allergic or atopic conditions: atopic dermatitis; asthma; and chronic sinusitis with nasal polyposis.

We also expect to see data from our Phase 2b study of dupilumab in asthma before the end of this year.

While asthma, atopic dermatitis, and chronic sinusitis with nasal polyposis present in different ways, we believe that they all share the same basic immunopathology.

The fact that many people suffer from more than one of these diseases at the same time provides evidence for this link.

For example, in our Phase 2b atopic dermatitis study, approximately 60% of patients had another allergic condition, including approximately 40% of patients who had a history of asthma.

The positive data we have generated so far in multiple indications support our belief that IL-4 and IL-13 could be important drivers of the common underlying immunopathology that links certain allergic diseases.

In the atopic dermatitis indication, we recently initiated a Phase 3 study called LIBERTY CHRONOS.

This is the first study in the Phase 3 clinical program for dupilumab, and is a double-blind, placebo-controlled, multi-national study with the primary objective of demonstrating efficacy of dupilumab in adults with moderate-to-severe atopic dermatitis, when administered concurrently with topical corticosteroids through 16 weeks.

The trial is expected to enroll approximately 700 adult patients, and will explore two separate doses of dupilumab.

This study is part of the larger LIBERTY program in atopic dermatitis that will consist of at least five clinical studies in patients with moderate-to-severe atopic dermatitis.

Turning to our earlier-stage pipeline, in immuno-oncology we recently initiated a study of our CD20 by CD3 bispecific antibody, also known as Regeneron 1979, and we expect to submit an IND for our PD-1 antibody before the end of this year.

We'd also like to share with you the targets of two antibodies that have been previously undisclosed.

First is Regeneron 2222, an antibody against respiratory syncytial virus, or RSV, which is currently in Phase 1 clinical development.

This antibody is being developed in collaboration with Sanofi.

RSV is a virus that affects the lungs and the respiratory passages, and can result in serious illness and mortality, particularly in young children.

It is the most common cause of bronchitis and pneumonia in children under the age of 1 in the United States, and is also an important cause of respiratory disease in older adults.

We believe that our antibody could require significantly fewer administrations when compared to the current standard of care, which would be a big advantage for the pediatric population, and open up the opportunity for benefit to a larger unmet need population.

The second antibody I would like to disclose is Regeneron 1500, an antibody to ANGPTL3 in the lipid-lowering space.

We are particularly excited about this opportunity, because there is substantial human and mouse genetic evidence supporting the possibility that blocking ANGPTL3 can improve lipid and metabolic profiles and perhaps provide cardiovascular benefits.

Continuing on the theme of genetics, we recently announced that the Regeneron Genetics Center is fully operational, and that we have obtained DNA sequences from the first 10,000 de-identified individuals.

We are currently on track to be able to sequence samples from 50,000 individuals per year.

While our capacity for DNA sequencing is extremely high, our competitive advantage in this field starts with the focus on the right types of individuals to sequence, such as those in our Geisinger collaboration, and is further enhanced by our ability to rapidly combine DNA sequencing with mouse gene functionazation technologies, and our ability to translate findings into therapeutics using our VelocImmune technology.

We have continued to expand our capabilities into important areas of human genetics research through new scientific collaborations with several leading institutions and important additions to our in-house and advisory scientific teams.

With that, let me now turn the call over to Bob Terifay.

Thanks, George, and good morning, everyone.

It's been a very busy time for the Regeneron commercial team, with two recent approvals and launches for EYLEA in diabetic macular edema and macular edema following retinal vein occlusion, and a potential launch in 2015 for alirocumab for hypercholesterolemia.

I'd like to begin my comments today with EYLEA.

Third-quarter US EYLEA net sales to distributors were $445 million, which represents a 23% increase over third-quarter 2013.

Sequential quarterly growth in physician sales was 8%.

Currently, EYLEA sales in the United States represent approximately one-half of the FDA approved anti-VEGF therapies for retinal diseases.

The vast majority of EYLEA sales come from the treatment of wet age-related macular degeneration.

EYLEA growth so far this year has come primarily from growth in the wet AMD market.

As you know, in July, we received FDA approval for EYLEA in a third, very important new indication, DME, which is the leading cause of blindness among working-aged adults in the United States.

EYLEA is the first and only anti-VEGF agent approved for DME with a dosing interval of greater than every four weeks.

According to the US prescribing information, EYLEA can be dosed every eight weeks following five initial monthly doses.

The Phase 3 studies for EYLEA in DME were the only registration studies that compared an anti-VEGF agent to standard-of-care macular laser photocoagulation therapy.

Immediately following approval, we launched EYLEA in DME.

The targeted physicians are largely the same physicians who treat wet AMD.

DME represents a large potential market opportunity for EYLEA, as it's estimated that approximately 600,000 eyes are diagnosed with centrally involved diabetic macular edema in the United States each year, a similar number to those diagnosed with wet AMD.

Of these eyes diagnosed, only about 40% are currently treated with anti-VEGF therapy, with laser used as an alternative treatment modality.

Because EYLEA has been approved using the same single-strength 2-milligram dose per injection for all indications, it's difficult to give you an estimate of the proportion of our sales coming specifically from DME versus AMD.

Anecdotal physician reports indicate that they are using EYLEA in both their anti-VEGF naive and switch DME patients.

Consistent with our pre-launch market research, physicians continue to indicate strong prescribing intent for EYLEA in DME; however, uptake will be slower than in wet AMD.

There's a significant difference in the market dynamics between wet AMD and DME.

In wet AMD, physicians are concerned if patients have ongoing retinal edema, with fear of hemorrhage leading to sudden vision loss.

Therefore, they look for alternative treatment options that might dry the retina.

At the time of the EYLEA launch in wet AMD, there was a large patient population with a history of inadequate response to both ranibizumab and bevacizumab, whose physicians were waiting to switch them to EYLEA.

In DME, physicians believe that the waxing and waning edema is not as dangerous to long-term maintenance of vision as in wet AMD.

Thus, there's less urgency to initiate treatment of naive patients or switch patients who have suboptimal responses to their current therapies.

Anti-VEGF agents have also not been used in DME for as long as they've been used in wet AMD.

So, the market is not as well developed, with laser treatment still heavily entrenched.

Payer dynamics are also different between wet AMD and DME.

In wet AMD, the vast majority of patients are over age 65 and covered by traditional Medicare.

Traditional Medicare coverage of buy-and-bill drugs occurred shortly after FDA approval.

In DME, only an estimated 30% of patients are covered by traditional Medicare.

Commercial payers are slower to provide drug coverage.

Even when coverage is granted, notification to physicians and the loading of reimbursement information to payer portals doesn't occur in a predictable manner.

Retinal physicians, who must absorb the cost of anti-VEGF agents if they don't get reimbursed, often want evidence for each payer that the drug is covered and that each payer has paid a claim before they prescribe the drug.

For these reasons, while usage of EYLEA and DME continues to grow, we expect the uptake of EYLEA and DME to be slower than what we saw in wet AMD.

Where are we so far with reimbursement?

Week over week, we continue to make steady progress with coverage and paid-claim confirmation across the payer space for EYLEA and DME.

Currently, all Medicare jurisdictions have coverage and evidence of paid claims for EYLEA in DME.

Regarding commercial patients, over 95% of commercial lives have confirmed coverage for EYLEA for DME.

We currently have evidence of paid claims from over half of these payers.

Benefits investigations through our reimbursement hub have increased at a growing pace every month since launch.

Likewise, use of physician samples for the initial patient start of therapy has increased since the DME launch.

We remain confident that there is a significant market opportunity for EYLEA in DME, as physicians become comfortable with reimbursement coverage.

This should be bolstered as physicians become more familiar with our Phase 3 DME data against standard-of-care therapy, and when the pending data from the NIH DRCR Protocol T comparative safety and efficacy study of VEGF inhibitors are publicly presented.

Other potential sources of further EYLEA growth include potential changes to the regulation of compounded biologics, such as bevacizumab, and our recent approval in macular edema following retinal vein occlusion.

I'd now like to address the ex-US business, where we split profits with our collaborator Bayer HealthCare.

Third-quarter 2014 ex US EYLEA sales were $277 million.

Ex-US EYLEA sales continue to be an important growth driver, and the launch outside the United States is making significant progress.

EYLEA has recently been approved for the DME indication in the European Union and for the treatment of myopic choroidal neovascularization in Japan.

Bayer HealthCare has also filed regulatory applications for EYLEA for the treatment of macular edema following BRVO in Europe.

There remains significant ex-US growth potential for EYLEA.

Highlighting the growth potential for EYLEA outside the United States, the annual market for EYLEA and ranibizumab, the two branded therapies combined, is approximately $3.5 billion outside the US, based on the run rate observed in the third quarter.

EYLEA currently has approximately a 30% share of the ex-US branded market, as compared to a 50% share of the US branded market.

Therefore, there is ample growth opportunity, ex-US, through approval in additional indications, further geographic expansion, and market share gains.

With respect to alirocumab, our investigational PCSK9 antibody that is being evaluated for lowering low-density lipoprotein cholesterol, we and our worldwide collaborator Sanofi, are busy preparing for US and EU regulatory submissions before the end of this year, and planning for potential approval in the second half of 2015.

Regeneron and Sanofi share in all internal strategic and tactical planning, and execution, including marketing, market access, health outcomes, and medical affairs.

Launch preparation is actively underway by both companies.

We've recently agreed that we will share in sales force promotion for alirocumab with Sanofi in the United States.

Sanofi will be responsible for sales promotion at launch outside of the United States.

We reserve the right to share in ex-US sales promotion at a later date.

In this competitive marketplace, we'll not be sharing any further specifics at this time.

Preparing for a significant launch such as this one requires planning and commercial investment.

With the potential launch anticipated in the second half of 2015, that investment is already underway and will continue to accelerate in the upcoming months.

As part of the agreement with Sanofi, we currently share pre- and post-launch commercial expenses, approximately 50/50, on a realtime basis.

Bob Landry will provide more detail on the financial impact.

With that, let me turn over the call to Bob Landry, our Chief Financial Officer.

Thanks, Bob, and good morning to everyone who has joined us today.

Overall, we're pleased with our third-quarter performance.

In the third quarter, we earned $2.52 per diluted share from non-GAAP net income of $295 million, which represents a 5% and 6% increase, respectively, versus the three months ended September 30, 2013.

Our non-GAAP EPS was negatively impacted by a $34-million charge, or $0.29 on a per diluted share basis, that we recognized in the third quarter of 2014 in connection with our and Sanofi's purchase of the priority-review voucher, which we plan to use for the anticipated BLA submission of alirocumab later this year.

Regeneron's non-GAAP EPS excludes non-cash share based compensation expense, non-cash interest expense related to our senior convertible notes, loss on extinguishment of debt in relation to the conversion of a portion of our convertible notes which occurred earlier in the year, and income tax expense.

In the third quarter of 2014, our GAAP to non-GAAP reconciliation also included an incremental charge related to our branded prescription drug fee, based on final regulations issued during the quarter by the IRS.

A full reconciliation of GAAP to non-GAAP earnings and a brief discussion of the branded prescription drug fee incremental charge is set forth in our earnings release.

Total revenues in the third quarter of 2014 were $726 million, representing a 22% increase, compared to total revenues in third quarter of 2013.

Net product sales were $449 million in the third quarter of 2014, compared to $367 million in the third quarter of 2013.

EYLEA net product sales in the US were $445 million in the third quarter of 2014, compared to $363 million in the third quarter of 2013, which represented an increase of 23%.

US EYLEA distributor inventory levels remained within the normal one- to two-week range.

As mentioned in our press release issued earlier this morning, we are tightening our US EYLEA net sales guidance to $1.7 billion to $1.74 billion from the previously provided range of $1.7 billion to $1.8 billion.

Ex-US EYLEA sales were $277 in the third quarter 2014, as compared to $247 million last quarter and $125 million in the third quarter of 2013.

Product revenue from ex US EYLEA sales is recorded by our collaborator Bayer HealthCare.

Please keep in mind that Bayer HealthCare's reported ex-US EYLEA sales are not exactly the same as the ex-US numbers that we report.

This is because, for Japan, Bayer reports their sales to their distributor, Santen, while we report Santen's in-market sales.

In the third quarter of 2014, Regeneron recognized $85 million from its share of net profit from EYLEA sales outside the United States, after repayment of $14 million in development expenses, compared to $32 million in the third quarter of 2013, after repayment of $15 million in development expenses.

Bayer HealthCare collaboration revenue for the third quarter was $136 million.

This included two $15-million sales milestones that we earned upon aggregate ex-US net sales of EYLEA exceeding $800 million and $900 million over a 12-month period.

We are expecting to earn another two $15-million milestones during the fourth quarter.

This would bring our EYLEA ex US milestones in 2014 to a total of $105 million.

After that, there will only be one $15-million milestone payment remaining to be earned from Bayer related to ex-US EYLEA sales, which we expect to receive in 2015.

Global ZALTRAP, or ziv-aflibercept, injection for intravenous infusion net sales, as recorded by Sanofi, were $23 million in the third quarter, compared to $18 million in the third quarter of 2013.

We recognized approximately $1 million as our share of the losses related to ZALTRAP in the third quarter.

Total Sanofi collaboration revenue was $133 million for the third quarter of 2014.

As we've said previously, the Sanofi collaboration revenue line primarily consists of reimbursement of Regeneron-incurred R&D expenses, which was $142 million in the third quarter of 2014; our share of losses in connection with ZALTRAP; amortization of upfront and other payments received from Sanofi; and our share of expenses associated with Sanofi's pre-launch commercialization expenses related to alirocumab in accordance with our antibody collaboration agreement.

As we approach the potential approval and launch of alirocumab in 2015, we fully expect these pre-launch commercialization expenses to become substantial.

Regeneron's share of antibody commercialization expenses was a new component within our Sanofi collaboration revenue line item, first introduced last quarter, where we outline the accounting treatment.

However, I think it's worth recapping again, so let me say a few words on how we will record our share of the antibody pre-launch commercialization expenses.

The pre-launch commercialization expenses that Regeneron incurs will be primarily recorded within our SG&A line.

We then recognize 100% of the amount of these pre-launch expenses as reimbursement revenue, which is contained in the other line in table 4 of our earnings release under Sanofi collaboration revenue.

On a net P&L basis, this reimbursement revenue offsets the expenses we incur.

In addition, we'll also record 50% of the total pre-launch commercialization expenses spent by both parties as contra revenue, which is represented by the $13 million of Regeneron's share of antibody commercialization expenses in Sanofi collaboration revenue as depicted in table 4 of our earnings release.

Please keep in mind that, as we approach the launch of alirocumab and other antibodies that are part of our collaboration with Sanofi, we expect this expense, or contra revenue, to significantly increase.

However, once the antibodies are launched and become profitable, we expect this component to become positive revenue as it will reflect our share of the antibody commercial profits.

Turning now to expenses.

Non-GAAP R&D expenses were $292 million in the third quarter of 2014.

Our unreimbursed R&D expense, which is calculated as the total GAAP R&D expense minus R&D reimbursements we receive from our collaborators and R&D non-cash share-based compensation expense, was $145 million in the third quarter of 2014.

Our press release includes all the information that is required to calculate unreimbursed non-GAAP R&D expense.

As we mentioned earlier, in July 2014, Regeneron and Sanofi announced that the companies had purchased an FDA rare pediatric disease priority-review voucher from a third party.

We and Sanofi shared equally the purchase price of the priority-review voucher.

Our share of the cost was $34 million, which we recorded as an R&D expense during the third quarter of 2014.

We are tightening our run reimbursed non-GAAP R&D guidance to $490 million to $510 million from the previous guidance of $470 million to $510 million.

Non-GAAP SG&A expenses for the third quarter were $82 million.

We are tightening our non-GAAP SG&A guidance for the full year of 2014 to be between $330 million and $350 million from the previously provided guidance of $310 million to $350 million.

As referenced earlier, and illustrated within our GAAP to non-GAAP reconciliation, the 2014 third-quarter GAAP net income included a $41-million incremental charge related to our branded prescription drug fee, based on final regulations issued during the quarter by the IRS.

By way of background, a non-tax-deductible fee, called the branded prescription drug fee, is imposed on pharmaceutical manufacturers that sell branded prescription drugs to specified government programs, such as Medicare Part B.

This fee is allocated to companies based on their prior-year market share of branded prescription drugs into these government programs.

And the fee commenced in 2011.

In July 2014, the IRS issued final regulations that provided guidance on the branded prescription drug fee, which were different in some respects from the temporary regulations issued by the IRS in 2011, including the fact that a company is liable for the fee based on its branded prescription drug sales in the current year, instead of the liability only being applicable upon the first qualifying branded prescription sale of the following year under the temporary regulations.

Given the one-time nature of this adjustment, we've elected to exclude this expense from our 2014 non-GAAP earnings.

Non-GAAP cost of goods sold was $33 million in the third quarter.

Included in this line item are royalty expenses in connection with our agreement with Genentech related to US EYLEA sales, which we are obligated to pay until May 2016.

Cost of collaboration manufacturing was $22 million in the third quarter.

With regard to taxes, due to the amounts of the Company's net operating loss and tax credit carryforwards available for tax purposes, the Company does not currently pay significant cash income taxes.

In the third quarter of 2014, our GAAP effective tax rate was approximately 55%, as compared to 37% for the third quarter of 2013.

For the full year, we expect our GAAP effective tax rate to be in the mid-50% range.

As a reminder, since we expect to begin to pay significant cash taxes in approximately the middle of 2015, we anticipate that our non-GAAP tax rate, beginning in the first quarter of 2015, will represent a blended rate based on an estimate of the cash taxes payable for the full year.

We'll be able to provide more details in early 2015.

Our capital expenditures for the nine months ended September 30, 2014, were $215 million, as we expand our Tarrytown, New York, and Rennselaer, New York, facilities and continue renovations on our new biopharmaceutical manufacturing facility in Limerick, Ireland.

These capital expenses will play an integral role in helping to ensure that we have the necessary infrastructure in place to launch our next generation of products.

We are lowering our full-year capital expenditure guidance to $300 million to $350 million from the previously provided range of $350 million to $425 million.

We ended the quarter with cash and marketable securities of $1.5 billion, compared to $1.1 billion at December 31, 2013.

In October 2014, the Company received notification that an additional $161-million principal amount of the Company's convertible senior notes was surrendered for conversion.

Settlement is anticipated during the fourth quarter of 2014.

The Company has elected to settle these conversion obligations through a combination of cash and shares.

With that, I'd like to turn the call back to Michael.

Thank you, Bob.

That concludes our prepared remarks.

We'd now like to open the call to Q&A.

As we like to give as many people a chance to ask questions as possible, as always we request you limit yourself to one question.

Our team will be available in our office after the call for follow-up questions.

Thank you.

And, Roland, if you can please open the call for questions.

(Operator Instructions)

Chris Raymond, Robert Baird.

Just a general market trend question.

Wonder if you can maybe give a little bit more color from what you're seeing.

You may know that IAS has a data point that they publish every month that shows specialist office visits in the US, and it's shown essentially all year that ophthalmology visits have been relatively weak, even when you look at it versus other specialties that have been fairly stable.

I guess first question on this is are you seeing this or is signal not just right?

Because it looks like it's not just EYLEA and AMD that is perhaps seeing a little bit of a slowdown, it's happening pretty much across the board.

Any color there would be great.

Sure, Bob can handle that.

I will just say as [SLEN] just announced it that the retinal specialists, they are only a small subgroup of the ophthalmologists.

So I'm not sure how relevant.

And also we haven't seen a slowdown in our product.

Bob?

I think Len summarized it.

The retinal doctors are a small portion of the ophthalmology population.

We are not hearing a slowdown in terms of visits.

Given the urgency of retinal diseases it would not be prudent for patients not to come into the physician's office.

So we're not seeing a fall off.

Jason Kantor, Credit Suisse.

Any chance you could provide us with what you think the breakdown of your sales are for AMD, RVO, and DME?

And in the case that you are not going to answer that question, could you tell us a little bit more about the ANGPTL-3 target?

Is anyone else working on it?

How is this different from PCSK9?

How do you see this developing longer term?

We said we can't really give you a breakdown because we don't have it, but George may be able to give you a little more information on ANGPTL-3.

As far as we know, we're the only people who are developing a fully human antibody to the target.

There are other approaches that I'm not going to really comment on that are trying to use other technologies to try to hit the target, but in our hands an antibody is really an optimal way to address this target.

And certainly we've shown that in pre-clinical models.

The human genetic evidence, as well as a lot of animal data, suggest that this really can impact lipid profiles as well as perhaps metabolic impact.

In terms of lipids, it not only lowers LDL cholesterol in an LDL receptor independent pathway, meaning that for example it could work in familial homozygotes that have absolutely no LDL receptor function, but also it can dramatically lower triglycerides, and essentially in animal studies normalize them regardless of how high that they are.

The human genetic data suggests the possibility that this can be associated with positive outcome benefits.

We're very excited about this target.

We think that we are relatively alone in terms of fully human antibodies, which is an optimal way to address it, and we are excited about moving forward.

Yaron Werber, Citi.

Just wanted to follow up on an earlier question, maybe for Bob, when you look at your earlier guidance of originally $1.7 billion to $1.8 billion, and now you're taking it to the lower end despite getting approved in DME a little earlier, so maybe I'm trying to understand a little bit -- help us understand what you're saying and why you are lowering the guidance to the lower end or what was unexpected for you this year?

Thank you.

Sure, Yaron, Bob will deal with that.

I just wanted to finish up on the ANGPTL-3.

George was maybe being a little bit too modest there.

He and his colleagues were the first group to discover the angiopoietins, and these are angiopoietin-like proteins.

So we have a long and rich history in this field that we are building on.

And combining with our experience with PCSK9 I think this is a good and logical target that we expect you're going to hear a lot more about.

Bob, you want to address --

First of all I would like to point out that we are very encouraged by the uptick that we are seeing in DME.

As I said during my presentation, the benefits investigations are growing month over month since the launch of DME.

We also have seen a growth in the utilization of our samples, which we did not have at our wet AMD launch.

The samples are actually a way of getting patients started onto therapy while physicians get comfortable with the reimbursement situation.

I think the big difference between the DME and the wet AMD is that the ramp is going to be a little slower.

That's both because physicians don't have the same urgency to treat, but it's also because they want to have evidence that the commercial payers, who are the primary payer in wet AMD due to the -- or DME due to the age of the DME patients, take a little longer to have evidence of a paid claim.

It's not that we're discouraged by the performance of the product this year, it's just in DME it's going to take a little bit longer.

I think I might add that Protocol T has the potential to be a real game changer I think in the minds of physicians.

And they have not seen those data.

So we hope those data will get published in the not too distant future and we expect presentations by the DRCR.

And as that data gets into the literature we hope it will influence physician choice.

Robyn Karnauskas, Deutsche Bank.

I'm going to ask a question you probably won't answer and then one that maybe you will.

So just with the PCSK9 lawsuit, can you just -- I know you can't comment probably on your thoughts around it, but is there any color you can give us on why isn't this something that we might have predicted earlier, and whether or not you think at all this could influence the timing of your launch?

And then this is the question that you might be able to answer more; so the Phase III on atopic dermatitis, you're going after adults in the broader market, as I understand it, is more children.

Can you help us understand how big the adult market is versus the kids and what is the path forward to getting to the broader label?

Thank you.

Sure, Robyn.

Before I get into that, which question didn't you think we were going to answer?

Oh, the PCSK9 lawsuit with Amgen question.

(laughter) Any color would make me very happy, though.

I appreciate it.

Let me just say about the PCSK9 lawsuit.

I know that Amgen has said publicly that -- I think the phrase they used is like a football phrase, they have the will and the scale and all that kind of stuff.

We're not going to comment much, but we are going to focus on the facts and the law.

We've got a lot of experience in this patent arena.

As you remember we had a patent fight with Genentech relating to our EYLEA, so this is something I think that you will just have to watch it unfold.

As far as whether or not what we can say, we don't believe that we infringe any valid claims asserted in the patents.

Now Bob, do you want to comment on the split between adult and pediatric opportunity?

Yes.

Robyn, you're correct.

Obviously there are a large number of children that develop atopic dermatitis early in life.

And as George pointed out the interesting thing about these Th2 mediated diseases is that those children often develop other conditions such as asthma, food allergies, and other Th2 mediated conditions.

The pediatric audience represents a very important one.

And we believe these children suffer in having the severe itch, in having the rash all over their body, there are definitely limitations on sleep, limitations on their ability to learn.

We definitely intend to develop dupilumab in the pediatric population, but we had to start in the adult population.

The adult population does represent a significant opportunity.

There's approximately 2 million adults around the world with moderate to severe atopic dermatitis that is inadequately controlled with topical cortico steroids.

The other treatment options for those patients are not chronic, because they have safety drawbacks.

So we believe there is a significant opportunity.

We've talked to a number of these patients, they suffer in silence and dupilumab represents a major opportunity to help these patients.

Adnan Butt, RBC Capital Markets.

Len, you said Protocol T could be a game changer.

When I attend meetings, talk to doctors, they appreciate the differences in safety and even efficacy.

But at the same time they say that maybe the sample sizes aren't big enough to show definitive differences in systemic side effects.

So how do think this impacts usage?

Is there something that gives you an advantage versus the other agents?

Is there something that helps you make the argument in terms of pairs?

How do you expect Protocol T to play out?

We don't want to get into a debate now about this, because we want to respect the DRCR.

They worked very hard at doing this well-controlled study, it was independently conducted, multi-sites, lost of investigators.

They were in complete control and they deserve the ability to publish the data and discuss it and answer these types of questions.

At a very high level the only reason we put something out is because we believe, we thought that this was material for our shareholders to know, that on a top line the data should be disclosed.

But we don't want to debate.

The Genentech machine is already in full gear coming up with press statements, which I think is not what we agreed to do at the DRCR.

So we're not going to get into that level of debate, but if you hang in there a little while I think everyone is going to be very pleased how it all turns out.

Terence Flynn, Goldman Sachs.

Looking at the midpoint of your new 2014 EYLEA guidance it implies about a sequential growth of 12% in the fourth quarter.

And I think over the last six quarters you guys have averaged around 6%.

Just wondering if double digit sequential growth is the right way to think about the forward trajectory for the drug, now that you have DME and BRVO on board?

Thanks.

I think as far as you should think, as far as we've given you some information, which is your mathematics is correct for the quarter, the next quarter, Terence.

Can I ask a second one then?

Yes, because that was a weak question a very narrow answer we'll give you another one.

(laughter)

Okay, I'll try harder this time.

(laughter) Obviously in your prepared remarks you said you selected two doses of 1979, your PDGF antibody that you're carrying forward into Phase II.

Just wondering what type of data drove the choice of the doses there?

Was it only PK data or did you also have some PD data that was available?

Thanks.

I think the first study primarily was just a safety study to demonstrate that we could deliver the product safely without inflammation and that sort of thing.

And that's the main guidance of dose selection for Phase I.

And Terence just to be clear, the 1979 is our CD20.

So I think you got the -- I know these Regeneron numbers can be confusing.

Different numbers, sorry.

I believe it's 2176.

Who knows.

We'll get back to you on that.

The answer is that was primarily a Phase I tolerability study.

Jing Wang, Bank of America Merrill Lynch.

The first one is related to antibodies for AMD and DME.

I notice that for the PDGF antibody Regeneron 2176 you are doing Phase I in AMD patients.

And then you just announced the Regeneron 910, which is the ANG2 antibody co-formula with EYLEA.

You're testing that in DME patients in Phase I.

I was wondering if this suggests you might use these two different numbers to target different disease?

One for DME, one for AMD.

And then I have a question on DRCR.

I hate to beat a dead horse, but Genentech and Roche were out there telling doctors that the two letter difference between Lucentis and also the in EYLEA arm in this trial was not really clinical and meaningful.

Can you make any comment around that?

Thank you.

As far as the second question goes, as I said, you are beating a dead horse there.

We're going to let the DRCR publish and speak and address the data.

And when you see the full data set, come back and talk to us and talk to Genentech.

It's a live horse, it's just that it's still in the barn.

And it hasn't gotten out yet, so you can't see exactly what it looks like.

As far as where ANG2 and PDGF combinations might fit in, I think that there's some clinical data as you might be aware that would suggest a more restricted application for the PDGF, not wanting to use it in the DME setting.

We'll see whether or not we can go broader in both settings, frankly, with ANG2 and EYLEA combinations.

And then can I squeeze in another one?

You already had two, Jing.

Now wait a minute, but you used to know him, Michael.

He was a good guy.

Can't we give him --

All right, because of our history, Jing, you get another question.

(laughter)

Thank you.

So Amgen recently announced that they're increasing enrollment for the outcome trial by 5,000 patients.

So that they'll get the outcomes data no later than 2017.

I was wondering if you could comment on your event rate in the outcomes trial for alirocumab?

That's a very good question, Jing, but we have no comment.

Sorry.

(laughter)

Matt Roden, UBS.

I have a question on a different horse, this one from the pipeline.

George, you have to think about where -- or I'm sure that you're considering very carefully where to invest your R&D dollars.

We realize bringing a new product cycle forward takes a lot of money, a lot of time.

And I just wondered if you could talk about the rationale for bringing forward a pre-clinical PD-1 antibody at this point?

We understand that the checkpoint inhibitors, particularly PD-1, represent a paradigm shift in providing combination approaches, is one of the ways to differentiate within that.

But what are your thoughts on that versus focusing on other checkpoint inhibitors where arguably you could be more in front of the pack?

And this is a little bit specific to PD-1, but it's more like I want to better understand the rationale for how you pick your projects to bring forward.

Thanks.

We think that is still very early in the game in terms of understanding the best and optimal way to use these various immune regulators and checkpoint inhibitors.

We think it's very important to have our own foundation therapy to be used in a variety of combination approaches, both with other immune regulators but also with other classes of therapeutics as well.

We are taking a long-term view here that the real solutions, the real advances are still yet to come.

And it's important to have a collection of the important players in the game to be providing the optimal combination solutions to patients in an efficient and economically feasible way as well.

It's a long-term strategy, we believe that it's very early in the game, and we're very excited about it.

I think as George has already said in some of his public talks that having more than -- if you need combinations of these, if you could have both of them then you can control the cost for patients as well.

And I think that's going to be important because we can't keep adding on expensive therapy on top of expensive therapy.

I think that's a very important point.

I should also say that even in our early stage PD-1 trials we're going to be trying to do different things than have been done before.

So even our early studies may suggest new insights and be able to provide better benefits to patients, even before we get to later stage combinations as well.

Phil Nadeau, Cowen and Company.

Just a question on the alirocumab patent challenge with Amgen.

Can you give us some sense of the publicly available milestones that will happen between here and your launch?

Amgen's obviously asked for a preliminary injunction and it seems like the time is tight for a judge to make that decision.

So what will we see between here and your PDUFA date coming from the judge or coming from the case?

The only thing we can say is we don't expect this lawsuit to impact our plans, but the details and how this unfolds, et cetera, et cetera are probably going to be fairly complicated and have a bit of a roller coaster in terms of lots of activity, little activity.

But that's all we have to say on it, Phil, at this point.

Operator, that's going to be the end of the call.

So I want to thank everyone for joining us for this call.

As we mentioned before, if you give us a few minutes we will be in our office for follow-up questions.

Thank you, ladies and gentlemen, that concludes the presentation.

You may all disconnect.