NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unless otherwise noted, dollars in thousands, except per share data)
1. Business Overview and Summary of Significant Accounting Policies
Organization and Business
Regeneron Pharmaceuticals, Inc. and its subsidiaries (collectively, the "Company" or "Regeneron") is a fully integrated biopharmaceutical company that discovers, invents, develops, manufactures, and commercializes medicines for the treatment of serious medical conditions. The Company has product candidates in development in areas of high unmet medical need, including oncology, rheumatoid arthritis, asthma, atopic dermatitis, pain, and infectious diseases. The Company is a party to collaboration agreements to develop certain of these product candidates (see Note 3). The Company's products that have received marketing approval consist of the following:
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•
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EYLEA
®
(aflibercept) Injection
,
known in the scientific literature as VEGF Trap-Eye, which is available in the United States, European Union ("EU"), Japan, and certain other countries outside the United States for the treatment of neovascular age-related macular degeneration ("wet AMD"), diabetic macular edema ("DME"), macular edema following retinal vein occlusion ("RVO"), which includes macular edema following central retinal vein occlusion ("CRVO") and macular edema following branch retinal vein occlusion ("BRVO"). EYLEA is also available in the EU, Japan, and certain other countries outside the United States for the treatment of myopic choroidal neovascularization (mCNV) and in the United States for the treatment of diabetic retinopathy in patients with DME. The Company is collaborating with Bayer on the development and commercialization of EYLEA outside the United States.
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•
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Praluent
®
(alirocumab) Injection
,
which is available in the United States where it is indicated as an adjunct to diet and maximally tolerated statin therapy for the treatment of adults with heterozygous familial hypercholesterolemia or clinical atherosclerotic cardiovascular disease ("ASCVD"), who require additional lowering of low-density lipoprotein ("LDL") cholesterol. Praluent is also available in certain countries in Europe for the treatment of adult patients with primary hypercholesterolemia (heterozygous familial hypercholesterolemia ("HeFH") and non-familial) or mixed dyslipidemia as an adjunct to diet: (a) in combination with a statin, or statin with other lipid-lowering therapies in patients unable to reach their LDL-cholesterol goals with the maximally-tolerated dose of a statin, or (b) alone or in combination with other lipid-lowering therapies for patients who are statin intolerant, or for whom a statin is contraindicated. In July 2016, the Japanese Ministry of Health, Labour and Welfare ("MHLW") granted marketing and manufacturing authorization for Praluent for the treatment of uncontrolled LDL cholesterol, in certain adult patients with hypercholesterolemia at high cardiovascular risk. The effect of Praluent on cardiovascular morbidity and mortality has not been determined. The Company is collaborating with Sanofi on the global development and commercialization of Praluent. See Note 17 for information regarding the patent infringement proceedings relating to Praluent, which may impact Praluent's commercial availability in the United States and other jurisdictions.
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ARCALYST
®
(rilonacept) Injection for Subcutaneous Use
, which is available in the United States for the treatment of Cryopyrin-Associated Periodic Syndromes ("CAPS"), including Familial Cold Auto-inflammatory Syndrome ("FCAS") and Muckle-Wells Syndrome ("MWS"), in adults and children 12 and older.
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Kevzara
TM
(sarilumab) Solution for Subcutaneous Injection
. In January 2017, Health Canada approved Kevraza for the treatment of adult patients with moderately to severely active rheumatoid arthritis who have an inadequate response to or intolerance to one or more biologic or non-biologic disease modifying anti-rheumatic drugs ("DMARDs"). This is the first approval of Kevzara worldwide.
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•
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ZALTRAP
®
(ziv-aflibercept) Injection for Intravenous Infusion
, known in the scientific literature as VEGF Trap, which is available in the United States, EU, and certain other countries for treatment, in combination with 5-fluorouracil, leucovorin, irinotecan ("FOLFIRI"), of patients with metastatic colorectal cancer ("mCRC") that is resistant to or has progressed following an oxaliplatin-containing regimen. Pursuant to a 2015 amended and restated ZALTRAP agreement ("Amended ZALTRAP Agreement"), Sanofi is solely responsible for the development and commercialization of ZALTRAP, and Sanofi pays the Company a percentage of aggregate net sales of ZALTRAP.
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The Company operates in one business segment, which includes all activities related to the discovery, development, and commercialization of pharmaceutical products for the treatment of serious medical conditions. The Company's business is subject to certain risks including, but not limited to, uncertainties relating to conducting pharmaceutical research, product development, obtaining regulatory approvals, market acceptance, competition, and obtaining and enforcing patents.
REGENERON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
Basis of Presentation
The consolidated financial statements include the accounts of Regeneron and its wholly-owned subsidiaries. Intercompany balances and transactions are eliminated in consolidation. Certain reclassifications have been made to prior period amounts to conform with the current period's presentation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Estimates which could have a significant impact on the Company's financial statements include provisions related to product sales, such as rebates, chargebacks, and distribution-related fees; periods over which payments, including non-refundable up-front, license, and milestone payments, are recognized as revenue in connection with collaboration and other agreements; periods over which certain clinical trial costs are recognized; fair value of stock options; inventory that may expire prior to expected sale or has a cost basis in excess of its estimated realizable value; capitalization of inventory costs associated with the Company's products prior to regulatory approval; provisions for loss contingencies; deferred tax asset valuation allowances; and the assessment of uncertain tax positions.
With respect to the Company's collaborations with Sanofi and Bayer:
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Included in Sanofi collaboration revenue is the Company's share of profits or losses from commercialization of antibodies, which is provided by Sanofi, and includes an estimate of the Company's share of profits or losses for the most recent fiscal quarter.
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•
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Included in Bayer collaboration revenue is the Company's share of profits or losses from commercialization of EYLEA outside the United States, which is provided by Bayer, and includes an estimate of the Company's share of profits or losses for the most recent fiscal quarter.
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•
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Included in research and development expenses is the Company's share of development expenses incurred by Bayer and Sanofi, including the Company's share of Bayer and Sanofi estimated development expenses for the most recent fiscal quarter.
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These estimates for the most recent period are adjusted on a prospective basis, if necessary, in the subsequent period to reflect actual amounts.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments with a maturity of three months or less when purchased to be cash equivalents. The carrying amount reported in the Consolidated Balance Sheet for cash and cash equivalents approximates its fair value.
Marketable Securities
The Company has an investment policy that includes guidelines on acceptable investment securities, minimum credit quality, maturity parameters, and concentration and diversification. The Company invests its excess cash primarily in marketable securities issued by investment grade institutions. The Company considers its marketable securities to be "available-for-sale," as defined by authoritative guidance issued by the Financial Accounting Standards Board ("FASB"). These assets are carried at fair value and the unrealized gains and losses are included in accumulated other comprehensive income (loss). Realized gains and losses on marketable securities are included as a component of other income (expense), net. The Company reviews its portfolio of marketable securities, using both quantitative and qualitative factors, to determine if declines in fair value below cost are other-than-temporary. If a decline in the fair value of a marketable security in the Company's investment portfolio is deemed to be other-than-temporary, the Company writes down the cost basis of the security to its current fair value and recognizes a loss as a charge against income.
Accounts Receivable - Trade
The Company's trade accounts receivable arise from product sales and represent amounts due from its distributors and specialty pharmacies (collectively, the Company's "customers"), which are all located in the United States. The Company monitors the financial performance and credit worthiness of its large customers so that it can properly assess and respond to changes in their credit profile. The Company provides reserves against trade receivables for estimated losses, if any, that may result from a customer's inability to pay. Amounts determined to be uncollectible are written-off against the reserve.
REGENERON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
Inventories
Inventories are stated at the lower of cost or estimated realizable value. The Company determines the cost of inventory using the first-in, first-out, or FIFO, method.
The Company capitalizes inventory costs associated with the Company's products prior to regulatory approval when, based on management's judgment, future commercialization is considered probable and the future economic benefit is expected to be realized; otherwise, such costs are expensed as research and development. The determination to capitalize inventory costs is based on various factors, including status and expectations of the regulatory approval process, any known safety or efficacy concerns, potential labeling restrictions, and any other impediments to obtaining regulatory approval.
The Company periodically analyzes its inventory levels to identify inventory that may expire prior to expected sale or has a cost basis in excess of its estimated realizable value, and writes-down such inventories as appropriate. In addition, the Company's products are subject to strict quality control and monitoring which the Company performs throughout the manufacturing process. If certain batches or units of product no longer meet quality specifications or become obsolete due to expiration, the Company records a charge to cost of goods sold to write down such unmarketable inventory to its estimated realizable value.
Property, Plant, and Equipment
Property, plant, and equipment are stated at cost, net of accumulated depreciation. Depreciation is provided on a straight-line basis over the estimated useful lives of the assets. Leasehold improvements are amortized over the shorter of the estimated useful lives of the assets or the lease term. Costs of construction of certain long-lived assets include capitalized interest, which is amortized over the estimated useful life of the related asset. Expenditures for maintenance and repairs which do not materially extend the useful lives of the assets are charged to expense as incurred. The cost and accumulated depreciation or amortization of assets retired or sold are removed from the respective accounts, and any gain or loss is recognized in operations. The estimated useful lives of property, plant, and equipment are as follows:
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Building and improvements
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10-40 years
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Laboratory and other equipment
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3-10 years
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Furniture and fixtures
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5 years
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The Company periodically assesses the recoverability of long-lived assets, such as property, plant, and equipment, and evaluates such assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Revenue Recognition
a. Product Revenue
Product revenue consists of U.S. sales of EYLEA and ARCALYST. Revenue from product sales is recognized when persuasive evidence of an arrangement exists, title to product and associated risk of loss have passed to the customer, the price is fixed or determinable, collection from the customer is reasonably assured, the Company has no further performance obligations, and returns can be reasonably estimated. The Company's written contracts with its customers stipulate product is shipped freight on board destination (FOB destination). The Company records revenue from product sales upon delivery to its customers.
The Company sells EYLEA
in the United States to several distributors and specialty pharmacies. The Company sells ARCALYST in the United States to two specialty pharmacies. Under these distribution models, the distributors and specialty pharmacies generally take physical delivery of product. For EYLEA, the distributors and specialty pharmacies generally sell the product directly to healthcare providers, whereas for ARCALYST, the specialty pharmacies sell the product directly to patients.
Revenue from product sales is recorded net of applicable provisions for rebates and chargebacks under governmental and other programs, distribution-related fees, and other sales-related deductions. Calculating these provisions involves estimates and judgments. The Company reviews its estimates of rebates, chargebacks, and other applicable provisions each period and records any necessary adjustments in the current period's net product sales.
Government Rebates and Chargebacks:
The Company estimates reductions to product sales for Medicaid and Veterans' Administration ("VA") programs, and for certain other qualifying federal and state government programs. Based upon the
REGENERON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
Company's contracts with government agencies, statutorily-defined discounts applicable to government-funded programs, historical experience, and estimated payer mix, the Company estimates and records an allowance for rebates and chargebacks. The Company's liability for Medicaid rebates consists of estimates for claims that a state will make for a current quarter, claims for prior quarters that have been estimated for which an invoice has not been received, and invoices received for claims from prior quarters that have not been paid. The Company's reserves related to discounted pricing to VA, Public Health Services ("PHS"), and other institutions (collectively "qualified healthcare providers") represent the Company's estimated obligations resulting from contractual commitments to sell products to qualified healthcare providers at prices lower than the list prices the Company charges to its customers (i.e., distributors and specialty pharmacies). The Company's customers charge the Company for the difference between what they pay for the products and the ultimate selling price to the qualified healthcare providers. The Company's reserve for this discounted pricing is based on expected sales to qualified healthcare providers and the chargebacks that customers have already claimed.
Distribution-Related Fees:
The Company has written contracts with its customers that include terms for distribution-related fees. The Company estimates and records distribution and related fees due to its customers based on gross sales.
Prompt Pay Discounts:
No prompt pay discounts are currently offered to the Company's customers on sales of EYLEA. In connection with sales of ARCALYST, the Company offers discounts to its customers for prompt payments. The Company estimates these discounts based on customer terms and historical experience, and expects that its customers will always take advantage of this discount. Therefore, the Company accrues
100%
of the prompt pay discount that is based on the gross amount of each ARCALYST
invoice, at the time of sale.
Product Returns:
Consistent with industry practice, the Company offers its customers a limited right to return product purchased directly from the Company, which is principally based upon the product's expiration date. The Company will accept returns for three months prior to and up to six months after the product expiration date. Product returned is generally not resalable given the nature of the Company's products and method of administration. The Company develops estimates for product returns based upon historical experience, inventory levels in the distribution channel, shelf life of the product, and other relevant factors. The Company monitors product supply levels in the distribution channel, as well as sales by its customers of EYLEA to healthcare providers and ARCALYST to patients using product-specific data provided by its customers. If necessary, the Company's estimates of product returns may be adjusted in the future based on actual returns experience, known or expected changes in the marketplace, or other factors.
b. Collaboration Revenue
The Company earns collaboration revenue in connection with collaboration agreements to develop and commercialize product candidates and utilize the Company's technology platforms. These arrangements may require the Company to deliver various rights, services, and/or goods across the entire life cycle of a product or product candidate. The terms of these agreements typically include that consideration be provided to the Company in the form of non-refundable up-front payments, milestone payments, payments for development and commercialization activities, and sharing of profits or losses arising from the commercialization of products.
In connection with non-refundable up-front payments, the Company's performance period estimates are principally based on projections of the scope, progress, and results of its research and development activities. Due to the variability in the scope of activities and length of time necessary to develop a drug product, changes to development plans as programs progress, and uncertainty in the ultimate requirements to obtain regulatory approval for commercialization, revisions to performance period estimates are likely to occur periodically, and could result in material changes to the amount of revenue recognized each year in the future. In addition, estimated performance periods may change if development programs encounter delays, or the Company and its collaborators decide to expand or contract the clinical plans for a drug candidate in various disease indications.
In arrangements involving multiple deliverables, each required deliverable is evaluated to determine whether it qualifies as a separate unit of accounting. This determination is generally based on whether the deliverables in the arrangement meet certain criteria, including whether the delivered item or items has value to the collaborator on a standalone basis. The arrangement's consideration that is fixed and determinable is allocated to each separate unit of accounting based on the relative selling price of each deliverable. If multiple collaboration activities or rights do not require separation, they are combined into a single unit of accounting and recognized over the performance period, which is the period over which the Company is obligated to deliver goods or services. The Company estimates its performance period based on the specific terms of each agreement, and adjusts the performance periods, if appropriate, based on the applicable facts and circumstances.
REGENERON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
Payments which are based on achieving a specific substantive performance milestone, involving a degree of risk, are recognized as revenue when the milestone is achieved and the related payment is due and non-refundable, provided there is no future service obligation associated with that milestone. Substantive performance milestones typically consist of significant achievements in the development life-cycle of the related product candidate, such as completion of clinical trials, filing for approval with regulatory agencies, and receipt of approvals by regulatory agencies. In determining whether a payment is deemed to be a substantive performance milestone, the Company takes into consideration (i) the enhancement in value to the related development product candidate, (ii) the Company's performance and the relative level of effort required to achieve the milestone, (iii) whether the milestone relates solely to past performance, and (iv) whether the milestone payment is considered reasonable relative to all of the deliverables and payment terms. Payments for achieving milestones which are not considered substantive are deferred and recognized over the related performance period.
The Company enters into collaboration agreements that include varying arrangements regarding which parties perform and bear the costs of research and development activities. The Company may
share the costs of research and development activities with a collaborator, or the Company may be reimbursed for all or a significant portion of the costs of the Company's research and development activities. The Company records its internal and third-party development costs associated with these collaborations as research and development expenses. When the Company is entitled to reimbursement of all or a portion of the research and development expenses that it incurs under a collaboration, the Company records those reimbursable amounts as collaboration revenue proportionately as the Company recognizes its expenses. If the collaboration is a cost-sharing arrangement in which both the Company and its collaborator perform development work and share costs, the Company also recognizes, as research and development expense in the period when its collaborator incurs development expenses, the portion of the collaborator's development expenses that the Company is obligated to reimburse. The Company may also be obligated to use commercially reasonable efforts to supply commercial bulk product to its collaborators. In such cases, the Company is reimbursed for its manufacturing costs as commercial product is shipped to its collaborators; however, recognition of such cost reimbursements as collaboration revenue is deferred until the product is sold by the Company's collaborators to third-party customers, at which time the Company's risk of inventory loss no longer exists. In addition, at that time, the related manufacturing costs for the sold product, which had been capitalized into inventory, are recognized by the Company.
Under the Company's collaboration agreements, product sales and cost of sales for products which are currently approved are recorded by the Company's collaborators. The Company shares in any profits or losses arising from the commercialization of such products. The Company records its share of the profits or losses from commercialization of such products, representing net product sales less cost of goods sold and shared commercialization and other expenses, as collaboration revenue.
Research and Development Expenses
Research and development expenses include costs directly attributable to the conduct of research and development programs, including the cost of salaries, payroll taxes, employee benefits, materials, supplies, depreciation on and maintenance of research equipment, costs related to research collaboration and licensing agreements, the cost of services provided by outside contractors, including services related to the Company's clinical trials, clinical trial expenses, the full cost of manufacturing drug for use in research, preclinical development, and clinical trials, amounts that the Company is obligated to reimburse to collaborators for research and development expenses that they incur, and the allocable portions of facility costs, such as rent, utilities, insurance, repairs and maintenance, depreciation, and general support services. Costs associated with research and development are expensed.
Clinical trial costs are a significant component of research and development expenses and include costs associated with third-party contractors. The Company outsources a substantial portion of its clinical trial activities, utilizing external entities such as contract research organizations ("CROs"), independent clinical investigators, and other third-party service providers to assist the Company with the execution of its clinical studies. For each clinical trial that the Company conducts, certain clinical trial costs are expensed immediately, while others are expensed over time based on the expected total number of patients in the trial, the rate at which patients enter the trial, and/or the period over which clinical investigators or CROs are expected to provide services.
Clinical activities which relate principally to clinical sites and other administrative functions to manage the Company's clinical trials are performed primarily by CROs. CROs typically perform most of the start-up activities for the Company's trials, including document preparation, site identification, screening and preparation, pre-study visits, training, and program management. These start-up costs usually occur within a few months after the contract has been executed and are event driven in nature. The remaining activities and related costs, such as patient monitoring and administration, generally occur ratably throughout the life of the individual contract or study. In the event of early termination of a clinical trial, the Company accrues and recognizes expenses in an amount based on its estimate of the remaining non-cancelable obligations associated with the winding down of the clinical trial and/or penalties.
REGENERON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
For clinical study sites, where payments are made periodically on a per-patient basis to the institutions performing the clinical study, the Company accrues expenses on an estimated cost-per-patient basis, based on subject enrollment and activity in each quarter. The amount of clinical study expense recognized in a quarter may vary from period to period based on the duration and progress of the study, the activities to be performed by the sites each quarter, the required level of patient enrollment, the rate at which patients actually enroll in and drop-out of the clinical study, and the number of sites involved in the study. Clinical trials that bear the greatest risk of change in estimates are typically those that have a significant number of sites, require a large number of patients, have complex patient screening requirements, and span multiple years. During the course of a trial, the Company adjusts its rate of clinical expense recognition if actual results differ from the Company's estimates. The Company's estimates and assumptions for clinical expense recognition could differ significantly from its actual results, which could cause material increases or decreases in research and development expenses in future periods when the actual results become known.
Stock-based Compensation
The Company recognizes stock-based compensation expense for grants of stock option awards and restricted stock under the Company's Long-Term Incentive Plans to employees and non-employee members of the Company's board of directors based on the grant-date fair value of those awards. The grant-date fair value of an award is generally recognized as compensation expense over the award's requisite service period.
The Company uses the Black-Scholes model to compute the estimated fair value of stock option awards. Using this model, fair value is calculated based on assumptions with respect to (i) expected volatility of the Company's Common Stock price, (ii) the periods of time over which employees and members of the board of directors are expected to hold their options prior to exercise (expected lives), (iii) expected dividend yield on the Common Stock, and (iv) risk-free interest rates. Stock-based compensation expense also includes an estimate, which is made at the time of grant, of the number of awards that are expected to be forfeited. This estimate is revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
Income Taxes
The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined on the basis of the difference between the tax basis of assets and liabilities and their respective financial reporting amounts ("temporary differences") at enacted tax rates in effect for the years in which the differences are expected to reverse. A valuation allowance is established for deferred tax assets for which it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Uncertain tax positions, for which management's assessment is that there is more than a 50% probability of sustaining the position upon challenge by a taxing authority based upon its technical merits, are subjected to certain recognition and measurement criteria. The Company re-evaluates uncertain tax positions and consider various factors, including, but not limited to, changes in tax law, the measurement of tax positions taken or expected to be taken in tax returns, and changes in facts or circumstances related to a tax position. The Company adjusts the level of the liability to reflect any subsequent changes in the relevant facts and circumstances surrounding the uncertain positions. The Company recognizes interest and penalties related to income tax matters in income tax expense.
Per Share Data
Basic net income per share is computed by dividing net income by the weighted average number of shares of Common Stock and Class A Stock outstanding. Net income per share is presented on a combined basis, inclusive of Common Stock and Class A Stock outstanding, as each class of stock has equivalent economic rights. Basic net income per share excludes restricted stock awards until vested. Diluted net income per share includes the potential dilutive effect of common stock equivalents as if such securities were converted or exercised during the period, when the effect is dilutive. Common stock equivalents include: (i) outstanding stock options and restricted stock awards under the Company's Long-Term Incentive Plans, which are included under the "treasury stock method" when dilutive, (ii) Common Stock to be issued upon the assumed conversion of the Company's convertible senior notes, which are included under the "if-converted method" when dilutive, and (iii) Common Stock to be issued upon the exercise of outstanding warrants, which are included under the "treasury stock method" when dilutive.
REGENERON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
Concentration of Credit Risk
Financial instruments which potentially expose the Company to concentrations of credit risk consist of cash, cash equivalents, certain financial instruments, and accounts receivable. A large portion of the Company's cash is held by a few major financial institutions. In accordance with the Company's policies, the Company mandates asset diversification and monitors exposure with its counterparties.
Concentrations of credit risk with respect to accounts receivable are significant. Accounts receivable from product sales of EYLEA and ARCALYST are due from several distributors and specialty pharmacies, who are the Company's customers. As of
December 31, 2016
, three individual customers accounted for
99%
of the Company's net trade accounts receivable balances. As of December 31, 2015, two individual customers accounted for
94%
of the Company's net trade accounts receivable balances.The Company has contractual payment terms with each of its customers, and the Company monitors its customers' financial performance and credit worthiness so that it can properly assess and respond to any changes in their credit profile. In addition, the Company may insure a portion of its accounts receivables within its overall risk management practices. As of December 31, 2016 and 2015, there were
no
reserves against trade accounts receivable. In addition, during the years ended December 31, 2016, 2015, and 2014, the Company did
no
t recognize any charges for write-offs of trade accounts receivable.
Recently Issued Accounting Standards
In May 2014, the FASB issued Accounting Standards Update 2014-09,
Revenue from Contracts with Customers
, which will replace existing revenue recognition guidance. The new standard requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. To achieve that core principle, an entity must identify the contract(s) with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when (or as) the entity satisfies the performance obligation. In July 2015, the FASB decided to delay the effective date of the new standard by one year; as a result, the new standard will be effective for annual and interim reporting periods beginning after December 15, 2017. Early adoption will be permitted, but no earlier than 2017 for calendar year-end entities. The standard allows for two transition methods - retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the standard recognized at the date of initial adoption. The Company has not yet determined its method of transition. The Company does not expect the new standard to have a material impact on the recognition of revenue from product sales. However, the Company continues to evaluate the impact that this guidance will have on its financial statements in connection with collaboration and license agreements.
In January 2016, the FASB issued Accounting Standards Update 2016-01,
Recognition and Measurement of Financial Assets and Financial Liabilities
. The amendments require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. The amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The implementation of the amendments is expected to increase the volatility of an entity's net income; however, the Company is not currently able to estimate the impact of adopting these amendments, as the significance of the impact will depend on the Company's equity investment balance upon adoption.
In February 2016, the FASB issued Accounting Standards Update 2016-02,
Leases
. The new standard requires a lessee to recognize in its balance sheet (for both finance and operating leases) a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. The amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The Company is evaluating the impact that this guidance will have on the Company's financial statements.
In March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update 2016-09 ("ASU 2016-09"),
Compensation - Stock Compensation, Improvements to Employee Share-Based Payment Accounting
, which the Company elected to early adopt during the second quarter of 2016. ASU 2016-09 requires an entity to recognize all excess tax benefits and tax deficiencies in connection with stock-based compensation as income tax expense or benefit in the income statement (previously, excess tax benefits were recognized in additional paid-in capital). This aspect of ASU 2016-09 was adopted prospectively, and accordingly, the Company recorded excess tax benefits of
$144.8 million
within income tax expense for the year ended December 31, 2016. Included within income tax expense for the year ended December 31, 2016 is
$15.6 million
of excess tax benefits, which was previously recorded to additional paid-in capital during the first quarter of 2016. The amendments also require recognition of excess tax benefits regardless of whether the benefit reduces taxes payable in the current period. Furthermore, the amendments require that excess tax benefits be classified as an operating activity in the statement of cash flows
REGENERON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
(such amounts were previously included as a financing activity in the statement of cash flows); the Company also adopted this provision of ASU 2016-09 prospectively.
2. Product Sales
Net product sales consist of U.S. sales of EYLEA and ARCALYST. The Company received marketing approval from the FDA for EYLEA for the treatment of wet AMD in 2011, macular edema following CRVO in 2012, DME and macular edema following BRVO in 2014, and diabetic retinopathy in patients with DME in 2015. EYLEA net product sales in the United States totaled
$3,323.1 million
,
$2,676.0 million
, and
$1,736.4 million
for the years ended
December 31, 2016
, 2015, and 2014, respectively. ARCALYST net product sales totaled
$15.3 million
,
$13.5 million
, and
$14.4 million
for the years ended
December 31, 2016
, 2015, and 2014, respectively.
The Company's product sales to certain customers that accounted for more than
10%
of total gross product revenue for each of the years ended December 31, 2016, 2015, and 2014. Sales to each of these customers as a percentage of the Company's total gross product revenue are as follows:
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Year Ended December 31,
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2016
|
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2015
|
|
2014
|
Besse Medical, a subsidiary of AmerisourceBergen Corporation
|
55
|
%
|
|
67
|
%
|
|
73
|
%
|
McKesson Corporation
|
28
|
%
|
|
26
|
%
|
|
20
|
%
|
Curascript SD Specialty Distribution, a subsidiary of Express Scripts
|
16
|
%
|
|
**
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**
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|
** For the periods ending December 31, 2015 and 2014, sales to Curascript SD Specialty Distribution represented less than
10%
of total gross product revenue.
Revenue from product sales is recorded net of applicable provisions for rebates and chargebacks, distribution-related fees, and other sales-related deductions. The following table summarizes the provisions, and credits/payments, for these sales-related deductions for the years ended December 31, 2016, 2015, and 2014.
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|
|
|
|
|
|
|
|
|
Rebates &
Chargebacks
|
|
Distribution-
Related
Fees
|
|
Other Sales-
Related
Deductions
|
|
Total
|
Balance as of December 31, 2013
|
$
|
4,400
|
|
|
$
|
19,663
|
|
|
$
|
538
|
|
|
$
|
24,601
|
|
Provision related to current period sales
|
33,117
|
|
|
77,160
|
|
|
1,578
|
|
|
111,855
|
|
Credits/payments
|
(34,434
|
)
|
|
(75,657
|
)
|
|
(1,584
|
)
|
|
(111,675
|
)
|
Balance as of December 31, 2014
|
3,083
|
|
|
21,166
|
|
|
532
|
|
|
24,781
|
|
Provision related to current period sales
|
61,124
|
|
|
122,466
|
|
|
9,600
|
|
|
193,190
|
|
Credits/payments
|
(57,788
|
)
|
|
(95,319
|
)
|
|
(9,615
|
)
|
|
(162,722
|
)
|
Balance as of December 31, 2015
|
6,419
|
|
|
48,313
|
|
|
517
|
|
|
55,249
|
|
Provision related to current period sales
|
93,385
|
|
|
154,477
|
|
|
30,442
|
|
|
278,304
|
|
Credits/payments
|
(87,092
|
)
|
|
(173,325
|
)
|
|
(27,285
|
)
|
|
(287,702
|
)
|
Balance as of December 31, 2016
|
$
|
12,712
|
|
|
$
|
29,465
|
|
|
$
|
3,674
|
|
|
$
|
45,851
|
|
3. Collaboration Agreements
The Company has entered into various agreements related to its activities to research, develop, manufacture, and commercialize product candidates and utilize its technology platforms. Significant agreements of this kind are described below.
REGENERON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
a. Sanofi
Sanofi owned a total of
23,418,396
shares of the Company's Common Stock as of December 31, 2016, a portion of which was purchased in connection with the companies' ZALTRAP
and antibody collaborations described below. See Note 13 for a description of the investor agreement between Sanofi and the Company.
The collaboration revenue the Company earned from Sanofi is detailed below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
Sanofi Collaboration Revenue
|
|
2016
|
|
2015
|
|
2014
|
Antibody:
|
|
|
|
|
|
|
Reimbursement of Regeneron research and development expenses
|
|
$
|
564,900
|
|
|
$
|
735,439
|
|
|
$
|
547,761
|
|
Reimbursement of Regeneron commercialization-related expenses
|
|
322,149
|
|
|
157,350
|
|
|
19,480
|
|
Regeneron's share of losses in connection with commercialization of antibodies
|
|
(459,058
|
)
|
|
(240,042
|
)
|
|
(41,378
|
)
|
Other
|
|
12,177
|
|
|
10,243
|
|
|
10,243
|
|
Total Antibody
|
|
440,168
|
|
|
662,990
|
|
|
536,106
|
|
Immuno-oncology:
|
|
|
|
|
|
|
Reimbursement of Regeneron research and development expenses
|
|
138,497
|
|
|
39,961
|
|
|
—
|
|
Other
|
|
80,000
|
|
|
40,000
|
|
|
—
|
|
Total Immuno-oncology
|
|
218,497
|
|
|
79,961
|
|
|
—
|
|
ZALTRAP:
|
|
|
|
|
|
|
Regeneron's share of losses in connection with commercialization of ZALTRAP
|
|
—
|
|
|
—
|
|
|
(4,715
|
)
|
Reimbursement of Regeneron research and development expenses
|
|
—
|
|
|
686
|
|
|
4,806
|
|
Other
|
|
—
|
|
|
15,236
|
|
|
5,102
|
|
Total ZALTRAP
|
|
—
|
|
|
15,922
|
|
|
5,193
|
|
|
|
$
|
658,665
|
|
|
$
|
758,873
|
|
|
$
|
541,299
|
|
Other selected financial information in connection with the Company's collaboration agreements with Sanofi is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2016
|
|
2015
|
Antibody:
|
|
|
|
|
Accounts receivable, net
|
|
$
|
47,268
|
|
|
$
|
126,687
|
|
Deferred revenue
|
|
98,741
|
|
|
84,237
|
|
|
|
|
|
|
Immuno-oncology:
|
|
|
|
|
Accounts receivable, net
|
|
$
|
40,647
|
|
|
$
|
21,394
|
|
Deferred revenue
|
|
520,000
|
|
|
600,000
|
|
REGENERON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
Antibodies
In November 2007, the Company entered into a global, strategic collaboration with Sanofi to discover, develop, and commercialize fully human monoclonal antibodies (the "Antibody Collaboration")
.
The Antibody Collaboration is governed by the companies' Discovery and Preclinical Development Agreement ("Antibody Discovery Agreement") and a License and Collaboration Agreement (each as amended). In connection with the execution of the Antibody Discovery Agreement in 2007, the Company received a non-refundable up-front payment of
$85.0 million
from Sanofi. In addition, under the Antibody Discovery Agreement, Sanofi is funding the Company's research to identify and validate potential drug discovery targets and develop fully human monoclonal antibodies against these targets. In November 2009, the Company and Sanofi amended these collaboration agreements to expand and extend the Antibody Collaboration. Pursuant to the Antibody Discovery Agreement, as amended, Sanofi agreed to fund up to
$160.0 million
per year of the Company's research activities in 2010 through 2017. However, in July 2015, in connection with the Company’s new immuno-oncology collaboration with Sanofi, as described below, the Company’s Antibody Discovery Agreement and License and Collaboration Agreement with Sanofi were each amended. In connection with these amendments, Sanofi's funding of the Company’s antibody discovery activities under the existing Antibody Collaboration was reduced to up to
$145.0 million
in 2015, and up to
$130.0 million
in both 2016 and 2017, or an aggregate reduction of
$75.0 million
over this
three
-year period. In addition, the Company's discovery activities to identify and validate potential drug discovery targets in the field of immuno-oncology and develop fully human monoclonal antibodies against these targets will be funded by Sanofi under the terms of the companies’ new immuno-oncology collaboration. Sanofi has the right to extend antibody development and preclinical activities relating to selected programs for up to an additional
three
years after 2017. Sanofi must identify any programs to be extended by June 30, 2017, and the Company and Sanofi must then agree on a plan and budget for the extended activities. During the extended period, the Company will use commercially reasonable efforts to develop such antibodies and conduct preclinical activities through IND preparation. After 2017, funding from Sanofi under the Antibody Discovery Agreement will cease to continue, except with regard to the programs for which Sanofi has exercised its extension right.
For each drug candidate identified under the Antibody Discovery Agreement (including drug candidates developed during the extended period of up to an additional
three
years described above), Sanofi has the option to license rights to the candidate under the License and Collaboration Agreement. If it elects to do so, Sanofi will co-develop the drug candidate with the Company through product approval. Under certain defined circumstances, upon exercising its option to license rights to particular candidates, Sanofi must make a
$10.0 million
substantive milestone payment to the Company. If Sanofi does not exercise its option to license rights to a particular drug candidate under the License and Collaboration Agreement, or if Sanofi elects not to continue to co-develop a product candidate, the Company retains the exclusive right to develop and commercialize such drug candidate and Sanofi will receive a royalty on sales, if any.
Under the License and Collaboration Agreement, agreed-upon worldwide development expenses incurred by both companies during the term of the agreement are funded by Sanofi, except that following receipt of the first positive Phase 3 trial results for a co-developed drug candidate, subsequent Phase 3 trial-related costs for that drug candidate ("Shared Phase 3 Trial Costs") are shared
80%
by Sanofi and
20%
by Regeneron. Consequently, the Company recognized as research and development expense
$108.6 million
,
$92.6 million
, and
$109.7 million
in 2016, 2015, and 2014, respectively, of antibody development expenses that the Company was obligated to reimburse to Sanofi related to Praluent, sarilumab, and, commencing in the first quarter of 2016, dupilumab. If the Antibody Collaboration becomes profitable, Regeneron will be obligated to reimburse Sanofi for
50%
of worldwide development expenses that were fully funded by Sanofi and
30%
of Shared Phase 3 Trial Costs, in accordance with a defined formula based on the amounts of these expenses and the Company's share of collaboration profits from commercialization of collaboration products. However, the Company is not required to apply more than
10%
of its share of the profits from the Antibody Collaboration in any calendar quarter to reimburse Sanofi for these development costs. The Company's contingent reimbursement obligation to Sanofi under the Antibody Collaboration was approximately
$2,245 million
as of December 31, 2016.
Sanofi will lead commercialization activities for products developed under the License and Collaboration Agreement, subject to the Company's right to co-promote such products. The parties equally share profits and losses from sales within the United States. The parties share profits outside the United States on a sliding scale based on sales starting at
65%
(Sanofi)/
35%
(Regeneron) and ending at
55%
(Sanofi)/
45%
(Regeneron), and losses outside the United States at
55%
(Sanofi)/
45%
(Regeneron). In addition to profit sharing, the Company is entitled to receive up to
$250.0 million
in sales milestone payments, with milestone payments commencing only if and after aggregate annual sales outside the United States exceed
$1.0 billion
on a rolling
twelve
-month basis.
Regeneron is obligated to use commercially reasonable efforts to supply clinical requirements of each drug candidate under the Antibody Collaboration until commercial supplies of that drug candidate are being manufactured. In connection with the November 2009 amendment of the collaboration's Antibody Discovery Agreement, Sanofi funded
$30.0 million
of agreed-upon
REGENERON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
costs the Company incurred to expand its manufacturing capacity at its Rensselaer, New York facilities. Additionally, during 2014, Sanofi agreed to fund up to
$17.5 million
of agreed-upon costs incurred by the Company in connection with expanding the Company's manufacturing capacity at its Rensselaer, New York facility. Payments received from Sanofi to fund agreed-upon expansions of the Company's manufacturing capacity are initially recorded as deferred revenue by the Company and are being recognized as collaboration revenue over the related performance period.
With respect to each antibody product which enters development under the License and Collaboration Agreement, Sanofi or the Company may, by giving
twelve
months' notice, opt-out of further development and/or commercialization of the product, in which event the other party retains exclusive rights to continue the development and/or commercialization of the product. The Company may also opt-out of the further development of an antibody product if it gives notice to Sanofi within
thirty
days of the date that Sanofi enters joint development of such antibody product under the License and Collaboration Agreement. Each of the Antibody Discovery Agreement and the License and Collaboration Agreement contains other termination provisions, including for material breach by the other party. Prior to December 31, 2017, Sanofi has the right to terminate the amended Antibody Discovery Agreement without cause with at least
three
months advance written notice; however, except under defined circumstances, Sanofi would be obligated to immediately pay to the Company the full amount of unpaid research funding during the remaining term of the research agreement through December 31, 2017. Upon termination of the collaboration in its entirety, the Company's obligation to reimburse Sanofi for development costs out of any future profits from collaboration products will terminate. In the event of termination of the amended Antibody Discovery Agreement, the Company retains exclusive rights to continue the development and/or commercialization of such product(s). Upon expiration of the amended Antibody Discovery Agreement, Sanofi has an option to license the Company's
VelocImmune
®
technology for an annual license fee plus royalties on any future sales of products developed using
VelocImmune
technology.
In connection with the Antibody Collaboration, in August 2008, the Company entered into a separate agreement with Sanofi, which extended through December 2012, to use Regeneron's proprietary
VelociGene
®
technology platform to supply Sanofi with genetically modified mammalian models of gene function and disease (the "
VelociGene
Agreement")
.
The
VelociGene
Agreement provided for minimum annual order quantities for the term of the agreement, for which the Company received payments totaling
$21.5 million
. Payments received were initially recorded as deferred revenue by the Company and are being recognized as collaboration revenue over the related performance period.
In May 2013, the Company acquired from Sanofi full exclusive rights to
two
families of novel antibodies invented at Regeneron and previously included in the Company's Antibody Collaboration with Sanofi. The Company acquired full rights to antibodies targeting the platelet derived growth factor (PDGF) family of receptors and ligands in ophthalmology and all other indications and to antibodies targeting the angiopoietin-2 (Ang2) receptor and ligand in ophthalmology. With respect to PDGF antibodies, the Company made
two
$5.0 million
development milestone payments to Sanofi in 2014 and a
$10.0 million
development milestone payment to Sanofi in 2015, each of which was recorded as research and development expense.
In July 2014, in connection with the Company's Antibody Collaboration with Sanofi, the Company purchased an FDA priority review voucher from a third party for
$67.5 million
. The Company and Sanofi equally shared the priority review voucher's purchase price, and the Company's share of the cost, or
$33.8 million
, was recorded as a research and development expense during 2014. The Company subsequently transferred the voucher to Sanofi, which used the priority review voucher in connection with the Biologics License Application submission to the FDA for Praluent.
"Reimbursement of Regeneron commercialization-related expenses" in the table above represents reimbursement of internal and external costs in connection with preparing to commercialize or commercializing, as applicable, Praluent, sarilumab, and effective in the first quarter of 2016, dupilumab.
In 2014, the Company and Sanofi began sharing commercialization expenses related to Praluent and sarilumab in accordance with the companies’ License and Collaboration Agreement. In addition, effective in the first quarter of 2016, the Company and Sanofi also began sharing pre-launch commercialization expenses related to dupilumab. As such, during the same periods that the Company recorded reimbursements from Sanofi related to the Company's commercialization expenses, the Company also recorded its share of losses in connection with the companies preparing to commercialize or commercializing, as applicable, Praluent, sarilumab, and dupilumab within Sanofi collaboration revenue.
REGENERON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
Immuno-Oncology
In July 2015, the Company and Sanofi entered into a collaboration to discover, develop, and commercialize antibody-based cancer treatments in the field of immuno-oncology (the "IO Collaboration"). The IO Collaboration is governed by an Immuno-oncology Discovery and Development Agreement ("IO Discovery Agreement"), and an Immuno-oncology License and Collaboration Agreement ("IO License and Collaboration Agreement"). In connection with the IO Discovery Agreement, Sanofi made a
$265.0 million
non-refundable up-front payment to the Company. Pursuant to the IO Discovery Agreement, the Company will spend up to
$1,090.0 million
("IO Discovery Budget") to identify and validate potential immuno-oncology targets and develop therapeutic antibodies against such targets through clinical proof-of-concept. Sanofi will reimburse the Company for up to
$825.0 million
("IO Discovery Funding") of these costs, subject to certain annual limits (including a limit of
$150.0 million
in 2016), which consists of (i)
$750.0 million
in new funding and (ii)
$75.0 million
of funding that would have otherwise been available to Regeneron under the existing Antibody Discovery Agreement, as described above. The term of the IO Discovery Agreement will continue through the later of
five
years from the effective date of the IO Collaboration or the date the IO Discovery Budget is exhausted, subject to Sanofi’s option to extend it for up to an additional
three
years for the continued development (and funding) of selected ongoing programs. Pursuant to the IO Discovery Agreement, the Company will be primarily responsible for the design and conduct of all research activities, including target identification and validation, antibody development, preclinical activities, toxicology studies, manufacture of preclinical and clinical supplies, filing of Investigational New Drug ("IND") Applications, and clinical development through proof-of-concept. The Company will reimburse Sanofi for half of the development costs they funded that are attributable to clinical development of antibody product candidates under the IO Discovery Agreement from Regeneron's share of future profits, if any, from commercialized IO Collaboration products to the extent they are sufficient for this purpose. However, the Company is not required to apply more than
10%
of its share of the profits from IO Collaboration products in any calendar quarter towards reimbursing Sanofi for these development costs. The Company's contingent reimbursement obligation to Sanofi under the IO Collaboration was approximately
$3 million
as of December 31, 2016. With regard to product candidates for which proof-of-concept is established, Sanofi will have the option to license rights to the product candidate pursuant to the IO License and Collaboration Agreement (as further described below). If Sanofi does not exercise its option to license rights to a product candidate, the Company will retain the exclusive right to develop and commercialize such product candidate and Sanofi will be entitled to receive a royalty on sales.
In connection with the IO License and Collaboration Agreement, Sanofi made a
$375.0 million
non-refundable up-front payment to the Company. If Sanofi exercises its option to license rights to a product candidate thereunder, it will co-develop the drug candidate with the Company through product approval. Principal control of development of each product candidate that enters development under the IO License and Collaboration Agreement will alternate between the Company and Sanofi on a candidate-by-candidate basis. Sanofi will fund drug candidate development costs up front for the candidates for which it is the principal controlling party and the Company will reimburse half of the total development costs for all such candidates from its share of future IO Collaboration profits to the extent they are sufficient for this purpose, subject to the same
10%
reimbursement limitation described above. In addition, Sanofi and the Company will share equally, on an ongoing basis, the development costs for the drug candidates for which the Company is the principal controlling party. The party having principal control over the development of a product candidate will also lead the commercialization activities for such product candidate in the United States. For all products commercialized under the IO License and Collaboration Agreement, Sanofi will lead commercialization activities outside of the United States. Each party will have the right to co-promote licensed products in countries where it is not the lead commercialization party. The parties will share equally in profits and losses in connection with the commercialization of collaboration products. The Company is obligated to use commercially reasonable efforts to supply clinical requirements of each drug candidate under the IO License and Collaboration Agreement until commercial supplies of that IO drug candidate are being manufactured.
Under the terms of the IO License and Collaboration Agreement, the parties will also co-develop the Company’s antibody product candidate targeting the receptor known as Programmed Cell Death protein 1, or PD-1 ("REGN2810"). The parties will share equally, on an ongoing basis, development expenses for REGN2810 up to a total of
$650.0 million
. The Company will have principal control over the development of REGN2810 and will lead commercialization activities in the United States, subject to Sanofi’s right to co-promote, while Sanofi will lead commercialization activities outside of the United States and the parties will equally share profits from worldwide sales. The Company will be entitled to a milestone payment of
$375.0 million
in the event that sales of all licensed products targeting PD-1 (including REGN2810), together with sales of any other products licensed under the IO License and Collaboration Agreement and sold for use in combination with a licensed product targeting PD-1, equal or exceed
$2.0 billion
in any consecutive
twelve
-month period.
REGENERON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
With respect to each product candidate that enters development under the IO License and Collaboration Agreement, Sanofi or the Company may, by giving
twelve
months’ notice, opt-out of further development and/or commercialization of the product, in which event the other party will retain exclusive rights to continue the development and/or commercialization of such product.
At the inception of the IO Collaboration, the Company's significant deliverables consisted of (i) license to certain rights and intellectual property, (ii) providing research and development services, and (iii) manufacturing clinical supplies. The Company concluded that the license did not have standalone value, primarily due to the fact that such rights were not sold separately by the Company, nor could Sanofi receive any benefit from the license without the fulfillment of other ongoing obligations by the Company, including the clinical supply arrangement. Therefore, the deliverables were considered a single unit of accounting. Consequently, the
$640.0 million
in aggregate up-front payments was initially recorded as deferred revenue, and is being recognized ratably as revenue over the related performance period.
ZALTRAP
In September 2003, the Company entered into a collaboration agreement ("ZALTRAP Collaboration Agreement") with Aventis Pharmaceuticals Inc. (predecessor to Sanofi U.S.) to jointly develop and commercialize ZALTRAP. Under the terms of the ZALTRAP Collaboration Agreement, as amended, Regeneron and Sanofi shared co-promotion rights and profits and losses on sales of ZALTRAP outside of Japan, and the Company was entitled to receive a percentage of sales of ZALTRAP in Japan. Sanofi commenced sales of ZALTRAP for patients with mCRC that is resistant to or has progressed following an oxaliplatin-containing regimen, in the United States in 2012 and in certain European and other countries in 2013.
In February 2015, the Company and Sanofi entered into the Amended ZALTRAP Agreement. Under the terms of the Amended ZALTRAP Agreement, Sanofi is solely responsible for the development and commercialization of ZALTRAP for cancer indications worldwide. Sanofi bears the cost of all development and commercialization activities and reimburses Regeneron for its costs for any such activities. Sanofi pays the Company a percentage of aggregate net sales of ZALTRAP during each calendar year, which percentage shall be from
15%
to
30%
, depending on the aggregate net sales of ZALTRAP in such calendar year. The Company will also be paid for all quantities of ZALTRAP manufactured by it, pursuant to a supply agreement, through the earlier of 2021 or the date Sanofi receives regulatory approval to manufacture ZALTRAP at one of its facilities, or a facility of a third party. Unless terminated earlier in accordance with its provisions, the Amended ZALTRAP Agreement will continue to be in effect until such time as neither Sanofi nor its affiliates or sublicensees is developing or commercializing ZALTRAP.
As a result of entering into the Amended ZALTRAP Agreement, in the first quarter of 2015, the Company recognized
$14.9 million
of collaboration revenue, which was previously recorded as deferred revenue under the ZALTRAP Collaboration Agreement, related to (i) amounts that were previously reimbursed by Sanofi for manufacturing commercial supplies of ZALTRAP since the risk of inventory loss no longer existed, and (ii) the unamortized portion of up-front payments from Sanofi as the Company had no further performance obligations. In addition, during the years ended December 31, 2016 and 2015, the Company recorded
$26.2 million
and
$38.8 million
, respectively, in other revenue, primarily related to a percentage of net sales of ZALTRAP and manufacturing ZALTRAP commercial supplies for Sanofi.
REGENERON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
b. Bayer
The collaboration revenue the Company earned from Bayer is detailed below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
Bayer Collaboration Revenue
|
|
2016
|
|
2015
|
|
2014
|
EYLEA:
|
|
|
|
|
|
|
Regeneron's net profit in connection with commercialization of EYLEA outside the United States
|
|
$
|
649,232
|
|
|
$
|
466,667
|
|
|
$
|
301,302
|
|
Sales milestones
|
|
—
|
|
|
15,000
|
|
|
105,000
|
|
Cost-sharing of Regeneron EYLEA development expenses
|
|
9,010
|
|
|
8,887
|
|
|
23,383
|
|
Other
|
|
52,527
|
|
|
69,466
|
|
|
52,390
|
|
Total EYLEA
|
|
710,769
|
|
|
560,020
|
|
|
482,075
|
|
PDGFR-beta antibody:
|
|
|
|
|
|
|
Cost-sharing of rinucumab/aflibercept (REGN2176-3) development expenses
|
|
10,291
|
|
|
10,075
|
|
|
2,848
|
|
Other
|
|
9,576
|
|
|
10,393
|
|
|
10,632
|
|
Total PDGFR-beta antibody
|
|
19,867
|
|
|
20,468
|
|
|
13,480
|
|
Ang2 antibody:
|
|
|
|
|
|
|
Cost-sharing of nesvacumab/aflibercept (REGN910-3) development expenses
|
|
8,036
|
|
|
—
|
|
|
—
|
|
Other
|
|
5,598
|
|
|
—
|
|
|
—
|
|
Total Ang2 antibody
|
|
13,634
|
|
|
—
|
|
|
—
|
|
|
|
$
|
744,270
|
|
|
$
|
580,488
|
|
|
$
|
495,555
|
|
Deferred revenue in connection with the Company's collaboration agreements with Bayer is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2016
|
|
2015
|
EYLEA
|
|
$
|
62,373
|
|
|
$
|
46,694
|
|
PDGFR-beta antibody
|
|
—
|
|
|
9,522
|
|
Ang2 antibody
|
|
45,739
|
|
|
—
|
|
EYLEA outside the United States
In October 2006, the Company entered into a license and collaboration agreement with Bayer for the global development and commercialization outside the United States of EYLEA. Under the terms of the agreement, Bayer made a non-refundable up-front payment to the Company of
$75.0 million
. The Company also received from Bayer a
$20.0 million
development milestone payment in 2007 (which, for the purpose of revenue recognition, was not considered substantive). The
$75.0 million
up-front payment and the
$20.0 million
milestone payment are being recognized as collaboration revenue over the related estimated performance period.
Since 2009, all agreed-upon EYLEA development expenses incurred by the Company and Bayer, under a global development plan, are being shared equally. The Company is also obligated to use commercially reasonable efforts to supply clinical and commercial bulk product of EYLEA. Bayer has the right to terminate the license and collaboration agreement without cause with at least
six
months' or
twelve
months' advance notice depending on defined circumstances at the time of termination. In the event of termination of the agreement for any reason, the Company retains all rights to EYLEA.
Bayer commenced sales of EYLEA outside the United States for the treatment of wet AMD in 2012, macular edema secondary to CRVO in 2013, visual impairment due to DME and mCNV (in Japan) in 2014, and macular edema following BRVO in 2015.
REGENERON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
Bayer markets EYLEA outside the United States, where, for countries other than Japan, the companies share equally in profits and losses from sales of EYLEA. In Japan, the Company is entitled to receive a tiered percentage of between
33.5%
and
40.0%
of EYLEA net sales. Within the United States, the Company is responsible for commercialization of EYLEA and retains exclusive rights to all profits from such commercialization in the United States. The Company is obligated to reimburse Bayer out of its share of the collaboration profits (including the Company's percentage of sales of EYLEA in Japan) for
50%
of the agreed-upon development expenses that Bayer has incurred in accordance with a formula based on the amount of development expenses that Bayer has incurred and the Company's share of the collaboration profits, or at a faster rate at the Company's option. The Company's contingent reimbursement obligation to Bayer was approximately
$256 million
as of December 31, 2016.
In 2014, the Company earned, and recorded as revenue,
$90.0 million
of sales milestone payments from Bayer upon total aggregate net sales of EYLEA outside the United States achieving certain specified levels starting at
$500.0 million
over a
twelve
-month period. In addition, in connection with a November 2013 agreement under which Bayer obtained rights to use certain of the Company's EYLEA clinical data for a regulatory filing, the Company earned, and recorded as revenue, a
$15.0 million
sales milestone payment in 2014 from Bayer upon total aggregate net sales of specific commercial supplies of EYLEA outside the United States exceeding
$100.0 million
over a
twelve
-month period. In 2015, the Company earned, and recorded as revenue, the final sales milestone payment from Bayer, in the amount of
$15.0 million
, upon total aggregate net sales of specific commercial supplies of EYLEA outside the United States exceeding
$200.0 million
over a
twelve
-month period.
In January 2014, Bayer decided to participate in the global development and commercialization of EYLEA outside the United States for the treatment of macular edema following BRVO. In connection with this decision, Bayer reimbursed Regeneron
$15.7 million
for a defined share of the EYLEA global development costs that the Company had incurred prior to February 2014 for the BRVO indication, which was recognized as Bayer collaboration revenue in the first quarter of 2014 and is included with "Cost-sharing of Regeneron EYLEA development expenses" in the table above. In addition, all future agreed upon global EYLEA development expenses incurred in connection with BRVO are being shared equally, and any profits or losses on sales of EYLEA outside of the United States for the treatment of macular edema following BRVO are also shared (for countries other than Japan). The Company is entitled to receive a tiered percentage of EYLEA net sales in Japan.
In periods when Bayer incurs agreed-upon EYLEA development expenses that benefit the collaboration and Regeneron, the Company recognizes, as additional research and development expense, the portion of Bayer's EYLEA development expenses that the Company is obligated to reimburse. In 2016, 2015, and 2014, the Company recognized as research and development expense
$1.4 million
,
$13.7 million
, and
$18.6 million
, respectively, of EYLEA development expenses that the Company was obligated to reimburse to Bayer.
PDGFR-beta antibody outside the United States
In January 2014, the Company entered into a license and collaboration agreement with Bayer governing the joint development and commercialization outside the United States of an antibody product candidate to Platelet Derived Growth Factor Receptor Beta (PDGFR-beta), including REGN2176-3, a combination product candidate comprised of an antibody to PDGFR-beta co-formulated with aflibercept. The agreement provides that the Company would conduct the initial development of the PDGFR-beta antibody through completion of the first proof-of-concept study, upon which Bayer would have a right to opt-in to license and collaborate on further development and commercialization outside the United States. Effective in the first quarter of 2017, the Company has discontinued clinical development of REGN2176-3.
In connection with the agreement, Bayer made a
$25.5 million
non-refundable up-front payment to the Company in January 2014, and is obligated to pay
25%
of global development costs and
50%
of development costs exclusively for the territory outside the United States under the initial development plan. In addition, Bayer is obligated to reimburse the Company for
50%
of development milestone payments to Sanofi related to the Company's acquisition of rights to antibodies targeting the PDGF family of receptors in May 2013. In that regard, Bayer made
two
$2.5 million
development milestone payments to the Company in 2014 (both of which, for the purpose of revenue recognition, were not considered substantive) and a
$5.0 million
development milestone payment to the Company in 2015 (which was recognized as a substantive milestone).
From inception of the agreement until Bayer has the right to opt-in to the collaboration, the Company's sole significant deliverable is research and development services provided in accordance with the agreement. Therefore, the
$25.5 million
up-front payment was allocated to this deliverable, initially recorded as deferred revenue, and will be recognized as revenue over the related performance period. In addition, the
two
$2.5 million
non-substantive development milestone payments from Bayer were also initially recorded as deferred revenue and will be recognized over the same performance period as the up-front payment.
REGENERON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
Ang2 antibody outside the United States
In March 2016, the Company entered into an agreement with Bayer governing the joint development and commercialization outside the United States of an antibody product candidate to angiopoietin-2 (Ang2), including in combination with aflibercept, for the treatment of ocular diseases or disorders. In connection with the agreement, Bayer made a
$50.0 million
non-refundable up-front payment to the Company and is obligated to pay
25%
of global development costs and
50%
of development costs exclusively for the territory outside the United States. The Company is also entitled to receive up to an aggregate of
$80.0 million
in development milestone payments from Bayer. Bayer will share profits and losses from sales outside the United States equally with the Company, and is responsible for certain royalties payable to Sanofi on sales of the product outside of the United States. Within the United States, the Company has exclusive commercialization rights and will retain all of the profits from sales.
At the inception of the agreement, the Company's significant deliverables consisted of (i) a license to certain rights and intellectual property, (ii) providing research and development services, and (iii) manufacturing clinical supplies. The Company concluded that the license did not have standalone value, as such right was not sold separately by the Company, nor could Bayer receive any benefit from the license without the fulfillment of other ongoing obligations by the Company, including the clinical supply arrangement. Therefore, the deliverables were considered a single unit of accounting. Consequently, the
$50.0 million
up-front payment was initially recorded as deferred revenue, and will be recognized ratably as revenue over the related performance period.
Unless terminated earlier in accordance with its provisions, the agreement will continue to be in effect until such time as neither party or its respective affiliates or sublicensees is developing or commercializing an Ang2 antibody in the specified field outside of the United States and such discontinuation is acknowledged as permanent by both the Company and Bayer.
c. Mitsubishi Tanabe Pharma
In September 2015, the Company and Mitsubishi Tanabe Pharma Corporation ("MTPC") entered into a collaboration agreement (the "MTPC Collaboration Agreement") providing MTPC with development and commercial rights to fasinumab, the Company's nerve growth factor antibody in late-stage clinical development, in Japan, South Korea, Taiwan, Indonesia, Thailand, the Philippines, Malaysia, Singapore, Vietnam, Myanmar, and Sri Lanka (the "MTPC Territories"). In connection with the agreement, MTPC made a
$10.0 million
non-refundable up-front payment. In the first quarter of 2016, MTPC made additional payments of
$45.0 million
and
$15.0 million
to the Company, which were recorded as deferred revenue and are being recognized ratably as revenue over the same performance period as the up-front payment. The Company is entitled to receive up to an aggregate of
$65.0 million
in development milestones if achieved by the Company and
$90.0 million
in other contingent payments, primarily related to development milestones achieved by MTPC.
Under the MTPC Collaboration Agreement, the Company is obligated to manufacture and supply MTPC with clinical and commercial supplies of fasinumab. If fasinumab is commercialized in the MTPC Territories, the Company will supply the product to MTPC at a tiered purchase price, which ranges from
30%
to
50%
of net sales of the product (subject to adjustment in certain circumstances), and is eligible for additional payments up to an aggregate of
$100.0 million
upon the achievement of specified annual net sales amounts starting at
$200.0 million
. Unless terminated earlier in accordance with its provisions, the MTPC Collaboration Agreement will continue to be in effect until such time as MTPC has ceased developing or commercializing fasinumab in the MTPC Territories.
At the inception of the MTPC Collaboration Agreement, the Company's significant deliverables consisted of (i) exclusive rights to develop and commercialize fasinumab in the MTPC Territories, and (ii) manufacturing clinical and commercial supplies. The Company concluded that the license did not have standalone value, as such right was not sold separately by the Company, nor could MTPC receive any benefit from the license without the manufacturing services to be rendered by the Company. Therefore, the deliverables were considered a single unit of accounting. Consequently, the
$10.0 million
up-front payment was initially recorded as deferred revenue, and is being recognized ratably as revenue over the related performance period.
The Company recognized
$14.4 million
of revenue in 2016 in connection with the MTPC Collaboration Agreement. Revenue recognized in connection with this agreement was not material in 2015.
d. Teva
In September 2016, the Company and Teva entered into a collaboration agreement (the "Teva Collaboration Agreement") to develop and commercialize fasinumab globally, excluding certain Asian countries that are subject to the Company's collaboration agreement with MTPC (as described above). In connection with the Teva Collaboration Agreement, Teva made a
$250.0 million
non-refundable up-front payment in September 2016. The Company will lead global development activities, and the parties will
REGENERON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
share equally, on an ongoing basis, development costs under a global development plan. In addition, the Company is entitled to receive up to an aggregate of
$460.0 million
in development milestones and up to an aggregate of
$1,890.0 million
in contingent payments upon achievement of specified annual net sales amounts. The Company is responsible for the manufacture and supply of fasinumab globally.
Within the United States, the Company will lead commercialization activities, and the parties will share equally in any profits and losses in connection with commercialization of fasinumab. In the territory outside the United States, Teva will lead commercialization activities and the Company will supply product to Teva at a tiered purchase price, which is calculated as a percentage of net sales of the product (subject to adjustment in certain circumstances). Unless terminated earlier in accordance with its provisions, the Teva Collaboration Agreement will continue to be in effect until such time as neither party is developing or commercializing fasinumab.
At the inception of the Teva Collaboration Agreement, the Company's significant deliverables consisted of (i) a license to certain rights and intellectual property, (ii) providing research and development services, and (iii) manufacturing clinical supplies. The Company concluded that the license did not have standalone value, primarily due to the fact that such rights were not sold separately by the Company, nor could Teva receive any benefit from the license without the fulfillment of the other ongoing obligations by the Company, including the clinical supply arrangement. Therefore, the deliverables were considered a single unit of accounting. Consequently, the
$250.0 million
up-front payment was initially recorded as deferred revenue, and is being recognized ratably as revenue over the related performance period.
The Company recognized
$37.9 million
of revenue in 2016 in connection with the Teva Collaboration Agreement.
e. Intellia Therapeutics
In April 2016, the Company entered into a license and collaboration agreement with Intellia Therapeutics, Inc. to advance CRISPR/Cas gene-editing technology for
in vivo
therapeutic development. The Company will collaborate with Intellia to conduct research for the discovery, development, and commercialization of new therapies ("Product Collaboration"), in addition to the research and technology development of the CRISPR/Cas platform ("Technology Collaboration"). In connection with the execution of the agreement, the Company made a
$75.0 million
up-front payment, which was recorded as research and development expense in the second quarter of 2016, and also agreed to purchase Intellia shares contingent upon Intellia consummating its next equity financing. The Company is responsible for costs of developing and commercializing CRISPR/Cas products under the Product Collaboration agreement and is also obligated to pay potential development and sales milestones, and royalties on any future sales of such products resulting from the development and commercialization of CRISPR/Cas products. In addition, under the Technology Collaboration agreement, the Company is responsible for funding certain research and technology development costs.
Under the terms of the Product Collaboration agreement, the parties agreed to a target selection process, whereby the Company may obtain exclusive rights in up to
10
targets to be chosen by the Company during the collaboration term, subject to various adjustments and limitations set forth in the agreement. Additionally, the Company may replace a limited number of targets with substitute targets upon the payment of a replacement fee, in which case rights to the replaced target(s) will revert to Intellia.
The Technology Collaboration term and the period for selecting targets for inclusion under the Product Collaboration both end in 2022, provided that the Company may make a payment to extend the term for an additional
two
-year period. The Product Collaboration agreement will continue until the date when no royalty or other payment obligations are due, unless earlier terminated in accordance with the terms of the agreement.
Certain targets that either the Company or Intellia select pursuant to the target selection process may be subject to a co-development and co-commercialization arrangement at the Company's option or Intellia's option, as applicable.
In May 2016, Intellia completed an initial public offering ("IPO") of its common stock and thereby triggered the Company's obligation to purchase up to
$50.0 million
of Intellia common stock in a concurrent private placement. As part of the concurrent private placement, the Company purchased from Intellia at the closing of the IPO
2,777,777
shares of Intellia common stock for an aggregate purchase price of
$50.0 million
(see Note 6).
f. Adicet Bio
In July 2016, the Company entered into a license and collaboration agreement with Adicet Bio, Inc., a privately held company, to develop next-generation engineered immune-cell therapeutics with fully human chimeric antigen receptors ("CARs") and T-cell receptors ("TCRs") directed to disease-specific cell surface antigens in order to enable the precise engagement and killing of
REGENERON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
tumor cells. In connection with the execution of the agreement, the Company made a
$25.0 million
up-front payment to Adicet, which was recorded as research and development expense in the third quarter of 2016, and is obligated to provide Adicet with research funding over the course of a
five
-year research term.
Under the terms of the agreement, the Company and Adicet will collaborate to identify and validate targets and work together to develop a pipeline of engineered immune-cell therapeutics for selected targets. The Company has the option to obtain development and commercial rights for a certain number of the product candidates developed by the parties, subject to an option payment for each product candidate. If the Company exercises its option on a given product candidate, Adicet then will have an option to participate in the development and commercialization for such product. If Adicet doesn’t exercise its option, Adicet will be entitled to royalties on any future sales of such products by the Company. In addition to developing CARs and TCRs for use in novel immune-cell therapies as part of the collaboration, the Company will have the right to use these CARs and TCRs in its other antibody programs outside of the collaboration.
The Company will also be entitled to royalties on any future sales of products developed and commercialized by Adicet under the agreement for all products for which the Company does not have development and commercial rights.
g. Other
In addition to the collaboration agreements discussed above, the Company has various other collaboration agreements that are not individually, or in the aggregate, significant to its operating results or financial condition at this time. Pursuant to the terms of those agreements, the Company may be required to pay, or it may receive, additional amounts upon the achievement of various development and commercial milestones which in the aggregate could be significant. The Company may also incur, or get reimbursed for, significant research and development costs if the related product candidate(s) were to advance to late stage clinical trials. In addition, if any products related to these collaborations are approved for sale, the Company may be required to pay, or it may receive, royalties on future sales. The payment or receipt of these amounts, however, is contingent upon the occurrence of various future events.
4. Technology Licensing Agreement
In March 2007, the Company entered into a
six
-year, non-exclusive license agreement with Astellas Pharma Inc. to allow Astellas to utilize the Company's
VelocImmune
technology in its internal research programs to discover human monoclonal antibodies. In July 2010, the license agreement with Astellas was amended and extended through June 2023. Under the terms of the amended agreement, Astellas made a
$165.0 million
up-front payment to the Company in 2010, which was deferred upon receipt and is being recognized as revenue ratably over a
seven
-year period beginning in mid-2011. In addition, Astellas will make a
$130.0 million
second payment to the Company in June 2018 unless the license agreement has been terminated prior to that date. Astellas has the right to terminate the agreement at any time by providing
90
days' advance written notice. Under certain limited circumstances, such as a material breach of the agreement by the Company, Astellas may terminate the agreement and receive a refund of a portion of its up-front payment or, if such termination occurs after June 2018, a portion of its second payment, to the Company under the July 2010 amendment to the agreement. The Company is entitled to receive a mid-single digit royalty on any future sales of antibody products discovered by Astellas using the Company's
VelocImmune
technology. In connection with the Astellas license agreement, for each of the years ended December 31, 2016, 2015, and 2014, the Company recognized
$23.6 million
of other revenue. In addition, deferred revenue at December 31, 2016 and 2015 in connection with the Astellas license agreement was
$33.9 million
and
$57.4 million
, respectively.
5. Marketable Securities
Marketable securities as of
December 31, 2016
and 2015 consist of both debt securities of investment grade issuers as well as equity securities.
REGENERON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
The following tables summarize the Company's investments in marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
Unrealized
|
|
Fair
|
As of December 31, 2016
|
|
Cost Basis
|
|
Gains
|
|
Losses
|
|
Value
|
Corporate bonds
|
|
$
|
1,076,964
|
|
|
$
|
630
|
|
|
$
|
(4,743
|
)
|
|
$
|
1,072,851
|
|
U.S. government and government agency obligations
|
|
132,923
|
|
|
58
|
|
|
(641
|
)
|
|
132,340
|
|
Municipal bonds
|
|
7,663
|
|
|
1
|
|
|
(20
|
)
|
|
7,644
|
|
Commercial paper
|
|
63,074
|
|
|
1
|
|
|
—
|
|
|
63,075
|
|
Certificates of deposit
|
|
42,612
|
|
|
—
|
|
|
—
|
|
|
42,612
|
|
Equity securities
|
|
57,251
|
|
|
5,551
|
|
|
(13,583
|
)
|
|
49,219
|
|
|
|
$
|
1,380,487
|
|
|
$
|
6,241
|
|
|
$
|
(18,987
|
)
|
|
$
|
1,367,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2015
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
770,092
|
|
|
$
|
156
|
|
|
$
|
(2,565
|
)
|
|
$
|
767,683
|
|
U.S. government and government agency obligations
|
|
51,402
|
|
|
—
|
|
|
(193
|
)
|
|
51,209
|
|
Municipal bonds
|
|
17,930
|
|
|
5
|
|
|
(11
|
)
|
|
17,924
|
|
Equity securities
|
|
17,005
|
|
|
14,462
|
|
|
—
|
|
|
31,467
|
|
|
|
$
|
856,429
|
|
|
$
|
14,623
|
|
|
$
|
(2,769
|
)
|
|
$
|
868,283
|
|
The Company classifies its debt security investments based on their contractual maturity dates. The debt securities listed as of
December 31, 2016
mature at various dates through November 2021. The fair values of debt security investments by contractual maturity consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2016
|
|
2015
|
Maturities within one year
|
|
$
|
503,482
|
|
|
$
|
236,121
|
|
Maturities after one year through five years
|
|
815,040
|
|
|
600,695
|
|
|
|
$
|
1,318,522
|
|
|
$
|
836,816
|
|
REGENERON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
The following table shows the fair value of the Company's marketable securities that have unrealized losses and that are deemed to be only temporarily impaired, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months
|
|
12 Months or Greater
|
|
Total
|
As of December 31, 2016
|
Fair Value
|
|
Unrealized Loss
|
|
Fair Value
|
|
Unrealized Loss
|
|
Fair Value
|
|
Unrealized Loss
|
Corporate bonds
|
$
|
759,222
|
|
|
$
|
(4,685
|
)
|
|
$
|
36,407
|
|
|
$
|
(58
|
)
|
|
$
|
795,629
|
|
|
$
|
(4,743
|
)
|
U.S. government and government agency obligations
|
81,170
|
|
|
(641
|
)
|
|
—
|
|
|
—
|
|
|
81,170
|
|
|
(641
|
)
|
Municipal bonds
|
7,141
|
|
|
(20
|
)
|
|
—
|
|
|
—
|
|
|
7,141
|
|
|
(20
|
)
|
Equity securities
|
36,417
|
|
|
(13,583
|
)
|
|
—
|
|
|
—
|
|
|
36,417
|
|
|
(13,583
|
)
|
|
$
|
883,950
|
|
|
$
|
(18,929
|
)
|
|
$
|
36,407
|
|
|
$
|
(58
|
)
|
|
$
|
920,357
|
|
|
$
|
(18,987
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
$
|
668,199
|
|
|
$
|
(2,473
|
)
|
|
$
|
23,749
|
|
|
$
|
(92
|
)
|
|
$
|
691,948
|
|
|
$
|
(2,565
|
)
|
U.S. government and government agency obligations
|
51,215
|
|
|
(193
|
)
|
|
—
|
|
|
—
|
|
|
51,215
|
|
|
(193
|
)
|
Municipal bonds
|
11,917
|
|
|
(11
|
)
|
|
—
|
|
|
—
|
|
|
11,917
|
|
|
(11
|
)
|
|
$
|
731,331
|
|
|
$
|
(2,677
|
)
|
|
$
|
23,749
|
|
|
$
|
(92
|
)
|
|
$
|
755,080
|
|
|
$
|
(2,769
|
)
|
During the year ended December 31, 2016, the Company recorded an other-than-temporary impairment charge of
$9.8 million
related to its investment in an equity security. There were
no
other-than-temporary impairment charges recorded on the Company's investments during 2015 or 2014. Realized gains and losses on sales of marketable securities were not material for the years ended December 31, 2016 and 2015. For the year ended December 31, 2014, total realized gains on sales of marketable securities were not material and there were
no
realized losses.
Changes in the Company's accumulated other comprehensive income (loss) for the years ended December 31, 2016, 2015, and 2014 related to unrealized gains and losses on available-for-sale marketable securities. For the years ended December 31, 2016, 2015, and 2014, amounts reclassified from accumulated other comprehensive income (loss) into other income (expense), net in the Company's Consolidated Statements of Operations were related to the 2016 impairment charge on the equity security and realized gains and losses on sales of marketable securities described above.
REGENERON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
6. Fair Value Measurements
The Company's assets that are measured at fair value on a recurring basis consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
As of December 31, 2016
|
Fair Value
|
|
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
Available-for-sale marketable securities:
|
|
|
|
|
|
Corporate bonds
|
$
|
1,072,851
|
|
|
—
|
|
|
$
|
1,072,851
|
|
U.S. government and government agency obligations
|
132,340
|
|
|
—
|
|
|
132,340
|
|
Municipal bonds
|
7,644
|
|
|
—
|
|
|
7,644
|
|
Commercial paper
|
63,075
|
|
|
—
|
|
|
63,075
|
|
Certificates of deposit
|
42,612
|
|
|
—
|
|
|
42,612
|
|
Equity securities
|
49,219
|
|
|
$
|
49,219
|
|
|
—
|
|
|
$
|
1,367,741
|
|
|
$
|
49,219
|
|
|
$
|
1,318,522
|
|
|
|
|
|
|
|
As of December 31, 2015
|
|
|
|
|
|
Available-for-sale marketable securities:
|
|
|
|
|
|
Corporate bonds
|
$
|
767,683
|
|
|
—
|
|
|
$
|
767,683
|
|
U.S. government and government agency obligations
|
51,209
|
|
|
—
|
|
|
51,209
|
|
Municipal bonds
|
17,924
|
|
|
—
|
|
|
17,924
|
|
Equity securities
|
31,467
|
|
|
$
|
31,467
|
|
|
—
|
|
|
$
|
868,283
|
|
|
$
|
31,467
|
|
|
$
|
836,816
|
|
Marketable securities included in Level 2 are valued using quoted market prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, or model-based valuations in which significant inputs used are observable. The Company considers market liquidity in determining the fair value for these securities. The Company did
no
t record any charges for other-than-temporary impairment of its Level 2 marketable securities in
2016
,
2015
, and
2014
.
There were no purchases, sales, or maturities of Level 3 marketable securities and
no
unrealized gains or losses related to Level 3 marketable securities for the years ended December 31, 2016 and 2015. During 2016, transfers of marketable securities from Level 2 to Level 1 were
$44.1 million
in connection with the lapse of transfer restrictions in November 2016 on the Company's investment in Intellia common shares. During 2015, transfers of marketable securities from Level 2 to Level 1 were
$91.4 million
in connection with the lapse of the transfer restrictions in January 2015 on the Company's investment in Adverum Biotechnologies, Inc. (formerly Avalanche Biotechnologies, Inc.) common shares.
The Company's policy for recognition of transfers between levels of the fair value hierarchy is to recognize any transfer at the beginning of the fiscal quarter in which the determination to transfer was made.
There were
no
other transfers of marketable securities between Levels 1, 2, or 3 classifications during the years ended December 31, 2016 and 2015.
As of December 31,
2015
, the Company had
$11.2 million
in aggregate principal amount of
1.875%
convertible senior notes outstanding that matured in October 2016 (see Note 11). The fair value of the outstanding convertible senior notes was estimated to be
$72.8 million
as of December 31,
2015
, and was determined based on Level 2 inputs, such as market and observable sources.
REGENERON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
7.
Inventories
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2016
|
|
2015
|
Raw materials
|
$
|
92,287
|
|
|
$
|
59,151
|
|
Work-in-process
|
202,301
|
|
|
132,068
|
|
Finished goods
|
13,334
|
|
|
11,197
|
|
Deferred costs
|
91,434
|
|
|
36,162
|
|
|
$
|
399,356
|
|
|
$
|
238,578
|
|
Deferred costs represent the costs of product manufactured and shipped to the Company's collaborators for which recognition of revenue has been deferred (see Note 1). For the years ended December 31,
2016
,
2015
, and
2014
, cost of goods sold included inventory write-downs and reserves totaling
$14.0 million
,
$10.6 million
, and
$6.0 million
, respectively.
8. Property, Plant, and Equipment
Property, plant, and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2016
|
|
2015
|
Land
|
$
|
103,906
|
|
|
$
|
77,826
|
|
Building and improvements
|
1,278,283
|
|
|
760,517
|
|
Leasehold improvements
|
101,101
|
|
|
95,226
|
|
Construction-in-progress
|
318,929
|
|
|
579,834
|
|
Laboratory and other equipment
|
554,181
|
|
|
330,432
|
|
Furniture, computer and office equipment, and other
|
152,525
|
|
|
81,381
|
|
|
2,508,925
|
|
|
1,925,216
|
|
Less, accumulated depreciation and amortization
|
(425,504
|
)
|
|
(331,096
|
)
|
|
$
|
2,083,421
|
|
|
$
|
1,594,120
|
|
As of December 31, 2016 and 2015,
$1,441.2 million
and
$1,118.4 million
, respectively, of the Company's property, plant, and equipment was located in the United States and
$642.2 million
and
$475.7 million
, respectively, was located in Ireland. In 2015, the Company acquired an approximate 100-acre parcel of undeveloped land adjacent to the Company's current Tarrytown, New York location for an aggregate purchase price of
$73.0 million
.
Depreciation and amortization expense on property, plant, and equipment amounted to
$104.7 million
,
$74.9 million
, and
$52.7 million
for the years ended December 31,
2016
,
2015
, and
2014
, respectively.
Property, plant, and equipment, at cost, as of
December 31, 2016
and
2015
included
$269.0 million
and
$254.6 million
, respectively, of costs incurred by the Company's landlord to construct laboratory and office facilities in Tarrytown, New York. Additionally, property, plant, and equipment, at cost, as of
December 31, 2016
included
$138.1 million
of leased property under a capital lease. See Note 12a.
REGENERON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
9.
Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following:
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2016
|
|
2015
|
Accounts payable
|
$
|
134,984
|
|
|
$
|
140,962
|
|
Accrued payroll and related costs
|
153,086
|
|
|
133,223
|
|
Accrued clinical trial expense
|
91,753
|
|
|
88,297
|
|
Accrued sales-related charges, deductions, and royalties
|
159,985
|
|
|
195,986
|
|
Income taxes payable
|
235,776
|
|
|
—
|
|
Other accrued expenses and liabilities
|
103,512
|
|
|
85,644
|
|
|
$
|
879,096
|
|
|
$
|
644,112
|
|
10. Deferred Revenue
Deferred revenue consists of the following:
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2016
|
|
2015
|
Current portion:
|
|
|
|
Received or receivable from Sanofi (see Note 3a)
|
$
|
115,267
|
|
|
$
|
101,573
|
|
Received or receivable from Bayer (see Note 3b)
|
31,084
|
|
|
24,290
|
|
Received or receivable from MTPC (see Note 3c)
|
9,188
|
|
|
2,352
|
|
Received or receivable from Teva (see Note 3d)
|
43,122
|
|
|
—
|
|
Received for technology license agreement (see Note 4)
|
23,572
|
|
|
23,572
|
|
Other
|
9,431
|
|
|
1,700
|
|
|
$
|
231,664
|
|
|
$
|
153,487
|
|
Long-term portion:
|
|
|
|
Received or receivable from Sanofi (see Note 3a)
|
$
|
503,474
|
|
|
$
|
582,664
|
|
Received or receivable from Bayer (see Note 3b)
|
77,028
|
|
|
31,926
|
|
Received or receivable from MTPC (see Note 3c)
|
45,940
|
|
|
7,059
|
|
Received or receivable from Teva (see Note 3d)
|
194,050
|
|
|
—
|
|
Received for technology license agreement (see Note 4)
|
10,280
|
|
|
33,851
|
|
Other
|
—
|
|
|
9,179
|
|
|
$
|
830,772
|
|
|
$
|
664,679
|
|
11. Debt
a. Convertible Debt
In October 2011, the Company issued
$400.0 million
aggregate principal amount of
1.875%
convertible senior notes (the "Notes") in a private placement. The Notes paid interest semi-annually on April 1 and October 1, and matured on October 1, 2016. The Notes were convertible, subject to certain conditions, into cash, shares of the Company's Common Stock, or a combination of cash and shares of Common Stock, at the Company's option. The Notes initial conversion price was approximately
$84.02
per share.
REGENERON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
In accordance with accounting guidance for debt with conversion and other options, the Company accounted for the liability and equity components of the Notes separately. The estimated fair value of the liability component at the date of issuance was
$271.1 million
, and was computed based on the fair value of similar debt instruments that do not include a conversion feature. The equity component of
$120.9 million
was recognized as a debt discount and represents the difference between the
$392.0 million
of gross proceeds from the issuance of the Notes and the
$271.1 million
estimated fair value of the liability component at the date of issuance. The debt discount was amortized over the expected life of a similar liability without the equity component. The Company determined this expected life to be equal to the term of the Notes, resulting in an amortization period ending October 1, 2016. The effective interest rate used to amortize the debt discount was approximately
10.2%
, which was based on the Company's estimated non-convertible borrowing rate as of the date the Notes were issued.
In connection with the offering of the Notes in October 2011, the Company entered into convertible note hedge ("call option") and warrant transactions with multiple counterparties, including an affiliate of the initial purchaser of the Notes. The convertible note hedge covered, subject to customary anti-dilution adjustments, the number of shares of the Company's Common Stock that initially underlie the Notes, and were intended to reduce the potential dilutive impact of the conversion feature of the Notes. The convertible note hedge terminated upon the earlier of the maturity date of the Notes or the first day the Notes were no longer outstanding. The Company paid
$117.5 million
for the convertible note hedge, which was recorded as a reduction to additional paid-in capital. The warrants had an initial strike price of approximately
$103.41
per share, could be settled in cash or shares of the Company's Common Stock, at the Company's option, and were to become exercisable at various dates during 2017. Proceeds received from the warrant transactions totaled
$93.8 million
and were recorded as additional paid-in capital. The original convertible note hedge and warrants were both considered indexed to the Company's Common Stock and classified as equity; therefore, the convertible note hedge and warrants were not accounted for as derivative instruments.
During 2015, the Company settled conversion obligations for
$166.5 million
principal amount of the Company's Notes that was previously surrendered for conversion. In accordance with the terms of the Notes, the Company elected to settle these conversion obligations through a combination of cash, in an amount equal to the principal amount of the converted Notes, and shares of the Company's Common Stock in respect of any amounts due in excess thereof. Consequently, in 2015, the Company paid
$166.5 million
in cash and issued
1,625,113
shares of Common Stock. In addition, in 2015, the Company allocated
$819.7 million
of the settlement consideration provided to the Note holders to the reacquisition of the equity component of the Notes, and recognized such amount as a reduction of stockholders' equity. In 2015, the Company also recognized a
$18.9 million
loss on the debt extinguishment. In connection with the Note conversions in 2015, the Company also exercised a proportionate amount of its convertible note hedges, for which the Company received
1,625,088
shares of Common Stock, which was approximately equal to the number of shares the Company was required to issue to settle the non-cash portion of the related Note conversions. The Company recorded the cost of the shares received, or
$136.5 million
, as Treasury Stock during 2015.
During 2016, the Company settled conversion obligations for
$12.9 million
principal amount of the Company's Notes. Consequently, in 2016, the Company paid
$12.9 million
in cash and issued
121,058
shares of Common Stock. In addition, the Company allocated
$47.8 million
of the settlement consideration provided to the Note holders to the reacquisition of the equity component of the Notes, and recognized such amount as a reduction of stockholders' equity. The loss on the debt extinguishment in connection with the Notes that were surrendered for conversion during 2016 was not material. As a result of these Note conversions, the Company also exercised a proportionate amount of its convertible note hedges during 2016, for which the Company received
121,048
shares of Common Stock, which was approximately equal to the number of shares the Company was required to issue to settle the non-cash portion of the related Note conversions. The Company recorded the cost of the shares received, or
$10.2 million
, as Treasury Stock during 2016.
The net carrying amount of the liability component of the Notes consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2016
|
|
2015
|
Total convertible senior notes - par
|
|
$
|
—
|
|
|
$
|
11,154
|
|
Unamortized discount
|
|
—
|
|
|
(352
|
)
|
|
|
$
|
—
|
|
|
$
|
10,802
|
|
REGENERON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
The December 31, 2015 net carrying amount of the liability component of the Notes was recorded within other current liabilities within the Company's Consolidated Balance Sheet since the Notes were due to mature on October 1, 2016.
Total interest expense associated with the Notes, net of capitalized interest as applicable, consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Contractual coupon interest rate
|
|
$
|
7
|
|
|
$
|
544
|
|
|
$
|
5,036
|
|
Amortization of discount and note issuance costs
|
|
150
|
|
|
2,818
|
|
|
17,821
|
|
|
|
$
|
157
|
|
|
$
|
3,362
|
|
|
$
|
22,857
|
|
Warrant Transactions
In November 2014, the Company entered into an amendment agreement with a warrant holder whereby the parties agreed to reduce a portion of the number of warrants held by the warrant holder. The Company was obligated to settle any payments due under the amendment agreement in February 2015. Given that the amendment agreement contained a conditional obligation that required settlement in cash, and the Company's obligation was indexed to the Company's share price, the Company reclassified the estimated fair value of the
493,229
warrants from additional paid-in capital to a liability in November 2014, with such liability subsequently measured at fair value with changes in fair value recognized in earnings. As a result of the warrant holder closing out a portion of its hedge position prior to December 31, 2014, the Company recorded a
$59.8 million
accrued liability as of December 31, 2014 and the estimated fair value of the remaining liability as of December 31, 2014 was
$87.5 million
, which was recorded within other current liabilities within the Company's Consolidated Balance Sheet. During the first quarter of 2015, the warrant holder closed out additional portions of its hedge position, and, as a result, in February 2015 the Company paid a total of
$124.0 million
to reduce the number of warrants held by such warrant holder by
416,480
. Upon expiration of the November 2014 amended agreement, in the first quarter of 2015, the remaining warrants were re-measured at fair value, and
$23.3 million
was reclassified back to additional paid-in capital, consistent with the original classification of the warrants under the 2011 issuance. Total losses related to changes in fair value of the warrants during the first quarter of 2015 were not material.
During 2014, in addition to the November 2014 warrant agreement described above, the Company entered into agreements to reduce the number of warrants held by the warrant holders. The Company was able to settle, at its option, any payments due under the amendment agreement in cash or by delivering shares of Common Stock. Pursuant to the agreements, the Company paid an aggregate amount of
$294.6 million
to the warrant holders to reduce the maximum number of shares of Common Stock issuable upon exercise of the warrants by
1,220,745
in the aggregate.
In November 2015, the Company entered into an amendment agreement with a warrant holder whereby the parties agreed to reduce a portion of the number of warrants held by the warrant holder. The reduction in the number of warrants was determined based on the number of warrants with respect to which the warrant holder closed out its hedge position, provided that the warrant holder did not effect any purchases at a price per share exceeding
$535.00
per share, during the period starting on November 16, 2015 and ending no later than
February 9, 2016
. The Company was able to settle, at its option, any payments due under the amendment agreement in cash or by delivering shares of Common Stock. As a result of the warrant holder closing out a portion of its hedge position prior to December 31, 2015, the Company paid a total of
$50.0 million
in 2015 to reduce the number of warrants it held by
115,970
. Additionally, during January 2016, the warrant holder closed out additional portions of its hedge position, and, as a result, the Company paid a total of
$135.3 million
in the first quarter of 2016 to further reduce the number of warrants held by such warrant holder by
360,406
(which was the remaining maximum number of warrants to be reduced subject to the amendment agreement).
In addition to the warrant transactions described above, during 2015, the Company entered into other agreements to reduce the number of warrants held by warrant holders. The Company was able to settle, at its option, any payments due under the amendment agreement in cash or by delivering shares of Common Stock. Pursuant to the agreements, the Company paid an aggregate amount of
$399.5 million
to the warrant holders during 2015 to reduce the number of shares of Common Stock issuable upon exercise of the warrant by
898,547
in the aggregate.
In February 2016, the Company entered into an amendment agreement with a warrant holder whereby the parties agreed to reduce a portion of the number of warrants held by the warrant holder by up to a maximum of
975,142
. The reduction in the number of warrants was determined based on the number of warrants with respect to which the warrant holder closed out its hedge position,
REGENERON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
provided that the warrant holder did not effect any purchases at a price per share exceeding
$375.00
per share, during the period starting on February 22, 2016 and ending no later than May 5, 2016. The Company was able to settle, at its option, any payments due under the amendment agreement in cash or by delivering shares of Common Stock. As a result of the warrant holder closing out a portion of its hedge position, the Company paid a total of
$106.9 million
to reduce the number of warrants held by such warrant holder by
403,665
.
In November 2016, the Company and warrant holders entered into warrant termination agreements whereby the parties agreed to cancel the remaining warrants held by the warrant holders and to terminate the respective warrant agreements in consideration for payments by the Company of
$401.2 million
in the aggregate. The Company made the termination payments in the fourth quarter of 2016, and, as a result, no warrants remained outstanding as of December 31, 2016.
b. Credit Facility
In March 2015, the Company entered into an agreement with a syndicate of lenders (the "Credit Agreement") which provides for a
$750.0 million
senior unsecured
five
-year revolving credit facility (the "Credit Facility"). The Credit Agreement includes an option for the Company to elect to increase the commitments under the Credit Facility and/or to enter into one or more tranches of term loans in the aggregate principal amount of up to
$250.0 million
subject to the consent of the lenders providing the additional commitments or term loans, as applicable, and certain other conditions. Proceeds of the loans under the Credit Facility may be used to finance working capital needs, and for general corporate or other lawful purposes, of Regeneron and its subsidiaries. The Credit Agreement also provides a
$100.0 million
sublimit for letters of credit. The Credit Agreement includes an option for the Company to elect to extend the maturity date of the Credit Facility beyond March 2020, subject to the consent of the extending lenders and certain other conditions. Amounts borrowed under the Credit Facility may be prepaid, and the commitments under the Credit Facility may be terminated, at any time without premium or penalty.
Any loans under the Credit Facility have a variable interest rate based on either the London Interbank Offered Rate ("LIBOR") or an alternate base rate, plus an applicable margin that varies with the Company's debt rating and total leverage ratio. The Company had
no
borrowings outstanding under the Credit Facility as of December 31, 2016.
The Credit Agreement contains financial and operating covenants. Financial covenants include a maximum total leverage ratio and a minimum interest expense coverage ratio. The Company was in compliance with all covenants of the Credit Facility as of December 31, 2016.
12. Commitments and Contingencies
a. Leases
Descriptions of Lease Agreements
The Company leases laboratory and office facilities in Tarrytown, New York (the "Tarrytown Leases"). The facilities leased by the Company in Tarrytown include (i) space in previously existing buildings, (ii) newly constructed space in
two
buildings ("Buildings A and B") that was completed in 2009, (iii) newly constructed space in a third building ("Building C") that was completed in 2011, (iv) under an April 2013 lease agreement, newly constructed laboratory and office space in
two
buildings ("Buildings D and E") that was completed in the third quarter of 2015, and (v) under a June 2015 lease agreement, an existing building ("Building F") that the Company intends to renovate for additional laboratory and office space. The lease agreements related to Buildings A, B, C, D, E, and F (collectively, the "Buildings") expire in 2029; the remaining facilities under the lease expire in June 2024. The Tarrytown Leases provide for monthly payments over their respective terms and additional charges for utilities, taxes, and operating expenses.
Historically, certain of the premises under the Tarrytown Leases had been accounted for as operating leases. However, as described further below under "
Facility Lease Obligations
," for the Buildings that the Company is leasing, the Company is deemed, in substance, to be the owner of the landlord's Buildings in accordance with the application of FASB authoritative guidance.
REGENERON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
On December 30, 2016, the Company entered into a Purchase Agreement with BMR-Landmark at Eastview LLC and BMR-Landmark at Eastview IV LLC (collectively, "BMR"), pursuant to which the Company agreed to purchase BMR's Tarrytown, New York facilities (the "Facility") for a purchase price of
$720.0 million
, subject to certain customary adjustments. The Company currently occupies a significant portion of the Facility, with the remaining rentable area, or approximately
300,000
square feet, under leases to third-party tenants. In accordance with the terms of the Purchase Agreement, the Company paid
$57.0 million
toward the purchase price to BMR in December 2016. The closing of the Purchase Agreement is anticipated in the first quarter of 2017.
The Company intends to fund the acquisition contemplated by the Purchase Agreement with a new financing. Accordingly, the Company has entered into an engagement letter with Banc of America Leasing & Capital, LLC ("BAL"), pursuant to which BAL has been engaged to use its best efforts to arrange a
$720.0 million
lease financing in connection with the acquisition contemplated by the Purchase Agreement. As part of the contemplated financing, the Company intends to assign some or all its rights under the Purchase Agreement (including the right to take title to the Facility) to an affiliate of BAL at the closing of the financing, as a result of which such affiliate will become the legal owner of the Facility (the "Lessor"). Upon assignment of its rights, the Company expects to be reimbursed by BAL or an affiliate of BAL for the
$57.0 million
payment the Company made in December 2016. Immediately thereafter, the Company intends to lease the Facility from the Lessor for a term of
five
years. At the end of the lease term, the Company expects to have an option to extend the term of the lease (subject to the consent of the financing providers), purchase the Facility at a predetermined amount, or sell the Facility to a third party on behalf of the Lessor.
While the Company has engaged BAL to use its best efforts to arrange a financing in connection with the contemplated Purchase Agreement, there is no guarantee that the Company will be able to obtain such financing on the agreed terms or at all.
Upon entering into the Purchase Agreement with BMR, the premises under the Company's Tarrytown Leases that were historically accounted for as operating leases were deemed to be modified, as the Company now has the option to purchase the facility, under terms that make it reasonably assured to be exercised. Consequently, the leases for such premises have been re-classified as a capital lease upon execution of the Purchase Agreement, and a proportionate amount of the
$57.0 million
payment was recorded as reduction of the initial capital lease liability. The execution of the Purchase Agreement did not impact the balance sheet classification for the Buildings; however, a proportionate amount of the
$57.0 million
payment was recorded as a reduction of the existing facility lease obligation.
The Company also leases certain other laboratory, office, and storage space and equipment under operating leases which expire at various times through 2022.
Commitments under Operating Leases
The estimated future minimum noncancelable lease commitments under operating leases, as of December 31, 2016, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facilities
|
|
Equipment
|
|
Total
|
2017
|
|
$
|
4,728
|
|
|
$
|
5,156
|
|
|
$
|
9,884
|
|
2018
|
|
4,860
|
|
|
825
|
|
|
5,685
|
|
2019
|
|
4,817
|
|
|
273
|
|
|
5,090
|
|
2020
|
|
4,271
|
|
|
12
|
|
|
4,283
|
|
2021
|
|
3,982
|
|
|
11
|
|
|
3,993
|
|
Thereafter
|
|
22,336
|
|
|
—
|
|
|
22,336
|
|
|
|
$
|
44,994
|
|
|
$
|
6,277
|
|
|
$
|
51,271
|
|
Rent expense under operating leases was:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Facilities
|
|
Equipment
|
|
Total
|
2016
|
|
$
|
15,861
|
|
|
$
|
852
|
|
|
$
|
16,713
|
|
2015
|
|
14,659
|
|
|
543
|
|
|
15,202
|
|
2014
|
|
13,360
|
|
|
952
|
|
|
14,312
|
|
REGENERON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
Capital Leases
As described above, the Company's Tarrytown Leases that had been historically accounted for as operating leases were re-classified as capital leases upon entering into the Purchase Agreement on December 30, 2016. The estimated future minimum noncancelable lease commitments under these capital leases, as of December 31, 2016, was not material as the Company anticipates closing of the Purchase Agreement in the first quarter of 2017. The Company had
no
additional capital leases as of December 31, 2016.
At December 31, 2016, capital lease obligations of
$127.3 million
were included in the Company's Consolidated Balance Sheet.
Facility Lease Obligations
Based upon various factors, including the Company's involvement in the construction of the Buildings and its responsibility for directly paying for a substantial portion of tenant improvements, the Company is deemed, in substance, to be the owner of the landlord's Buildings in accordance with the application of FASB authoritative guidance. Consequently, in addition to capitalizing the tenant improvements, the Company capitalizes the landlord's costs of constructing these new facilities, offset by a corresponding lease obligation on the Company's Consolidated Balance Sheet. The Company also recognizes, as additional facility lease obligation, reimbursements from the Company's landlord for tenant improvement costs that the Company incurred since such payments that the Company receives from its landlord are deemed to be a financing obligation. The Company allocates a portion of its lease payments on these facilities between the Buildings and the land on which the Buildings are constructed, based on the initial estimated relative fair values of the land and Buildings. The land element of the lease is treated for accounting purposes as an operating lease.
With respect to Buildings A and B, in 2009, monthly lease payments commenced and the buildings were placed in service by the Company. The imputed interest rate applicable to the Company's Buildings A and B facility lease obligation is approximately
12%
. With respect to Building C, in 2011, monthly lease payments commenced and the building was placed in service by the Company. The imputed interest rate applicable to the Company's Building C facility lease obligation is approximately
11%
. With respect to Buildings D and E, in 2015, monthly lease payments commenced and the buildings were placed in service by the Company. The imputed interest rate applicable to the Company's Buildings D and E facility lease obligation is approximately
7%
. With respect to Building F, the building was placed in service by the Company in 2016 and monthly lease payments do not commence until 2017. The imputed interest rate applicable to the Company's Buildings F facility lease obligation is approximately
10%
. In 2016, 2015, and 2014, the Company recognized
$5.4 million
,
$9.7 million
, and
$14.5 million
, respectively, of interest expense in connection with the Buildings' facility lease obligations.
Facility lease obligations consist of the following:
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2016
|
|
2015
|
Buildings A and B
|
$
|
99,323
|
|
|
$
|
108,857
|
|
Building C
|
44,338
|
|
|
49,475
|
|
Buildings D and E
|
194,037
|
|
|
206,376
|
|
Building F
|
16,154
|
|
|
—
|
|
|
$
|
353,852
|
|
|
$
|
364,708
|
|
REGENERON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
The estimated future minimum noncancelable commitments under these facility lease obligations, as of December 31, 2016, exclusive of the potential impact of the closing of the Purchase Agreement (which is anticipated to occur in the first quarter of 2017), are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Buildings A and B
|
|
Building C
|
|
Buildings D and E
|
|
Building F
|
|
Total
|
2017
|
|
$
|
13,965
|
|
|
$
|
4,740
|
|
|
$
|
12,922
|
|
|
$
|
490
|
|
|
$
|
32,117
|
|
2018
|
|
14,242
|
|
|
4,873
|
|
|
13,267
|
|
|
759
|
|
|
33,141
|
|
2019
|
|
14,526
|
|
|
5,009
|
|
|
13,621
|
|
|
786
|
|
|
33,942
|
|
2020
|
|
14,818
|
|
|
5,149
|
|
|
13,983
|
|
|
813
|
|
|
34,763
|
|
2021
|
|
15,116
|
|
|
5,292
|
|
|
14,354
|
|
|
841
|
|
|
35,603
|
|
Thereafter
|
|
101,010
|
|
|
48,801
|
|
|
121,927
|
|
|
7,190
|
|
|
278,928
|
|
|
|
$
|
173,677
|
|
|
$
|
73,864
|
|
|
$
|
190,074
|
|
|
$
|
10,879
|
|
|
$
|
448,494
|
|
b. Research Collaboration and Licensing Agreements
As part of the Company's research and development efforts, the Company enters into research collaboration and licensing agreements with other companies and universities. These agreements contain varying terms and provisions which include fees to be paid by the Company, services to be provided, and license rights to certain proprietary technology developed under the agreements. Some of these agreements may require the Company to pay additional amounts upon the achievement of various development and commercial milestones, contingent upon the occurrence of various future events. Additionally, some of the agreements contain provisions which require the Company to pay royalties, as defined, at rates that range from
0.5%
to
16.5%
, in the event the Company sells or licenses any proprietary products developed under the respective agreements. The Company also has contingent reimbursement obligations to its collaborators Sanofi and Bayer once the applicable collaboration becomes profitable. See Note 3.
In December 2011, the Company and Genentech, a member of the Roche Group, entered into a Non-Exclusive License and Partial Settlement Agreement (the "Original Genentech Agreement") that covered making, using, and selling EYLEA for the prevention of human eye diseases and disorders in the United States, and ended the litigation relating to those matters. Pursuant to the Original Genentech Agreement, the Company received a non-exclusive license to certain patents relating to VEGF receptor proteins, known as the Davis-Smyth patents, and other technology patents. The Original Genentech Agreement provided for the Company to make payments to Genentech based on U.S. sales of EYLEA commencing upon FDA approval of EYLEA in November 2011 through May 7, 2016. The Company made a one-time, non-refundable
$60.0 million
payment during 2012 upon cumulative U.S. sales of EYLEA reaching
$400.0 million
, and was obligated to pay royalties of
4.75%
on cumulative U.S. sales of EYLEA between
$400.0 million
and
$3.0 billion
and
5.5%
on any cumulative U.S sales of EYLEA over
$3.0 billion
. As the Company recorded net product sales of EYLEA, the Company recognized expense in connection with the Genentech Agreement using a blended mid-single digit royalty rate that reflected both the
$60.0 million
payment and the royalties payable on cumulative sales and that was based upon the Company's estimate of cumulative EYLEA sales through May 7, 2016.
Effective May 17, 2013, the Company entered into an Amended and Restated Non-Exclusive License and Settlement Agreement with Genentech (the "Amended Genentech Agreement"), which amended the Original Genentech Agreement to include all sales of EYLEA worldwide and ended the litigation relating to those matters. Under the Amended Genentech Agreement, the Company received a worldwide non-exclusive license to the Davis-Smyth patents, and certain other patents, owned or co-owned by Genentech for the prevention or treatment of eye diseases and eye disorders in a human through administration of EYLEA to the eye. Under the Amended Genentech Agreement, the Company was obligated to make payments to Genentech based on sales of EYLEA in the United States, and EYLEA manufactured in the United States and sold outside the United States, through May 7, 2016 using the same milestone and royalty rates as in the Original Genentech Agreement. EYLEA is sold outside the United States by affiliates of Bayer under the Company's license and collaboration agreement. All payments to Genentech under the Original Genentech Agreement and the Amended Genentech Agreement were made by the Company, and Bayer shared in all such payments based on the proportion of EYLEA sales outside the United States to worldwide EYLEA sales and determined consistent with the license and collaboration agreement. The Company's obligation to pay royalties pursuant to the Original Genentech Agreement and Amended Genentech Agreement terminated on May 7, 2016, when the licenses granted to the Company thereunder became fully paid up and royalty free for the duration of the remaining term of the underlying patents.
REGENERON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
For the years ended December 31, 2016, 2015, and 2014, the Company recorded royalty expense of
$125.3 million
,
$247.9 million
, and
$169.9 million
, respectively, based on product sales of commercial products under various licensing agreements (including the Genentech agreements described above).
13. Stockholders' Equity
The Company's Restated Certificate of Incorporation, as amended, provides for the issuance of up to
40 million
shares of Class A Stock, par value
$0.001
per share, and
320 million
shares of Common Stock (increased from
160 million
shares effective upon shareholder approval obtained in 2015), par value
$0.001
per share. Shares of Class A Stock are convertible, at any time, at the option of the holder into shares of Common Stock on a share-for-share basis. Holders of Class A Stock have rights and privileges identical to Common Stockholders except that each share of Class A is entitled to
ten votes per share
, while each share of Common Stock is entitled to
one vote per share
. Class A Stock may only be transferred to specified Permitted Transferees, as defined. Under the Company's Restated Certificate of Incorporation, the Company's board of directors is authorized to issue up to
30 million
shares of Preferred Stock, in series, with rights, privileges, and qualifications of each series determined by the board of directors.
In December 2007, Sanofi purchased
12 million
newly issued, unregistered shares of the Company's Common Stock. As a condition to the closing of this transaction, Sanofi entered into an investor agreement, as amended and restated in January 2014, with the Company. Under the terms of the amended and restated investor agreement, Sanofi has
three
demand rights to require the Company to use all reasonable efforts to conduct a registered underwritten public offering with respect to shares of the Company's Common Stock held by Sanofi from time to time. Under the amended and restated investor agreement, Sanofi has also agreed not to dispose of any shares of the Company's Common Stock beneficially owned by Sanofi from time to time until the later of (i) December 20, 2020, and (ii) the expiration of the Antibody Discovery Agreement with Sanofi, as amended (see Note 3a) if the agreement is extended beyond December 20, 2020. These restrictions on dispositions are subject to earlier termination upon the occurrence of certain events, such as the consummation of a change-of-control transaction involving the Company or the Company's dissolution or liquidation, and certain restrictions have been imposed on the manner of sales thereafter.
Further, pursuant to the amended and restated investor agreement, Sanofi is bound by certain "standstill" provisions, which contractually prohibit Sanofi from seeking to directly or indirectly exert control of the Company or acquiring more than
30%
of the outstanding shares of the Company's Class A Stock and Common Stock (taken together). This prohibition will remain in place until the earliest of (i) the later of the fifth anniversaries of the expiration or earlier termination of the Company's License and Collaboration Agreement with Sanofi and the Company's ZALTRAP Agreement with Sanofi, each as amended (see Note 3a) and (ii) other specified events. Sanofi has also agreed to vote as recommended by the Company's board of directors, except that it may elect to vote proportionally with the votes cast by all of the Company's other shareholders with respect to certain change-of-control transactions, and to vote in its sole discretion with respect to liquidation or dissolution, stock issuances equal to or exceeding
20%
of the outstanding shares or voting rights of the Company's Class A Stock and Common Stock (taken together), and new equity compensation plans or amendments if not materially consistent with the Company's historical equity compensation practices. The rights and restrictions under the investor agreement are subject to termination upon the occurrence of certain events.
In addition, upon Sanofi reaching
20%
ownership of the Company's outstanding shares of Class A Stock and Common Stock (taken together) during 2014, the Company was required to appoint an individual agreed upon by the Company and Sanofi to the Company's board of directors. This individual is required to be independent of the Company, and not to be a current or former officer, director, employee, or paid consultant of Sanofi.
In connection with the Company's license and collaboration agreements with Bayer for the joint development and commercialization outside the United States of antibody product candidates to PDGFR-beta and Ang2 (see Note 3b), Bayer is bound by certain "standstill" provisions, which contractually prohibit Bayer from seeking to influence the control of the Company or acquiring more than
20%
of the Company's outstanding shares of Class A Stock and Common Stock (taken together). With respect to each of these agreements, this prohibition will remain in place until the earliest of (i) the fifth anniversary of the expiration or earlier termination of the agreement or (ii) other specified events.
Further, pursuant to the 2016 Teva Collaboration Agreement, Teva and its affiliates are bound by certain "standstill" provisions, which contractually prohibit them from seeking to directly or indirectly exert control of the Company or acquiring more than
5%
of the Company's Class A Stock and Common Stock (taken together). This prohibition will remain in place until the earliest of (i) the fifth anniversary of the expiration or earlier termination of the agreement; (ii) the Company's announcement recommending acceptance by the Company's shareholders of a tender offer or exchange offer that, if consummated, would constitute a change of control involving the Company; (iii) the public announcement of any definitive agreement providing for a change of control
REGENERON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
involving the Company; (iv) the acquisition of more than
30%
of the voting power of the Company's then outstanding Class A Stock and Common Stock (taken together); (v) the date of any issuance of shares of capital stock by the Company that would result in another party having more than
10%
of the voting power of the Company's then outstanding Class A Stock and Common Stock (taken together) unless such party enters into a standstill agreement containing certain terms substantially similar to the standstill obligations of Teva; or (vi) other specified events, such as a liquidation or dissolution of the Company.
In October 2011, the Company completed a private placement of
$400.0 million
aggregate principal amount of Notes, which were convertible into shares of the Company's Common Stock. In connection with the offering of the Notes in October 2011, the Company entered into convertible note hedge and warrant transactions. During 2016, 2015, and 2014, the Company elected to settle Notes which were surrendered for conversion through a combination of cash, in an amount equal to the principal amount of the converted Notes, and shares of the Company's Common Stock in respect of any amounts due in excess thereof. A portion of the settlement consideration provided to the Note holders was allocated to the reacquisition of the equity component of the Notes. In addition, as a result of the Note conversions, the Company exercised a proportionate amount of its convertible note hedges, for which the Company received shares of Common Stock. The shares received were recorded as Treasury Stock, at cost. See Note 11.
During 2016, 2015, and 2014, the Company entered into agreements and made payments to reduce the number of warrants held by warrant holders. In addition, in November 2014, the Company entered into an amendment agreement with a warrant holder whereby the parties agreed to reduce a portion of the number of warrants held by the warrant holder. Given that the November 2014 amendment agreement contained a conditional obligation that required settlement in cash, and the Company's obligation was indexed to the Company's share price, the Company reclassified the estimated fair value of the warrants from additional paid-in capital to a liability in November 2014. See Note 11.
14. Long-Term Incentive Plans
During 2000, the Company established the Regeneron Pharmaceuticals, Inc. 2000 Long-Term Incentive Plan which, as amended and restated and approved by the Company's shareholders (the "2000 Incentive Plan"), provided for the issuance of up to
35,397,043
shares of Common Stock in respect of awards, in addition to any shares subject to awards that were returned to the 2000 Incentive Plan upon expiration, forfeiture, surrender, exchange, cancellation, or termination of previously granted awards.
During 2014, the Company established, and the Company's shareholders approved, the Regeneron Pharmaceuticals, Inc. 2014 Long-Term Incentive Plan (the "2014 Incentive Plan"). As of the shareholder approval date, the 2014 Incentive Plan provides for the issuance of up to
16,485,333
shares of Common Stock in respect of awards (including
4,485,333
shares of Common Stock rolled over into the 2014 Incentive Plan from the 2000 Incentive Plan), which were registered with the Securities and Exchange Commission, in addition to any shares subject to awards under the 2000 Incentive Plan or the 2014 Incentive Plan that are added to the pool of shares available for grant under the 2014 Incentive Plan upon the expiration, forfeiture, surrender, exchange, cancellation, or termination of previously granted awards. Employees of the Company, including officers, and nonemployees, including consultants and nonemployee members of the Company's board of directors (collectively, "Participants"), may receive awards as determined by a committee of independent directors ("Committee").
The awards that may be made under the 2014 Incentive Plan include: (a) Incentive Stock Options ("ISOs") and Nonqualified Stock Options, (b) shares of Restricted Stock, (c) shares of Phantom Stock, (d) Stock Bonuses, and (e) Other Awards.
Stock Option awards grant Participants the right to purchase shares of Common Stock at prices determined by the Committee; however, in the case of an ISO, the option exercise price may not be less than the fair market value of a share of Common Stock on the date the option is granted. Options vest over a period of time determined by the Committee, generally on a pro rata basis over a
three
- to
four
-year period. The Committee also determines the expiration date of each option; however, no ISO is exercisable more than
ten
years after the date of grant. The maximum term of options that have been awarded under the 2000 Incentive Plan or 2014 Incentive Plan (collectively, the "Incentive Plans") is
ten
years.
Restricted Stock awards grant Participants shares of restricted Common Stock or allow Participants to purchase such shares at a price determined by the Committee. Such shares are nontransferable for a period determined by the Committee ("vesting period"). Should employment terminate, as specified in the Incentive Plans, except as determined by the Committee in its discretion and subject to the applicable Incentive Plan documents, the ownership of any unvested Restricted Stock will be transferred to the Company. In such an event, the Company will be obligated to repay the Participant the amount, if any, paid by the Participant for such shares. In addition, if the Company requires a return of the Restricted Stock, it also has the right to require a return of all dividends paid on such shares.
REGENERON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
Phantom Stock awards provide the Participant the right to receive, within
30
days of the date on which the share vests, an amount, in cash and/or shares of Common Stock as determined by the Committee, equal to the sum of the fair market value of a share of Common Stock on the date such share of Phantom Stock vests and the aggregate amount of cash dividends paid with respect to a share of Common Stock during the period from the grant date of the share of Phantom Stock to the date on which the share vests. Stock Bonus awards are bonuses payable in shares of Common Stock which are granted at the discretion of the Committee.
Other Awards are other forms of awards which are valued based on the Common Stock. Subject to the provisions of the 2014 Incentive Plan, the terms and provisions of such Other Awards are determined solely on the authority of the Committee.
The Incentive Plans contain provisions that allow for the Committee to provide for the immediate vesting of awards upon a change in control of the Company, as defined in the Plans.
As of December 31,
2016
, there were
6,408,989
shares available for future grants under the 2014 Incentive Plan. No additional awards may be made under the 2000 Incentive Plan.
Transactions involving stock option awards during
2016
under the Company's Incentive Plans are summarized in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options:
|
|
Number of Shares
|
|
Weighted-Average Exercise Price
|
|
Weighted-Average Remaining Contractual Term (in years)
|
|
Intrinsic Value
|
Outstanding as of December 31, 2015
|
|
23,165,769
|
|
|
$
|
236.75
|
|
|
|
|
|
|
2016:
|
Granted
|
|
4,201,978
|
|
|
$
|
386.44
|
|
|
|
|
|
|
Forfeited
|
|
(468,798
|
)
|
|
$
|
398.57
|
|
|
|
|
|
|
Expired
|
|
(20,645
|
)
|
|
$
|
420.04
|
|
|
|
|
|
|
Exercised
|
|
(1,742,277
|
)
|
|
$
|
76.79
|
|
|
|
|
|
Outstanding as of December 31, 2016
|
|
25,136,027
|
|
|
$
|
269.69
|
|
|
6.66
|
|
$
|
3,399,815
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest as of December 31, 2016
|
|
24,598,430
|
|
|
$
|
266.16
|
|
|
6.60
|
|
$
|
3,397,437
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of December 31, 2016
|
|
15,140,287
|
|
|
$
|
166.96
|
|
|
5.19
|
|
$
|
3,299,296
|
|
The Company satisfies stock option exercises with newly issued shares of the Company's Common Stock. The total intrinsic value of stock options exercised during
2016
,
2015
, and
2014
was
$550.4 million
,
$1,031.6 million
, and
$1,081.2 million
, respectively. The intrinsic value represents the amount by which the market price of the underlying stock exceeds the exercise price of an option.
REGENERON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
The Company grants stock options with exercise prices that are equal to or greater than the average market price of the Company's Common Stock on the date of grant ("Market Price"). The table below summarizes the weighted-average exercise prices and weighted-average grant-date fair values of options issued during the years ended December 31,
2016
,
2015
, and
2014
. The fair value of each option granted under the Company's Incentive Plans during these periods was estimated on the date of grant using the Black-Scholes option-pricing model.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Options Granted
|
|
Weighted-Average Exercise Price
|
|
Weighted-Average Fair Value
|
2016:
|
|
|
|
|
|
|
Exercise price equal to Market Price
|
|
4,201,978
|
|
|
$
|
386.44
|
|
|
$
|
126.68
|
|
2015:
|
|
|
|
|
|
|
Exercise price equal to Market Price
|
|
4,495,487
|
|
|
$
|
537.29
|
|
|
$
|
181.65
|
|
2014:
|
|
|
|
|
|
|
Exercise price equal to Market Price
|
|
3,913,368
|
|
|
$
|
385.33
|
|
|
$
|
140.38
|
|
For the years ended December 31,
2016
,
2015
, and
2014
, the Company recognized
$546.0 million
,
$443.7 million
, and
$306.1 million
, respectively, of non-cash stock-based compensation expense related to non-performance based stock option awards. As of December 31,
2016
, there was
$888.0 million
of stock-based compensation cost related to outstanding non-performance based stock options, net of estimated forfeitures, which had not yet been recognized. The Company expects to recognize this compensation cost over a weighted-average period of
1.9
years.
For the year ended December 31,
2014
, the Company recognized
$4.1 million
of non-cash stock-based compensation expense related to performance-based options. The Company has not issued any performance-based options since 2011, and such options became fully vested during 2014.
Fair Value Assumptions:
The following table summarizes the weighted average values of the assumptions used in computing the fair value of option grants during 2016, 2015, and 2014.
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Expected volatility
|
|
34
|
%
|
|
35
|
%
|
|
39
|
%
|
Expected lives from grant date
|
|
5.1 years
|
|
|
5.1 years
|
|
|
5.2 years
|
|
Expected dividend yield
|
|
0
|
%
|
|
0
|
%
|
|
0
|
%
|
Risk-free interest rate
|
|
1.84
|
%
|
|
1.68
|
%
|
|
1.62
|
%
|
Expected volatility has been estimated based on actual movements in the Company's stock price over the most recent historical periods equivalent to the options' expected lives. Expected lives are principally based on the Company's historical exercise experience with previously issued employee and board of directors' option grants. The expected dividend yield is
zero
as the Company has never paid dividends and does not currently anticipate paying any in the foreseeable future. The risk-free interest rates are based on quoted U.S. Treasury rates for securities with maturities approximating the options' expected lives.
REGENERON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
A summary of the Company's activity related to Restricted Stock awards during
2016
is summarized below:
|
|
|
|
|
|
|
|
|
|
Restricted Stock:
|
|
Number of Shares
|
|
Weighted-Average Grant Date Fair Value
|
Outstanding as of December 31, 2015
|
|
541,700
|
|
|
$
|
133.96
|
|
2016:
|
Granted
|
|
16,750
|
|
|
$
|
385.84
|
|
|
Vested
|
|
(11,590
|
)
|
|
$
|
125.38
|
|
|
Forfeited
|
|
(40
|
)
|
|
$
|
237.68
|
|
Outstanding as of December 31, 2016
|
|
546,820
|
|
|
$
|
141.85
|
|
The Company recognized non-cash stock-based compensation expense from Restricted Stock awards of
$13.9 million
,
$15.3 million
, and
$11.5 million
in
2016
,
2015
, and
2014
, respectively. As of December 31, 2016, there was
$26.0 million
of stock-based compensation cost related to unvested shares of Restricted Stock which had not yet been recognized. The Company expects to recognize this compensation cost over a weighted-average period of
1.2
years.
15. Employee Savings Plans
The Company maintains the Regeneron Pharmaceuticals, Inc. 401(k) Savings Plan (the "Savings Plan"). The terms of the Savings Plan, as amended and restated, allow U.S. employees (as defined by the Savings Plan) to contribute to the Savings Plan a percentage of their compensation. In addition, the Company may make discretionary contributions ("Contribution"), as defined, to the accounts of participants under the Savings Plan. The Company recognized
$17.7 million
,
$15.4 million
, and
$13.1 million
of Contribution expense in 2016, 2015, and 2014, respectively.
In 2014, the Regeneron Ireland Pension Plan (the "Ireland Plan"), a defined contribution occupational pension plan which covers all eligible Ireland-based employees (as defined by the Ireland Plan), was established. Contributions to the Ireland Plan are comprised of two components: (i) a minimum mandatory employee and employer contribution rate, and (ii) a matching scheme, whereby the Company will match employee contributions up to a certain percentage. Employees can make additional voluntary contributions to the Ireland Plan. Expenses related to the Company's contributions to the Ireland Plan were not material during 2016, 2015, and 2014.
REGENERON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
16. Income Taxes
The Company is subject to U.S. federal, state, and foreign income taxes. Components of income before income taxes consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
United States
|
$
|
1,650,959
|
|
|
$
|
1,665,087
|
|
|
$
|
1,101,446
|
|
Foreign
|
(321,144
|
)
|
|
(439,990
|
)
|
|
(340,211
|
)
|
|
|
$
|
1,329,815
|
|
|
$
|
1,225,097
|
|
|
$
|
761,235
|
|
Components of income tax expense consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Current:
|
|
|
|
|
|
|
Federal
|
$
|
786,964
|
|
|
$
|
686,561
|
|
|
$
|
437,038
|
|
|
State
|
8,769
|
|
|
28,568
|
|
|
28,718
|
|
|
Foreign
|
(1,362
|
)
|
|
4,004
|
|
|
2,879
|
|
|
Total current tax expense
|
794,371
|
|
|
719,133
|
|
|
468,635
|
|
Deferred:
|
|
|
|
|
|
|
Federal
|
(377,368
|
)
|
|
(119,849
|
)
|
|
(62,932
|
)
|
|
State
|
13,431
|
|
|
(3,768
|
)
|
|
18,891
|
|
|
Foreign
|
3,859
|
|
|
(6,475
|
)
|
|
(1,485
|
)
|
|
Total deferred tax (benefit) expense
|
(360,078
|
)
|
|
(130,092
|
)
|
|
(45,526
|
)
|
|
$
|
434,293
|
|
|
$
|
589,041
|
|
|
$
|
423,109
|
|
In 2015 and 2014, the Company utilized
$405.3 million
and
$439.3 million
of excess tax benefits in connection with stock option exercises, which were credited to additional paid-in capital as realized. The Company elected to early adopt ASU 2016-09 during the second quarter of 2016. Consequently, in 2016, the Company recorded excess tax benefits of
$144.8 million
within income tax expense. See Note 1. "Business Overview and Summary of Significant Accounting Policies -
Recently Issued Accounting Standards.
"
The Company also recorded an income tax benefit in its Statement of Comprehensive Income of
$3.3 million
during the year ended December 31, 2016 and an income tax provision of
$24.9 million
and
$27.1 million
during the years ended December 31, 2015 and 2014, respectively, primarily related to unrealized gains (losses) on available-for-sale marketable securities.
REGENERON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
A reconciliation of the U.S. statutory income tax rate to the Company's effective income tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
U.S. federal statutory tax rate
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
Stock-based compensation
|
(10.9
|
)
|
|
—
|
|
|
—
|
|
State and local income taxes
|
0.3
|
|
|
1.0
|
|
|
2.4
|
|
Change in state effective rate
|
1.0
|
|
|
(0.1
|
)
|
|
2.9
|
|
Foreign income tax rate differential
|
8.8
|
|
|
12.2
|
|
|
15.8
|
|
Income tax credits
|
(1.2
|
)
|
|
(1.6
|
)
|
|
(5.1
|
)
|
Non-deductible Branded Prescription Drug Fee
|
1.9
|
|
|
2.0
|
|
|
2.8
|
|
Domestic production activities deduction
|
(2.8
|
)
|
|
(3.2
|
)
|
|
—
|
|
Other permanent differences
|
0.6
|
|
|
2.8
|
|
|
1.8
|
|
Effective income tax rate
|
32.7
|
%
|
|
48.1
|
%
|
|
55.6
|
%
|
In 2016, the difference between the U.S. federal statutory rate of
35%
and the Company's effective tax rate of
32.7%
was primarily attributable to the tax benefit associated with stock-based compensation, the domestic manufacturing deduction, and the federal tax credit for research activities, offset by the negative impact of losses incurred in foreign jurisdictions with rates lower than the U.S. federal statutory rate and the non-tax deductible Branded Prescription Drug Fee.
In 2015, the difference between the U.S. federal statutory rate of
35%
and the Company's effective tax rate of
48.1%
was primarily attributable to losses incurred in foreign jurisdictions with rates lower than the U.S. federal statutory rate, partly offset by the positive impact of the domestic manufacturing deduction.
In 2014, the difference between the U.S. federal statutory rate of
35%
and the Company's effective tax rate of
55.6%
was primarily attributable to losses incurred in foreign jurisdictions with rates lower than the U.S. federal statutory rate and the non-deductible Branded Prescription Drug Fee, partly offset by the positive impact of the federal tax credit for increased research activities and state income tax credits.
REGENERON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2016
|
|
2015
|
Deferred tax assets:
|
|
|
|
|
Net operating loss carryforward
|
|
$
|
137
|
|
|
$
|
140
|
|
Fixed and intangible assets
|
|
21,139
|
|
|
—
|
|
Deferred revenue
|
|
214,587
|
|
|
51,766
|
|
Deferred compensation
|
|
515,984
|
|
|
349,508
|
|
Capitalized research and development costs
|
|
2,492
|
|
|
7,725
|
|
Accrued expenses
|
|
37,188
|
|
|
47,520
|
|
Other
|
|
46,471
|
|
|
26,580
|
|
|
|
837,998
|
|
|
483,239
|
|
Valuation allowance
|
|
(3,420
|
)
|
|
—
|
|
Total deferred tax assets
|
|
834,578
|
|
|
483,239
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
Unrealized gains/losses on marketable securities
|
|
—
|
|
|
(3,280
|
)
|
Fixed assets and intangible assets
|
|
—
|
|
|
(5,559
|
)
|
Other
|
|
(9,275
|
)
|
|
(12,455
|
)
|
Total deferred tax liabilities
|
|
(9,275
|
)
|
|
(21,294
|
)
|
Net deferred tax assets
|
|
$
|
825,303
|
|
|
$
|
461,945
|
|
The Company's 2012 through 2015 federal income tax returns remain open to examination by the IRS. The Company's 2012 federal income tax return is currently under audit by the IRS. The Company's state income tax returns from 2013 to 2015 remain open to examination. The Department of Revenue of the Commonwealth of Pennsylvania is currently auditing the Company's 2013 and 2014 tax returns
.
The United States and many states generally have statutes of limitation ranging from 3 to 5 years; however, those statutes could be extended due to the Company's net operating loss and tax credit carryforward positions in a number of the Company's tax jurisdictions. In general, tax authorities have the ability to review income tax returns for loss periods in which the statute of limitation has previously expired to adjust the net operating loss carryforward or tax credits generated in those years.
The following table summarizes the gross amounts of unrecognized tax benefits. The amount of unrecognized tax benefits that, if settled, would impact the effective tax rate is
$107.2 million
,
$102.1 million
, and
$51.2 million
as of December 31, 2016, 2015, and 2014, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Balance as of January 1
|
|
$
|
116,572
|
|
|
$
|
57,615
|
|
|
$
|
26,627
|
|
Gross increases related to current year tax positions
|
|
45,575
|
|
|
59,909
|
|
|
27,538
|
|
Gross (decreases) increases related to prior year tax positions
|
|
(42,284
|
)
|
|
(952
|
)
|
|
6,464
|
|
Gross decrease due to settlements, recapture, filed returns, and lapse of statutes of limitation
|
|
(2,697
|
)
|
|
—
|
|
|
(3,014
|
)
|
Balance as of December 31
|
|
$
|
117,166
|
|
|
$
|
116,572
|
|
|
$
|
57,615
|
|
REGENERON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
In 2016 and 2015, the increases in unrecognized tax benefits related primarily to the Company's calculation of certain tax credits and other items related to the Company's international operations. In 2014, the decreases in unrecognized tax benefits resulted from the settlement of the IRS audit of the 2011 tax year and the New York State audit of the 2009 to 2011 tax years, as well as the reduction in the New York state income tax rate. In 2016, the Company accrued interest of
$3.3 million
related to its unrecognized tax benefits. In 2015 and 2014, accrued interest related to unrecognized tax benefits recorded by the Company was not material. The Company believes that it is reasonably possible that its unrecognized tax benefits as of December 31, 2016 may decrease by up to
$22.3 million
within the next twelve months related to the resolution of state tax exposures.
17. Legal Matters
From time to time, the Company is a party to legal proceedings in the course of the Company's business.
Costs associated with the Company's involvement in legal proceedings are expensed as incurred.
The outcome of any such proceedings, regardless of the merits, is inherently uncertain. If the Company were unable to prevail in any such proceedings, its consolidated financial position, results of operations, and future cash flows may be materially impacted.
Proceedings Relating to '287 Patent, '163 Patent, and '018 Patent
The Company is a party to patent infringement litigation initiated by the Company involving its European Patent No. 1,360,287 (the "'287 Patent"), its European Patent No. 2,264,163 (the "'163 Patent"), and its U.S. Patent No. 8,502,018 (the "'018 Patent"). Each of these patents concerns genetically engineered mice capable of producing chimeric antibodies that are part human and part mouse. Chimeric antibody sequences can be used to produce high-affinity fully human monoclonal antibodies. In these proceedings, the Company claims infringement of several claims of the '287 Patent, the '163 Patent, and the '018 Patent (as applicable), and seeks, among other types of relief, an injunction and an account of profits in connection with the defendants' infringing acts, which may include, among other things, the making, use, keeping, sale, or offer for sale of genetically engineered mice (or certain cells from which they are derived) that infringe one or more claims of the '287 Patent, the '163 Patent, and the '018 Patent (as applicable). At this time, the Company is not able to predict the outcome of, or estimate possible gain or a range of possible loss, if any, related to, these proceedings.
Proceedings Relating to Praluent (alirocumab) Injection
As described in greater detail below, the Company is currently a party to patent infringement actions initiated by Amgen Inc. against the Company and Sanofi (and/or the Company's and Sanofi's respective affiliated entities) in a number of jurisdictions relating to Praluent, which the Company is jointly developing and commercializing with Sanofi.
In the United States, Amgen has asserted a number of U.S. patents, which were subsequently narrowed to U.S. Patent Nos. 8,829,165 (the "'165 Patent") and 8,859,741 (the "'741 Patent"), and seeks a permanent injunction to prevent the Company and the Sanofi defendants from manufacturing, using, offering to sell, or selling within the United States (as well as importing into the United States) (collectively, "Commercializing") Praluent. Amgen also seeks a judgment of patent infringement of the asserted patents, monetary damages (together with interest), costs and expenses of the lawsuits, and attorneys' fees. A jury trial in this litigation was held in the United States District Court for the District of Delaware from March 8 to March 16, 2016. During the course of the trial, the court ruled as a matter of law in favor of Amgen that the asserted patent claims were not obvious, and in favor of the Company and the Sanofi defendants that there was no willful infringement of the asserted patent claims by the Company or the Sanofi defendants. On March 16, 2016, the jury returned a verdict in favor of Amgen, finding that the asserted claims of the '165 and '741 Patents were not invalid based on either a lack of written description or a lack of enablement. On January 3, 2017, the court issued a final opinion and judgment, denying the Company and the Sanofi defendants' motions for new trial and judgment as a matter of law. The court also denied as moot Amgen's motion to strike the Company and the Sanofi defendants' request to obtain a judgment as a matter of law, which allows the U.S. Court of Appeals for the Federal Circuit to address the Company and the Sanofi defendants' patent invalidity arguments on appeal. On January 12, 2017, the Company and the Sanofi defendants filed a notice of appeal with the U.S. Court of Appeals for the Federal Circuit. On January 18, 2017, the U.S. Court of Appeals for the Federal Circuit ordered an expedited briefing schedule of the appeal on the merits, pursuant to which the briefing is scheduled to be completed no later than March 31, 2017. On January 31, 2017, Amgen filed a motion with the United States District Court for the District of Delaware to amend the court's final judgment to include an award of supplemental damages (including interest) and enhancement of such damages following the resolution of the appeal.
REGENERON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
On March 23 and March 24, 2016, the United States District Court for the District of Delaware held a permanent injunction hearing to determine whether Regeneron and the Sanofi defendants should be prohibited from Commercializing Praluent in the United States. On January 5, 2017, the court granted the permanent injunction but delayed its imposition for 30 days (subsequently extended to 45 days) from the date of grant (i.e., until February 21, 2017). On January 13, 2017, the Company and the Sanofi defendants filed an emergency motion for stay of the permanent injunction pending appeal with the U.S. Court of Appeals for the Federal Circuit; and, on February 8, 2017, the court granted the stay pending appeal.
On July 25, 2016, Amgen filed a lawsuit against Regeneron, Sanofi-Aventis Groupe S.A., Sanofi-Synthelabo Limited, Aventis Pharma Limited, Sanofi Winthrop Industrie S.A., and Sanofi-Aventis Deutschland GmbH in the English High Court of Justice, Chancery Division, Patents Court, in London, seeking a declaration of infringement of Amgen's European Patent No. 2,215,124 (the "'124 Patent"), which pertains to PCSK9 monoclonal antibodies, by Praluent. The lawsuit also seeks a permanent injunction, damages, an accounting of profits, and costs and interest. On February 8, 2017, the court temporarily stayed this litigation on terms mutually agreed by the parties.
Also on July 25, 2016, Amgen filed a lawsuit for infringement of the '124 Patent against Regeneron, Sanofi-Aventis Groupe S.A., Sanofi Winthrop Industrie S.A., and Sanofi-Aventis Deutschland GmbH in the Regional Court of Düsseldorf, Germany, seeking a permanent injunction, an accounting of marketing activities, a recall of Praluent and its removal from distribution channels, and damages. Oral hearing on this infringement lawsuit is currently scheduled for October 19, 2017.
On September 26, 2016, Amgen filed a lawsuit for infringement of the '124 Patent in the Tribunal de grande instance in Paris, France against Regeneron, Sanofi-Aventis Groupe S.A., and Sanofi Winthrop Industrie. Amgen is seeking the prohibition of allegedly infringing activities with a
€10,000
penalty per drug unit of Praluent produced in violation of the court order sought by Amgen; an appointment of an expert for the assessment of damages; disclosure of technical (including supply-chain) and accounting information to the expert and the court; provisional damages of
€10.0 million
(which would be awarded on an interim basis pending final determination); reimbursement of costs; publication of the ruling in three newspapers; and provisional enforcement of the decision to be issued, which would ensure enforcement of the decision (including any provisional damages) pending appeal. Amgen is not seeking a preliminary injunction in this proceeding at this time.
At this time, the Company is not able to predict the outcome of, or estimate a range of possible loss, if any, related to these proceedings.
Proceedings Relating to Patents Owned by Genentech and City of Hope
On July 27, 2015, the Company and Sanofi-Aventis U.S. LLC ("Sanofi-Aventis") filed a complaint in the United States District Court for the Central District of California (Western Division) seeking a declaratory judgment of invalidity, as well as non-infringement by the manufacture, use, sale, offer of sale, or importation of Praluent, of U.S. Patent No. 7,923,221 (the "'221 Patent") jointly owned by Genentech, Inc. ("Genentech") and City of Hope relating to the production of recombinant antibodies by host cells. On the same day, the Company and Sanofi-Aventis initiated an inter partes review in the United States Patent and Trademark Office ("USPTO") seeking a declaration of invalidity of certain claims of U.S. Patent No. 6,331,415 (the "'415 Patent" and, together, with the "221 Patent", the "Cabilly Patents") jointly owned by Genentech and City of Hope relating to the production of recombinant antibodies by host cells. On February 5, 2016, the USPTO instituted an inter partes review of the validity of most of the patent claims of the '415 Patent for which review had been requested. On August 18, 2016, Regeneron and Sanofi-Aventis entered into a License and Settlement Agreement with Genentech and City of Hope that resolved all outstanding issues concerning the Cabilly Patents in the above-referenced litigation and inter partes review proceeding, resulting in a joint stipulation of dismissal being entered in the court and the USPTO. Under the agreement, Regeneron has been granted a license to the Cabilly Patents to make, use, and sell Praluent and all other antibody products under development at the time of the settlement.
REGENERON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
Proceedings Relating to Shareholder Derivative Claims
On December 30, 2015, an alleged shareholder filed a shareholder derivative complaint in the New York Supreme Court, naming the current and certain former non-employee members of the Company's board of directors, the Chairman of the board of directors, the Company's Chief Executive Officer, and the Company's Chief Scientific Officer as defendants and Regeneron as a nominal defendant. The complaint asserts that the individual defendants breached their fiduciary duties and were unjustly enriched when they approved and/or received allegedly excessive compensation in 2013 and 2014. The complaint seeks damages in favor of the Company for the alleged breaches of fiduciary duties and unjust enrichment; changes to Regeneron's corporate governance and internal procedures; invalidation of the 2014 Incentive Plan with respect to the individual defendants' compensation and a shareholder vote regarding the individual defendants' equity compensation; equitable relief, including an equitable accounting with disgorgement; and award of the costs of the action, including attorneys' fees. On March 2, 2016, the defendants filed a motion to dismiss the shareholder derivative complaint. On August 16, 2016, the court heard oral argument on defendants' motion to dismiss.
On or about December 15, 2015, the Company received a shareholder litigation demand upon the Company's board of directors made by a purported Regeneron shareholder. The demand asserts that the current and certain former non-employee members of the board of directors and the Chairman of the board of directors excessively compensated themselves in 2013 and 2014. The demand requests that the board of directors investigate and bring legal action against these directors for breach of fiduciary duty, unjust enrichment, and corporate waste, and implement internal controls and systems designed to prohibit and prevent similar actions in the future. The Company's board of directors, working with outside counsel, investigated the allegations in the demand and the shareholder derivative complaint, and has determined to defer its decision on the demand until the court rules on the pending motion to dismiss the shareholder derivative complaint, as discussed above.
At this time, the Company is not able to predict the outcome of, or estimate a range of possible loss, if any, relating to these matters.
Department of Justice Investigation
In January 2017, the Company received a subpoena from the U.S. Attorney's Office for the District of Massachusetts requesting documents relating to its support of 501(c)(3) organizations that provide financial assistance to patients; documents concerning its provision of financial assistance to patients with respect to products sold or developed by Regeneron (including EYLEA, Praluent, ARCALYST, and ZALTRAP); and certain other related documents and communications. The Company is cooperating with this investigation. The Company cannot predict the outcome or duration of these investigations or any other legal proceedings or any enforcement actions or other remedies that may be imposed on the Company arising out of these investigations.
REGENERON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
18. Net Income Per Share
The Company's basic net income per share amounts have been computed by dividing net income by the weighted average number of shares of Common Stock and Class A Stock outstanding. Net income per share is presented on a combined basis, inclusive of Common Stock and Class A Stock outstanding, as each class of stock has equivalent economic rights. Diluted net income per share includes the potential dilutive effect of other securities as if such securities were converted or exercised during the period, when the effect is dilutive. The calculations of basic and diluted net income per share are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Net income - basic
|
|
$
|
895,522
|
|
|
$
|
636,056
|
|
|
$
|
338,126
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
Convertible senior notes - interest expense related to contractual coupon interest rate and amortization of discount and note issuance costs
|
|
397
|
|
|
—
|
|
|
—
|
|
Net income - diluted
|
|
$
|
895,919
|
|
|
$
|
636,056
|
|
|
$
|
338,126
|
|
|
|
|
|
|
|
|
(Shares in thousands)
|
|
|
|
|
|
|
Weighted average shares - basic
|
|
104,719
|
|
|
103,061
|
|
|
100,612
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
Stock options
|
|
10,177
|
|
|
9,446
|
|
|
9,440
|
|
Restricted stock
|
|
474
|
|
|
477
|
|
|
425
|
|
Convertible senior notes
|
|
61
|
|
|
—
|
|
|
—
|
|
Warrants
|
|
936
|
|
|
2,246
|
|
|
2,936
|
|
Dilutive potential shares
|
|
11,648
|
|
|
12,169
|
|
|
12,801
|
|
Weighted average shares - diluted
|
|
116,367
|
|
|
115,230
|
|
|
113,413
|
|
|
|
|
|
|
|
|
Net income per share - basic
|
|
$
|
8.55
|
|
|
$
|
6.17
|
|
|
$
|
3.36
|
|
Net income per share - diluted
|
|
$
|
7.70
|
|
|
$
|
5.52
|
|
|
$
|
2.98
|
|
Shares which have been excluded from diluted per share amounts because their effect would have been antidilutive, include the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(Shares in thousands)
|
|
2016
|
|
2015
|
|
2014
|
Stock options
|
|
8,041
|
|
|
1,343
|
|
|
1,470
|
|
Restricted stock
|
|
19
|
|
|
—
|
|
|
—
|
|
Convertible senior notes
|
|
—
|
|
|
994
|
|
|
4,247
|
|
19. Statement of Cash Flows
Supplemental disclosure of non-cash investing and financing activities:
Included in accounts payable and accrued expenses as of December 31, 2016, 2015, and 2014 were
$28.2 million
,
$50.7 million
, and
$56.2 million
, respectively, of accrued capital expenditures.
Included in accounts payable and accrued expenses as of December 31, 2014 was
$59.8 million
related to the Company's payment obligation for a reduction in the number of warrants based on a warrant holder closing out a portion of its hedge position (see Note 11). Additionally, included within other current liabilities as of December 31, 2014 was
$87.5 million
in connection with the estimated fair value of the remaining warrant liability (see Note 11). There were
no
such liabilities recorded in connection with warrants as of December 31, 2016 and 2015.
REGENERON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unless otherwise noted, dollars in thousands, except per share data)
The Company recognized an additional facility lease obligation of
$16.8 million
,
$26.0 million
, and
$127.8 million
during 2016, 2015, and 2014, respectively, in connection with capitalizing, on the Company's books, the landlord's costs of constructing new facilities that the Company has leased (see Note 12a). In addition, during 2016, the Company recognized capital lease obligations of
$138.1 million
in connection with the modification of the Company's Tarrytown Leases (see Note 12a).
20. Unaudited Quarterly Results
Summarized quarterly financial data for the years ended December 31, 2016 and 2015 are set forth in the following tables.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter Ended
March 31, 2016
*
|
|
Second Quarter Ended
June 30, 2016
|
|
Third Quarter Ended
September 30, 2016
|
|
Fourth Quarter Ended
December 31, 2016
|
|
|
(Unaudited)
|
Revenues
|
|
$
|
1,200,849
|
|
|
$
|
1,212,629
|
|
|
$
|
1,220,122
|
|
|
$
|
1,226,827
|
|
Net income
|
|
$
|
181,385
|
|
|
$
|
196,218
|
|
|
$
|
264,804
|
|
|
$
|
253,115
|
|
Net income per share - basic
|
|
$
|
1.74
|
|
|
$
|
1.88
|
|
|
$
|
2.53
|
|
|
$
|
2.41
|
|
Net income per share - diluted
|
|
$
|
1.59
|
|
|
$
|
1.69
|
|
|
$
|
2.27
|
|
|
$
|
2.19
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter Ended
March 31, 2015
|
|
Second Quarter Ended
June 30, 2015
|
|
Third Quarter Ended
September 30, 2015
|
|
Fourth Quarter Ended
December 31, 2015
|
|
|
(Unaudited)
|
Revenues
|
|
$
|
869,612
|
|
|
$
|
998,617
|
|
|
$
|
1,137,422
|
|
|
$
|
1,098,077
|
|
Net income
|
|
$
|
76,021
|
|
|
$
|
194,643
|
|
|
$
|
210,398
|
|
|
$
|
154,994
|
|
Net income per share - basic
|
|
$
|
0.74
|
|
|
$
|
1.89
|
|
|
$
|
2.04
|
|
|
$
|
1.49
|
|
Net income per share - diluted
|
|
$
|
0.66
|
|
|
$
|
1.69
|
|
|
$
|
1.82
|
|
|
$
|
1.34
|
|
*
Due to the adoption of ASU 2016-09, the Company revised its net income from the amounts originally reported for the quarterly period ended March 31, 2016 to include a
$15.6 million
income tax benefit, which was originally recorded as additional paid-in capital.