Why did Regeneron report a profit in 2004 when it has never sold a product?

The 2004 profit of $41.7 million was driven by collaboration revenue and one-time items rather than product sales. Key contributors included $113.2 million of contract R&D revenue, $42.8 million of research progress payments (including a $25 million sanofi-aventis milestone and forgiveness of a $17.8 million Novartis loan), and a $42.75 million payment from Novartis after it exited the IL-1 Trap collaboration. Investors should recognize that such items are largely non-recurring and depend on partner decisions and milestone achievement.

How much cash does Regeneron have, and how long will it last?

At December 31, 2004, cash, cash equivalents, and marketable securities totaled $348.9 million. In January 2005 the company received two $25 million payments from sanofi-aventis. Management believes existing capital resources will fund operations through at least mid-2007, though this is a forward-looking estimate that depends on operating plans, partner payments, and clinical program costs, which are expected to rise substantially in 2005. The company also has $200 million of 5.5% convertible notes due in 2008 and no bank credit line.

What is the status of the VEGF Trap and what rights does Regeneron retain?

The VEGF Trap is in phase 1 and early-stage trials in cancer, with the sanofi-aventis Group funding agreed development costs and sharing co-promotion rights and profits outside Japan, where Regeneron retains product rights. Regeneron may receive up to $360 million in milestone payments tied to approvals for up to eight indications in Europe or the U.S. In January 2005, the companies amended the agreement so Regeneron now holds exclusive rights to VEGF Trap for eye diseases delivered locally, such as by intravitreal injection, with a clinical trial planned for mid-2005. Sanofi-aventis can terminate on twelve months' notice, which would return all VEGF Trap rights to Regeneron but also remove its partner's funding.

What are the most significant risks to investors identified in the filing?

Major risks include: the company has never commercialized a product and expects continued losses; it will require additional financing, which could be dilutive; several clinical trials have failed or shown modest results, including the IL-1 Trap RA phase 2 study and the AXOKINE phase 3 study; the VEGF Trap faces safety concerns common to VEGF inhibitors such as bleeding, hypertension, and proteinuria; competitors such as Genentech, Eyetech/Pfizer, and Novartis have approved or advanced products; the company faces a securities class action after a February 2005 denial of its motion to dismiss; and a significant portion of equity is held by a few large shareholders and Class A holders with 30.5% of voting power, which may limit other shareholders' influence.

How will the accounting change for stock options affect future results?

Regeneron intends to adopt fair-value expensing of stock-based compensation under SFAS 123 as modified by SFAS 148 effective January 1, 2005, using the modified prospective method, and will adopt SFAS 123R from July 1, 2005. The 2004 pro forma analysis showed that expensing options would have reduced 2004 net income by about $33.6 million, cutting basic EPS from $0.75 to $0.15. The January 2005 option exchange program, which issued 1,977,840 replacement options at $8.50, will add further compensation cost recognized over the vesting periods. Management expects these changes to materially reduce reported earnings and may negatively affect the stock price.

REGN 10-K FY2004 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 11, 2005. Cited figures are marked; the original filing is the authoritative source.

Regeneron Pharmaceuticals' FY2004 10-K (filed March 11, 2005) marks a pivotal year in which the company reported its first annual net income in its history: $41.7 million^a, or $0.74 per diluted share, compared with net losses of $107.5 million in 2003 and $124.4 million in 2002.

The swing was driven almost entirely by non-recurring and collaboration-related items rather than product sales, since Regeneron has never commercialized a product. Total revenue rose to $174.0 million^b from $57.5 million, led by $113.2 million of contract research and development revenue (largely from sanofi-aventis on the VEGF Trap and Novartis on the IL-1 Trap), $42.8 million of research progress payments, and a $42.75 million other contract income payment from Novartis after it withdrew from IL-1 Trap development. Research and development spending was flat at $136.1 million, and the company's cumulative loss since inception stood at $489.8 million.

The pipeline is concentrated in three clinical programs: the VEGF Trap (oncology, partnered with sanofi-aventis, and eye diseases, where Regeneron retained rights to local intravitreal delivery after a January 2005 amendment), the IL-1 Trap (rheumatoid arthritis, CAPS, and planned osteoarthritis trials), and the IL-4/13 Trap (asthma/allergy). Investors should weigh the strong near-term cash position against meaningful risks: a phase 2 RA trial of the IL-1 Trap missed its primary endpoint, AXOKINE's phase 3 results were modest, a securities class action survived a motion to dismiss, competition from Avastin and approved anti-VEGF eye therapies is intensifying, and management expects R&D to rise 40-60%^c in 2005. Stock-based compensation accounting changes (SFAS 123R) are expected to materially reduce earnings beginning in 2005.

Liquidity remains adequate by management's account, with $348.9 million^d in cash and marketable securities at year-end 2004 plus $50 million of expected January 2005 sanofi-aventis receipts, and management states resources are sufficient through at least mid-2007. However, the $200 million 5.5% convertible notes due 2008 and the company's dependence on partner payments for revenue mean the 2004 profit is largely not representative of recurring operating economics.

02—Key points

Key Highlights

First annual net income in company history: $41.7 million ($0.74 diluted EPS) in 2004, versus net losses of $107.5 million in 2003 and $124.4 million in 2002.
Total revenue grew to $174.0 million from $57.5 million, driven by sanofi-aventis VEGF Trap collaboration revenue, $42.8 million in research progress payments, and Novartis's $22.1 million deferred revenue release.
Other contract income of $42.75 million from Novartis, which withdrew from IL-1 Trap co-development in February 2004, was a key one-time contributor to 2004 profitability.
Cash, cash equivalents, and marketable securities totaled $348.9 million at December 31, 2004; management believes resources suffice through at least mid-2007.
R&D expenses were $136.1 million, flat year over year, but management expects a 40-60% increase in 2005 as VEGF Trap, IL-1 Trap, and IL-4/13 Trap programs expand.
Key pipeline risks include a previous phase 2 IL-1 Trap rheumatoid arthritis trial that missed its primary endpoint, competition from Genentech's approved Avastin and Eyetech/Pfizer's approved anti-VEGF eye therapy, and a pending securities class action related to AXOKINE.
Accounting change to fair-value stock option expensing (SFAS 123/123R) starting in 2005 is expected to materially reduce reported earnings, and the company has a $200 million 5.5% convertible note maturing in October 2008.

03—Questions

Frequently Asked Questions

Why did Regeneron report a profit in 2004 when it has never sold a product?
The 2004 profit of $41.7 million was driven by collaboration revenue and one-time items rather than product sales. Key contributors included $113.2 million of contract R&D revenue, $42.8 million of research progress payments (including a $25 million sanofi-aventis milestone and forgiveness of a $17.8 million Novartis loan), and a $42.75 million payment from Novartis after it exited the IL-1 Trap collaboration. Investors should recognize that such items are largely non-recurring and depend on partner decisions and milestone achievement.
How much cash does Regeneron have, and how long will it last?
At December 31, 2004, cash, cash equivalents, and marketable securities totaled $348.9 million. In January 2005 the company received two $25 million payments from sanofi-aventis. Management believes existing capital resources will fund operations through at least mid-2007, though this is a forward-looking estimate that depends on operating plans, partner payments, and clinical program costs, which are expected to rise substantially in 2005. The company also has $200 million of 5.5% convertible notes due in 2008 and no bank credit line.
What is the status of the VEGF Trap and what rights does Regeneron retain?
The VEGF Trap is in phase 1 and early-stage trials in cancer, with the sanofi-aventis Group funding agreed development costs and sharing co-promotion rights and profits outside Japan, where Regeneron retains product rights. Regeneron may receive up to $360 million in milestone payments tied to approvals for up to eight indications in Europe or the U.S. In January 2005, the companies amended the agreement so Regeneron now holds exclusive rights to VEGF Trap for eye diseases delivered locally, such as by intravitreal injection, with a clinical trial planned for mid-2005. Sanofi-aventis can terminate on twelve months' notice, which would return all VEGF Trap rights to Regeneron but also remove its partner's funding.
What are the most significant risks to investors identified in the filing?
Major risks include: the company has never commercialized a product and expects continued losses; it will require additional financing, which could be dilutive; several clinical trials have failed or shown modest results, including the IL-1 Trap RA phase 2 study and the AXOKINE phase 3 study; the VEGF Trap faces safety concerns common to VEGF inhibitors such as bleeding, hypertension, and proteinuria; competitors such as Genentech, Eyetech/Pfizer, and Novartis have approved or advanced products; the company faces a securities class action after a February 2005 denial of its motion to dismiss; and a significant portion of equity is held by a few large shareholders and Class A holders with 30.5% of voting power, which may limit other shareholders' influence.
How will the accounting change for stock options affect future results?
Regeneron intends to adopt fair-value expensing of stock-based compensation under SFAS 123 as modified by SFAS 148 effective January 1, 2005, using the modified prospective method, and will adopt SFAS 123R from July 1, 2005. The 2004 pro forma analysis showed that expensing options would have reduced 2004 net income by about $33.6 million, cutting basic EPS from $0.75 to $0.15. The January 2005 option exchange program, which issued 1,977,840 replacement options at $8.50, will add further compensation cost recognized over the vesting periods. Management expects these changes to materially reduce reported earnings and may negatively affect the stock price.

04—Continue

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