Regeneron Pharmaceuticals, Inc. (REGN) Q3 2014 Earnings Report, Transcript and Summary

Michael Aberman - Vice President of Strategy & Investor Relations Leonard S. Schleifer - Co-Founder, Chief Executive Officer, President, Executive Director and Ex Officio Member of Technology Committee George D. Yancopoulos - Chief Scientific Officer, Executive Vice President, Director, Ex Officio Member of Technology Committee and President of Regeneron Research Laboratories Robert J. Terifay - Senior Vice President of Commercial Robert E. Landry - Chief Financial Officer and Senior Vice President of Finance

Christopher J. Raymond - Robert W. Baird & Co. Incorporated, Research Division Yaron Werber - Citigroup Inc, Research Division Robyn S. Karnauskas - Deutsche Bank AG, Research Division Adnan S. Butt - RBC Capital Markets, LLC, Research Division Terence C. Flynn - Goldman Sachs Group Inc., Research Division Ying Huang - BofA Merrill Lynch, Research Division Matthew Roden - UBS Investment Bank, Research Division Philip Nadeau - Cowen and Company, LLC, Research Division

Good day, ladies and gentlemen, and welcome to Regeneron Pharmaceuticals Q3 2014 Earnings Conference Call. [Operator Instructions] As a reminder, this conference today is being recorded. I would like to now introduce your host for today's conference, Dr. Michael Aberman, Vice President of Strategy and Investor Relations for Regeneron. Sir, you may begin.

Thank you, operator. Good morning, and welcome to Regeneron Pharmaceuticals Third Quarter 2014 Conference Call. An archive of this webcast will be available on our website under events and presentations for 30 days. Joining me on the call today is Dr. Leonard Schleifer, Founder, President and Chief Executive Officer; George Yancopoulos, Founding Scientist, President of Regeneron Laboratories and Chief Scientific Officer; Bob Terifay, Senior Vice President of Commercial; and Bob Landry, Chief Financial Officer. After our prepared remarks, we will open the call for Q&A. I would also like to remind you that remarks made on this call include forward-looking statements about Regeneron. Such statements may include, but are not limited to, those related to Regeneron and its products and business, sales and expense forecast, financial forecast, development programs, collaborations, finances, regulatory matters, intellectual property and competition. Each forward-looking statement is subject to risks and uncertainties that could cause actual results and events to differ materially from those projected in such statements. A more complete description of these and other material risks can be found in Regeneron's filings with the United States Securities and Exchange Commission, or SEC, including its Form 10-K for the year ended December 31, 2013, and in Form 10-Q for the quarter ended September 30, 2014, which was filed with the SEC earlier this morning. Regeneron does not undertake any obligation to update publicly any forward-looking statement, whether as a result of new information, future events or otherwise. In addition, please note that GAAP and non-GAAP measures will be discussed on today's call. Information regarding our use of non-GAAP financial measures and a reconciliation of those measures to GAAP are available in our financial results press release, which can be accessed on our website at www.regeneron.com. Once our call concludes, the IR team and our CFO will be available to answer further questions. With that, let me turn the call over to our President and Chief Executive Officer, Dr. Len Schleifer.

Thank you, Michael, and a very good morning to everyone, who has joined us on the call and webcast today. The third quarter was another successful quarter for Regeneron. EYLEA sales continue to expand with a 23% growth in the U.S. compared to third quarter of 2013 and a more than twofold increase in sales outside the United States. Total global sales of EYLEA were approximately $725 million during the quarter. Importantly, in the third quarter, we received approval for EYLEA in the U.S. for the treatment of diabetic macular edema or DME. And in October, we announced top line results from the diabetic retinopathy clinical research network, comparative effectiveness study of EYLEA, Lucentis, also known as ranibizumab and Avastin, also known as bevacizumab, in patients with DME. In this independent NIH-sponsored study, EYLEA had significantly greater efficacy than both Avastin and Lucentis with a good safety profile. Patients receiving EYLEA also achieved this outcome with few injections and less rescue laser therapy. While these data have positive implications for the long-term growth of EYLEA, we are constrained about how much we can say about the detailed results of this study until the full data are published or presented by the DRCR. Beyond EYLEA, our company is in the midst of an evolution into a multi-product company with the potential for multiple significant revenue streams across a variety of therapeutic areas. We expect this evolution to drive our future as a company and to enhance value to our shareholders. With our collaborator, Sanofi, we will soon submit regulatory applications in the United States and EU for alirocumab for lowering LDL cholesterol. And we expect to receive Priority Review by the FDA, based on the use of a priority review voucher we purchased during the quarter. We expect additional Phase III data for sarilumab, our IL-6 receptor antibody, next year and regulatory submission by the end of 2015. Dupilumab, our IL-4/IL-13 blocking antibody, continues to show very encouraging data in multiple indications. Last quarter, we were positive -- we reported positive dupilumab data in chronic sinusitis with nasal polyps. And earlier in the fourth quarter, we presented additional positive data in atopic dermatitis. We also recently announced that we have started the atopic dermatitis Phase III program. We expect additional Phase IIb data in asthma this quarter. Our early-stage programs are also humming along. George will share with you important progress with our earliest-stage pipeline as well as with our Regeneron Genetics Center, and landmark genomics efforts that has already exceeded our initial expectations in terms of productivity. Turning to our earnings. Non-GAAP net income for the quarter was $295 million and diluted non-GAAP earnings per share was $2.52. This included a $34 million, or $0.29 per share, charge that we incurred for the purchase of the priority review voucher. Bob Landry will discuss our financial performance in more detail. As we all are acutely aware, the recent Ebola virus outbreak is a serious worldwide public health emergency. Regeneron has an active infection disease research group and is working on establishing a rapid response approach to address new and serious infectious disease outbreaks as they emerge. With respect to Ebola, we already have an effort there and are consulting with various government agencies to see if our fully-human monoclonal antibody technologies can be applied to combat the virus. This is still a very early initiative, but we hope that our leading antibody Science and Technologies will be part of the solution for Ebola and other emerging infectious diseases. A recent honor that George and I are especially proud of is Regeneron being ranked as the #1 employer in the biopharmaceutical industry by Science Magazine for the third consecutive year, a 3-peat, so to speak. We are very proud of this recognition since it is a testament to our science-driven innovative culture and our incredibly talented employees. As we grow and evolve, we are focused on staying in this culture in order to maintain our edge as a leading scientific innovator and employer of choice with talented scientists. Before I turn the call over to George, let me briefly address the recent management change at Sanofi. As I'm sure you all know, last week, the Sanofi Board of Directors removed their CEO, Chris Viehbacher, and announced initiation of a search for a new CEO. We had a close and productive working relationship with Chris for many years, and we wish him well in his future endeavors. But our relationship with Sanofi began before Chris's tenure and extends deeply to both company's research, development and commercial organizations. We expect the relationship to continue without interruption and unabated, as we advance our joint pipeline, including 3 Phase III antibodies to clinical trials and into commercialization. I spoke with Serge Weinberg, Sanofi's Chairman and acting CEO, on the day of their announcement and we'll meet with him this week. Sanofi and Regeneron are committed to bringing our late-stage drug candidates to patients as quickly as possible. With that, let me turn the call over to George Yancopoulos, Regeneron's Chief Scientific Officer, who would discuss -- who will discuss our pipeline and our clinical research progress in greater detail. He will be followed by Bob Terifay, Senior Vice President of Commercial and then by Bob Landry, our Chief Financial Officer. George?

Thank you, Len. And a very good morning to everyone who has joined us today. I echo Len's sentiments that we are at a transformational stage in our evolution. From an R&D perspective, we had a very successful third quarter and we are poised to make significant strides in a variety of therapeutic areas. We have 3 antibodies in Phase III clinical development, and our pipeline of more than a dozen antibodies is advancing well. I'd Like to begin with EYLEA. In the third quarter, EYLEA was approved in the U.S. in diabetic macular edema, or DME. And just last month, EYLEA received FDA approval for yet another indication, macular edema following retinal vein occlusion, which now includes both central and branch retinal vein occlusion. Outside the United States, our collaborator, Bayer HealthCare has received approval for EYLEA in DME in the European Union and for myopic choroidal neovascularization, or MCNV, in Japan. Len mentioned the results from an NIH-sponsored study called Protocol T that looked at the comparative safety and efficacy of EYLEA versus ranibizumab and bevacizumab in patients with DME. We are very encouraged by these top line data and look forward to the full data publication by the DRCR and presentation at an upcoming medical conference. We continue to invest in R&D that could bolster and protect our EYLEA franchise. Specifically, we're exploring combinations of EYLEA with other antibodies, our PDGF receptor antibody and our Ang2 antibody. Our combination trial of EYLEA with our PDGF receptor antibody is ongoing, and we expect to report initial data in early 2015. We have identified 2 doses from the Phase I study that we plan to move into Phase II, both in combination with the approved EYLEA 2 milligram dose, formulated in a single intravitreal injection. Our combination study of EYLEA, coformulated with our Ang2 antibody, also in a single intravitreal injection in ophthalmology, is on track to enter clinical development later this year. In the third quarter, we received breakthrough therapy designations for EYLEA from the FDA for diabetic retinopathy in patients with DME. This designation was based on the positive data from 2 Phase III studies in DME, VIVID and VISTA, which demonstrates statistically significant improvements in prespecified measures of diabetic retinopathy in patients with DME after 2 years of treatment. Turning now to the 3 antibody programs we have in Phase III, alirocumab for lowering LDL cholesterol, sarilumab for rheumatoid arthritis, and dupilumab which is currently in Phase III for atopic dermatitis and also being studied in a variety of other allergic and atopic conditions. In the third quarter, we reported detailed positive data from 4 pivotal Phase III studies of alirocumab, our PCSK9 antibody, for lowering LDL cholesterol in people with hypercholesterolemia. These data were presented at the Annual Meeting of the European Society of Cardiology. Across all these trials, alirocumab showed significant and sustained reduction in LDL cholesterol over one year on top of standard-of-care statin therapy across different patient types. As a reminder, a post-hoc safety analysis from the ODYSSEY long-term study showed that there was a lower rate of adjudicated major cardiovascular events, including cardiac death, myocardial infarction, stroke and unstable angina requiring hospitalization. In the alirocumab group, compared to placebo, 1.4% compared to 3%, with a nominal p value of less than 0.01. These represent the first preliminary evidence that this class may potentially lower the risk of cardiovascular events. However, definitive conclusions on cardiovascular risk lowering of alirocumab await the results of the ongoing 18,000-patient ODYSSEY OUTCOMES trial, which is prospectively evaluating the potential of alirocumab to demonstrate cardiovascular benefit. We will be reporting data from 5 additional studies of alirocumab at the upcoming Annual Meeting of the American Heart Association. Turning to sarilumab, our IL-6 receptor antibody, which is in Phase III development for rheumatoid arthritis. We will be presenting additional data from positive Phase III sarilumab RA MOBILITY study at the upcoming Annual Meeting of the American College of Rheumatology. Let me remind you that the Phase III data, we have already shown, demonstrate an inhibition of progression of structural damage at week 52 as measured by the change in the modified van der Heijde Total Sharp Score. In the MOBILITY study, the group receiving the 200 milligram dose of sarilumab plus methotrexate had a reduction of approximately 90% in the radiographic progression assessment of the modified Total Sharp Score compared to the radiographic progression with placebo plus methotrexate at week 52. The safety findings in MOBILITY study were consistent with those observed in prior investigational studies with sarilumab. We have also initiated a new Phase III study, MONARCH, which is a head-to-head study of sarilumab monotherapy compared to a TNF inhibitor, adalimumab or Humira, also as monotherapy, in patients who are inadequate responders to methotrexate. We expect to report data from the ongoing Phase III trials and plan on regulatory submissions in 2015. Dupilumab, our antibody that blocks both IL-4 and IL-13 signaling, is one of the most exciting antibodies in our pipeline and continue to make significant progress in the third quarter. We now have positive Phase II data in 3 allergic or atopic conditions: atopic dermatitis, asthma and chronic sinusitis with nasal polyposis. We also expect to see data from our phase IIb study of dupilumab in asthma before the end of this year. While asthma, atopic dermatitis and chronic sinusitis with nasal polyposis present in different ways, we believe that they all share the same basic immunopathology. The fact that many people suffer from more than one of these diseases at the same time provides evidence for this link. For example, in our phase IIb atopic dermatitis study, approximately 60% of patients had another allergic condition, including approximately 40% of patients who had a history of asthma. The positive data we have generated so far in multiple indications support our belief that IL-4 and IL-13 could be important drivers of the common underlying immunopathology that links certain allergic diseases. In the atopic dermatitis indication, we recently initiated a Phase III study called, LIBERTY AD CHRONOS. This is the first study in the Phase III clinical program for dupilumab and is a double-blind placebo-controlled multinational study, with the primary objective of demonstrating efficacy of dupilumab in adults with moderate-to-severe atopic dermatitis who had administered concomitantly with topical corticosteroids through 16 weeks. The trial is expected to enroll approximately 700 adult patients and will explore 2 separate doses of dupilumab. This study is part of the Larger LIBERTY Program in atopic dermatitis that will consist of at least 5 clinical studies in patients with moderate-to-severe atopic dermatitis. Turning to our earlier-stage pipeline. In immuno-oncology, we recently initiated the study of our CD20 by CD3 by specific antibody, also known as REGN1979, and we expect to submit an IND for our PD-1 antibody before the end of this year. We would also like to share with you the targets of 2 antibodies that have been previously undisclosed. First is REGN2222, an antibody against respiratory syncytial virus, or RSV, which is currently in Phase I clinical development. This antibody is being developed in collaboration with Sanofi. RSV is a virus that affects the lungs in the respiratory passages and can result in serious illness and mortality, particularly in young children. It is the most common cause of bronchitis and pneumonia in children under the age of 1 in the United States, and is also an important cause of respiratory disease in older adults. We believe that our antibody could require significantly fewer administrations when compared to the standard -- current standard of care, which would be a big advantage for the pediatric population and open up the opportunity for benefit to a larger unmet need population. The second antibody, we'd like to disclose, is REGN1500, an antibody to ANGPTL3, in the lipid lowering space. We are particularly excited about this opportunity because there is a substantial human and mouse genetic evidence supporting the possibility that blocking ANGPTL3 can improve lipid and metabolic profiles and perhaps provide cardiovascular benefits. Continuing on the theme of genetics. We recently announced that the Regeneron Genetics Center is fully operational and that we have obtained DNA sequences from the first 10,000, the de-identified individuals. We are currently on track to be able to sequence samples from 50,000 individuals per year. While our capacity for DNA sequencing is extremely high, our competitive advantage in this field starts with the focus on the right types of individuals to sequence, such as those in our Geisinger collaboration, and is further enhanced by our ability to rapidly combine DNA sequencing with mouse gene functionization technologies. And our ability to translate findings into therapeutics using our VelocImmune technology. We have continued to expand our capabilities into foreign areas of human genetics research through new scientific collaborations with several leading institutions, an important additions to our in-house and advisory scientific teams. With that, let me now turn the call over to Bob Terifay.

Thanks, George. And good morning, everyone. It's been a very busy time for the Regeneron commercial team with 2 recent approvals and launches for EYLEA and diabetic macular edema and macular edema following retinal vein occlusion. And a potential launch in 2015 for alirocumab for hypercholesterolemia. I'd like to begin my comments today with EYLEA. Third quarter, U.S. EYLEA net sales to distributors were $445 million, which represents a 23% increase over third quarter 2013. Sequential quarterly growth in physician sales was 8%. Currently, EYLEA sales in the United States represent approximately half of the FDA-approved anti-VEGF therapies for retinal diseases. The vast majority of EYLEA sales come from the treatment of wet age-related macular degeneration. EYLEA growth so far this year has come primarily from growth in the wet AMD market. As you know, in July, we received FDA approval for EYLEA in a third, very important new indication, DME, which is the leading cause of blindness among working aged adults in the United States. EYLEA is the first and only anti-VEGF agent approved for DME with a dosing interval of greater than every 4 weeks. According to the U.S. prescribing information, EYLEA can be dosed every 8 weeks, following 5 initial monthly doses. The Phase III studies for EYLEA in DME were the only registration studies that compared an anti-VEGF agent to standard-of-care macular laser photocoagulation therapy. Immediately, following approval, we launched EYLEA in DME. The targeted physicians are largely the same physicians who treat wet AMD. DME represents a large potential market opportunity for EYLEA. As it's estimated that approximately 600,000 eyes are diagnosed with essentially involved diabetic macular edema in the United States each year, a similar number to those diagnosed with wet AMD. Of these eyes diagnosed, only about 40% are currently treated with anti-VEGF therapy, with laser used as an alternative treatment modality. Because EYLEA has been approved using the same single strength 2-milligram dose per injection for all indications, it's difficult to give you an estimate of the portion of our sales coming specifically from DME versus AMD. Anecdotal physician reports indicate that they are using EYLEA in both their anti-VEGF naive and switch DME patients. Consistent with our prelaunch market research, physicians continue to indicate strong prescribing intent for EYLEA in DME. However, uptake will be slower than in wet AMD. There's a significant difference in the market dynamics between wet AMD and DME. In wet AMD, physicians are concerned if patients have ongoing retinal edema with fear of hemorrhage leading to sudden vision loss. Therefore, they look for alternative treatment options that might dry the retina. At the time of the EYLEA launch in wet AMD, there was a large patient population with a history of inadequate response to both ranibizumab and bevacizumab, whose physicians were waiting to switch them to EYLEA. In DME, physicians believe that the waxing and waning edema is not as dangerous to long-term maintenance of vision as in wet AMD. Thus, there's less urgency to initiate treatment of naive patients or switch patients, who have suboptimal responses to their current therapies. Anti-VEGF agents have also not been used to DME for as long as they have been used in wet AMD. So the market is not as well-developed, with laser treatments still heavily entrenched. Pair dynamics are also different between wet AMD and DME. In wet AMD, the vast majority of patients are over age 65 and covered by traditional Medicare. Traditional Medicare coverage of "buy and bill" drugs occur shortly after FDA approval. In DME, only an estimated 30% of patients are covered by traditional Medicare. Commercial payers are slower to provide drug coverage. Even when coverage is granted, notification to physicians, and the loading of reimbursement information to payer portals doesn't occur in a predictable manner. Retinal physicians, who must absorb the cost of anti-VEGF agents if they don't get reimbursed, often want evidence for each payer that the drug is covered and that each payer has paid a claim before they will prescribe the drug. For these reasons, while usage of EYLEA in DME continues to grow, we expect the uptake of EYLEA in DME to be slower than what we saw in wet AMD. Where are we so far with reimbursement? Week-over-week, we continue to make steady progress with coverage and paid claim confirmation across the payer space for EYLEA in DME. Currently, all Medicare jurisdictions have coverage and evidence of paid claims for EYLEA in DME. Regarding commercial patients. Over 95% of commercial lives have confirmed coverage for EYLEA for DME. We currently have evidence of paid claims from over half of these payers. Benefits investigations to our reimbursement hub have increased at a growing pace every month since launch. Likewise, use of physician samples for the initial patient startup therapy has increased since the DME launch. We remain confident that there's a significant market opportunity for EYLEA in DME, if physicians become comfortable with reimbursement coverage. This should be bolstered as physicians become more familiar with our Phase III DME data against standard-of-care therapy and when the pending data from the NIH DRCR Protocol T Comparative Safety and Efficacy Study of the VEGF inhibitors are publicly presented. Other potential sources of further EYLEA growth include potential changes to the regulation of compounded biologics, such as bevacizumab and our recent approval in macular edema following retinal vein occlusion. I'd now like to address the x U.S. business, where we split profits with our collaborator, Bayer HealthCare. Third quarter 2014, x U.S. EYLEA sales were $277 million. X U.S. EYLEA sales continue to be an important growth driver, and the launch outside the United States is making significant progress. EYLEA has recently been approved for the DME indication in the European Union and for the treatment of myopic choroidal neovascularization in Japan. Bayer HealthCare has also filed regulatory applications for EYLEA for the treatment of macular edema following BRVO in Europe. There remains significant x U.S. growth potential for EYLEA. Highlighting the growth potential for EYLEA outside the United States. The annual market for EYLEA and ranibizumab, the 2 branded therapies combined, is approximately $3.5 billion outside the U.S. based on the run rate observed in the third quarter. EYLEA currently has approximately a 30% share of the x U.S. branded market as compared to a 50% share of the U.S. branded market. Therefore, there is ample growth opportunity x U.S. through approval and additional indications, further geographic expansion and market share gains. With respect to alirocumab, our investigational PCSK9 antibody, that is being evaluated for lowering low-density lipoprotein cholesterol, we and our worldwide collaborator, Sanofi, are busy preparing for U.S. and EU regulatory submissions before the end of this year and planning for potential approval in the second half of 2015. Regeneron and Sanofi share in all internal strategic and tactical planning and execution, including marketing, market access, health outcomes and medical affairs. Launch preparation is actively underway by both companies. We've recently agreed that we will share in sales force promotion for alirocumab with Sanofi in the United States. Sanofi will be responsible for sales promotion at launch outside of the United States. We reserve the right to share in x U.S. sales promotion at a later date. In this competitive marketplace, we'll not be sharing any further specifics at this time. Preparing for a significant launch, such as this one, requires planning and commercial investment. With the potential launch anticipated in the second half of 2015, that investment is already underway and will continue to accelerate in the upcoming months. As part of the agreement with Sanofi, we currently share pre- and post-launch commercial expenses, approximately 50-50, on a realtime basis. Bob Landry will provide more detail on the financial impact. With that, let me turn over the call to Bob Landry, our Chief Financial Officer.

Thanks, Bob, and good morning to everyone who has joined us today. Overall, we're pleased with our third quarter performance. In the third quarter, we are in $2.52 per diluted share for a non-GAAP net income of $295 million, which represents a 5% and 6% increase respectively versus the 3 months ended September 30, 2013. Our non-GAAP EPS was negatively impacted by a $34 million charge, or $0.29 on a per diluted share basis, that we recognized in the third quarter 2014 in connection with our and Sanofi's purchase of the priority review voucher, which we plan to use for the anticipated BLA submission of alirocumab later this year. Regeneron's non-GAAP EPS excludes noncash share-based compensation expense, noncash interest expense related to our senior convertible notes, loss on extinguishment of debt in relation to the conversion of a portion of our convertible notes which occurred earlier in the year, and income tax expense. In the third quarter of 2014, our GAAP to non-GAAP reconciliation also included an incremental charge related to our branded prescription drug fee, based on final regulations issued during the quarter by the IRS. A full reconciliation of GAAP to non-GAAP earnings and a brief discussion of the branded prescription drug fee incremental charge is set forth in our earnings release. Total revenues in the third quarter of 2014 were $726 million, representing a 22% increase compared to total revenues in the third quarter of 2013. Net product sales were $449 million in the third quarter of 2014 compared to $367 million in the third quarter of 2013. EYLEA net product sales in the U.S. were $445 million in the third quarter of 2014 compared to $363 million in the third quarter of 2013, which represented an increase of 23%. U.S. EYLEA distributor inventory levels remained within the normal 1 to 2-week range. As mentioned in our press release issued earlier this morning, we are tightening our U.S. EYLEA net sales guidance to $1.7 billion to $1.74 billion from the previously provided range of $1.7 billion to $1.8 billion. X U.S. EYLEA sales were $277 million in the third quarter 2014 as compared to $247 million last quarter and $125 million in the third quarter of 2013. Product revenue from x U.S. EYLEA sales is recorded by our collaborator, Bayer HealthCare. Please keep in mind that Bayer HealthCare's reported x U.S. EYLEA sales are not exactly the same as the x U.S. numbers that we report. This is because for Japan, Bayer reports their sales to their distributor, Santen, while we report Santen's end market sales. In the third quarter 2014, Regeneron recognized $85 million from its share of net profit from EYLEA sales outside the United States after repayment of $14 million in development expenses compared to $32 million in the third quarter of 2013 after repayment of $15 million in development expenses. Bayer HealthCare collaboration revenue for the third quarter was $136 million. This included two 15 million dollar sales milestones that we earned upon aggregate x U.S. net sales of EYLEA exceeding $800 million and $900 million over a 12-month period. We are expecting to earn another two 15 million dollar milestones during the fourth quarter. This would bring our EYLEA x U.S. milestones in 2014 to a total of $105 million. After that, there will only be one 15 million dollar milestone payment remaining to be earned from Bayer related to x U.S. EYLEA sales, which we expect to receive in 2015. Global ZALTRAP, or ziv-aflibercept, injection for intravenous infusion net sales, as recorded by Sanofi, were $23 million in the third quarter compared to $18 million in the third quarter of 2013. We recognized approximately $1 million as our share of the losses related to ZALTRAP in the third quarter. Total Sanofi collaboration revenue was $133 million for the third quarter of 2014. As we said previously, the Sanofi collaboration revenue line primarily consists of reimbursement of Regeneron-incurred R&D expenses, which was $142 million in the third quarter of 2014, our share of losses in connection with ZALTRAP, amortization of upfront and other payments received from Sanofi and our share of expenses associated with Sanofi's prelaunch commercialization expenses related to alirocumab in accordance with our antibody collaboration agreement. As we approach the potential approval and launch of alirocumab in 2015, we fully expect these prelaunch commercialization expenses to become substantial. Regeneron's share of antibody commercialization expenses was a new component within our Sanofi collaboration revenue line item first introduced last quarter, where we outlined the accounting treatment. However, I think it's worth recapping again. So let me say a few words on how we will record our share of the antibody prelaunch commercialization expenses. The prelaunch commercialization expenses that Regeneron incurs will be primarily recorded within our SG&A line. We then recognize 100% of the amount of these prelaunch expenses as reimbursement revenue, which is contained in the other line in Table 4 of our earnings release under Sanofi collaboration revenue. On a net P&L basis, this reimbursement revenue offsets the expenses we incur. In addition, we will also record 50% of the total prelaunch commercialization expenses spent by both parties as contra revenue, which is represented by the $13 million of Regeneron's share of antibody commercialization expenses in Sanofi collaboration revenue, as depicted in Table 4 of our earnings release. Please keep in mind that as we approach the launch of alirocumab and other antibodies that are part of our collaboration with Sanofi, we expect this expense, or contra revenue, to significantly increase. However, once the antibodies are launched and become profitable, we expect this component to become positive revenue as it will reflect our share of the antibody commercial profits. Turning now to expenses. Non-GAAP R&D expenses were $292 million in the third quarter of 2014. Our unreimbursed R&D expense, which is calculated as the total GAAP R&D expense minus R&D reimbursements we receive from our collaborators and R&D noncash share-based compensation expense, was $145 million in the third quarter of 2014. Our press release issued this morning includes all the information that is required to calculate unreimbursed non-GAAP R&D expense. As we mentioned earlier, in July 2014, Regeneron and Sanofi announced that the companies had purchased an FDA rare pediatric disease priority review voucher from a third party. We, in Sanofi, shared equally the purchase price of the priority review voucher. Our share of the cost was $34 million, which we recorded as an R&D expense during the third quarter of 2014. We are tightening our unreimbursed non-GAAP R&D guidance to $490 million to $510 million from the previous guidance of $470 million to $510 million. Non-GAAP SG&A expenses for the third quarter were $82 million. We are tightening our non-GAAP SG&A guidance for the full year of 2014 to be between $330 million and $350 million from the previously provided guidance of $310 million to $350 million. As referenced earlier and illustrated within our GAAP to non-GAAP reconciliation, the 2014 third quarter GAAP net income included a $41 million incremental charge related to our branded prescription drug fee based on final regulations issued during the quarter by the IRS. By way of background, a non-tax-deductible fee, called the branded prescription drug fee, is imposed on pharmaceutical manufacturers that sell branded prescription drugs to specified government programs, such as Medicare Part B. This fee is allocated to companies based on their prior year market share of branded prescription drugs into these government programs, and the fee commenced in 2011. In July 2014, the IRS issued final regulations that provided guidance on the branded prescription drug fee which were different in some respects from the temporary regulations issued by the IRS in 2011, including the fact that a company is liable for the fee based on its branded prescription drug sales in the current year, instead of the liability only being applicable upon the first qualifying branded prescription drug sale of the following year under the temporary regulations. Given the onetime nature of this adjustment, we have elected to exclude this expense from our 2014 non-GAAP earnings. Non-GAAP cost of goods sold was $33 million in the third quarter. Included in this line item are royalty expenses in connection with our agreement with Genentech related to U.S. EYLEA sales, which we are obligated to pay until May 2016. Cost of collaboration manufacturing was $22 million in the third quarter. With regard to taxes, due to the amounts of the company's net operating loss and tax credit carryforwards available for tax purposes, the company does not currently pay significant cash income taxes. In the third quarter of 2014, our GAAP effective tax rate was approximately 55% as compared to 37% for the third quarter of 2013. For the full year, we expect our GAAP effective tax rate to be in the mid 50% range. As a reminder, since we expect to begin to pay significant cash taxes in approximately the middle of 2015, we anticipate that our non-GAAP tax rate beginning in the first quarter of 2015 will represent a blended rate based on an estimate of the cash taxes payable for the full year. We will be able to provide more details in early 2015. Our capital expenditures for the 9 months ended September 30, 2014, were $215 million, as we expand our Tarrytown, New York and Rensselaer New York facilities and continue renovations on our new biopharmaceutical manufacturing facility in Limerick, Ireland. These capital expenses will play an integral role in helping to ensure that we have the necessary infrastructure in place to launch our next generation of products. We are lowering our full year capital expenditure guidance to $300 million to $350 million from the previously provided range of $350 million to $425 million. We ended the quarter with cash and marketable securities of $1.5 billion compared to $1.1 billion at December 31, 2013. In October 2014, the company received notifications, that an additional $161 million principal amount of the company's convertible senior notes was surrendered for conversion, and settlement is anticipated during the fourth quarter of 2014. The company has elected to settle these conversion obligations through a combination of cash and shares. With that, I'd like to turn the call back to Michael.

Thank you, Bob. That concludes our prepared remarks. We'd now like to open the call for Q&A. [Operator Instructions] Our team will be available in our office after the call for follow-up questions. Thank you. And Roland, if you can please open the call for questions?

[Operator Instructions] Our first question comes from the line of Chris Raymond from Robert Baird. Christopher J. Raymond - Robert W. Baird & Co. Incorporated, Research Division: Just sort of a general market trend question. I wonder if you can give me a little bit more color from what you're seeing in, so you may know that IAS has a data point that they publish every month that shows specialist office visits in the U.S. And it's shown, essentially all year, that ophthalmology business has been relatively weak in -- even when you look at it versus other specialties that have been fairly stable. I guess, first question on this is, are you seeing this? Or is this signal sort of not just right because it looks like not just EYLEA and AMD that is perhaps seeing a little bit of slowdown that's happening pretty much across the board. And any color on that would be great?

Sure. Bob can handle that. And I will just say, Len, just as an outset, that the retinal specialists are only a small subgroup of the ophthalmologists, so I'm not sure how relevant. And also, we haven't seen a slowdown in our product. Bob?

No. As, I think, Len summarized it, the retinal doctors are a small portion of the ophthalmology population. We are not hearing a slowdown in terms of visits. Given the urgency of retinal diseases, it would not be prudent for patients not to come into the physicians' office. So we're not seeing a falloff.

Our next question comes from the line of Jason Kantor from Credit Suisse. Terrific. Any chance if you could provide us with what you think the breakdown of your sales are for AMD, RVO, and DME? And in the case that you're not going to answer that question, could you tell us a little bit more about the ANGPTL3 target? Is anyone else working on it? How is this different from PCSK9? How do you see this developing longer term?

Yes. So what we are -- we said we can't really give you breakdown because we don't have it, but George may be able to give you a little more information on ANGPTL3.

Well, as far as we know, we're the only people who are developing a fully human antibody to the target. There are other approaches that I'm not going to really comment on that are trying to use other technologies to try to hit the target. But in our hands, an antibody is, really, an optimal way to address this target and certainly, we've shown that in preclinical models. The human genetic evidence as well as a lot of animal data suggests that this really can impact lipid profiles as well as perhaps, metabolic impact. In terms of lipids, it not only lowers LDL cholesterol in an LDL receptor independent pathway, meaning that for example, it could work in familial homozygotes that have absolutely no LDL receptor function. But also, it can dramatically lower triglycerides and essentially in animal studies, normalize them regardless of how high that they are. So the human genetic data suggests the possibility that this can be associated with positive outcome benefits. So we're very excited about this target. We think that we're relatively alone in terms of fully human antibodies, which is an optimal way to address it, and we're excited about moving forward.

Our next question comes from the line of Yaron Werber from Citi.

So I just wanted to follow-up on an earlier question. Maybe for Bob. So when you look at your earlier guidance of originally '17 to '18, now you're kind of taking to the lower end despite getting approval in DME a little earlier, so maybe I'm trying to understand a little bit. Can you help us understand what you're seeing and why you're sort of lowering the guidance to the lower end? Or what was sort of unexpected for you this year?

Sure. Bob will deal with that. I just want to finish up on the ANGPTL3, George was being -- maybe being a little bit too modest there. He and his colleagues were the first group to discover the angiopoietins, it means the angiopoietin light protein. So we have a long and rich history in this field that we're building on. And combining with our experience with PCSK9, I think this is a good and logical target that you -- we expect you're going to hear a lot more about. Bob, you want to address?

Yes. So first of all, I'd like to point out that we are very encouraged by the uptick that we are seeing in DME. As I said during my presentation, the benefits investigations are growing month over month since the launch of DME. We also have seen a growth in the utilization of our samples, which we did not have at our wet AMD launch. The samples are actually a way of getting patients started on to therapy whilst physicians get comfortable with the reimbursement situation. I think the big difference between the DME and the wet AMD is that the ramp is going to be a little slower. That's both because physicians don't have the same urgency to treat, but it's also because they want to have evidence that the commercial payers, who are the primary payer in wet AMD due to the -- DME due to the age of the DME patients, take a little longer to have evidence of a paid claim. So it's not that we're discouraged by the performance of the product this year, it's just in DME, it's going to take a little bit longer.

Yes, I think I might add that protocol T has the potential to be a real game changer, I think, in the minds of physicians. And they have not seen those data, so we hope those data will get published in the not-too-distant future, and we expect presentations by the DRCR. And as that data gets into the literature, we hope that it will influence a physician choice.

Our next question comes from the line of Robyn Karnauskas with Deutsche Bank.

I'm going to ask the question, you probably won't answer and then one that maybe you will. So just with the PCSK9 lawsuit, can you just -- I know you can't comment probably on your thoughts around it. Bus is there any color you can give us on why isn't it something that we might have predicted earlier and whether or not you think at all this could influence the timing of your launch? And then the question that you might be able to answer more is, so the Phase III in atopic dermatitis you're going after adults in the broader market, as I understand it, is more children. Can you help us understand how big the adult market is versus the kids, and like, what is the path or to getting to the broader label? Thank you.

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

Oh, the PCSK9 lawsuit with the Amgen question. Any color would make me very happy though, I appreciate it.

Well, let me just say about the PCSK9 lawsuit. I know that Amgen has said publicly that, I think, the phrase they use that, it's sort of like a football phrase, they have the will and the skill and all that kind of stuff. We're not going to comment much, but we're going to focus on the facts and the law. And we've got a lot of experience in this patent arena. As you remember, we had a patent fight with Genentech relating to our EYLEA. So this is something I think that you'll just have to watch it unfold. As far as, whether or not we -- what we can say, we don't believe that we infringe any valid claims asserted in the past. Now, Bob, do you want to comment on the split between adult and pediatric opportunities?

Yes. So Robyn, you're correct. Obviously, there are a large number of children that develop atopic dermatitis early in life. And as George pointed out, the interesting about these Th2-mediated diseases is those children often develop other conditions, such as asthma, food allergies and other Th2-mediated conditions. So the pediatric audience represents a very important one, and we believe these children suffer in having the severe itch, in having the rash all over their body. There are definitely limitations on sleep, limitations on their ability to learn. So we definitely intend to develop dupilumab in the pediatric population, but we had to start in the adult population. The adult population does represent a significant opportunity. There's approximately 2 million adults around the world with moderate-to-severe atopic dermatitis that is inadequately controlled with topical corticosteroids. The other treatment options for those patients are not chronic because they have safety drawbacks. So we believe there is a significant opportunity. We've talked to a number of these patients, they suffer in silence and this dupilumab represents a major opportunity to help these patients.

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

Len, you said Protocol T could be a game changer. When I attend meetings to talk to doctors, they appreciate the differences in safety and even efficacy. But at the same time, they say that maybe the sample sizes aren't big enough to show definitive differences in systemic side effects. So how do you think this impacts usage? Is this something that gives you an advantage versus the other agents? Is this something that helps you make the argument in front of parents? How do you expect Protocol T to play out?

Yes. I think we want to -- we don't want get into a debate now about this. Because we want to respect the DRCR. They worked very hard at doing this well-controlled study, it was independently conducted, multi-sites, lots of investigators. They were in complete control, and they deserve the ability to publish the data and discuss it and answer these types of questions. At a very high level, the only reason we put something out is because we believe we thought that this was material for our shareholders to know that on the top line, the data should be disclosed. But we don't want to debate. The Genentech machine is already in full gear, coming up with press statements, which I think is sort of not what we agreed to do with the DRCR. So we're not going to get into that level of debate. But if you hang in there a little while, I think everyone is going to be very pleased at how it all turns out.

Next question comes from the line of Terence Flynn from Goldman Sachs.

So looking at the mid-point of your new 2014 EYLEA guidance that implies about sequential growth of 12% in the fourth quarter. And I think over the last 6 quarters, you guys have averaged around 6%. So just wondering if double-digit sequential growth is the right way to think about the forward trajectory for the drug now that you have DME and BRV on board?

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

Can I ask a second one then, since...

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

Okay. I'll try harder this time. So obviously, in your prepared remarks, you said you selected 2 doses of 1979, your PDGF antibody that you're carrying forward into Phase II. Just wondering what type of data drove the choice of the doses there. Was it only PK data? Or did you also have some PD data that was available?

I think the first study primarily was just a safety study to demonstrate that we could deliver the product safely without inflammation and that sort of thing. And that's the main guidance of dose selection for Phase I.

And Terence, just to be clear, the 1979 is our 80:20, so when you get there -- I know these Regeneron numbers can be confusing.

This is, yes, different numbers, sorry.

I believe it's 2176.

Who knows, but...

But we'll get back to you on that.

But the answer is, that was primarily a Phase I tolerability study.

Our next question comes from the line of Ying Huang with Bank of America Merrill Lynch.

The first one is related to your 2 antibodies for AMD and DME. I noticed that for the PDGF antibody REGN2176, you're doing the Phase I in AMD patients. And then you just announced the REGN910, which is the Ang2 antibody coformulated with EYLEA. You're testing that in DME patients in Phase I. I was wondering if this suggests you might use these 2 different antibodies to target different disease, one for DME, one for AMD? And then I have a question on DRCR, I mean, I hate to beat the dead horse, but Genentech and Roche were out there telling doctors that the 2 other difference between Lucentis and also the EYLEA in this trial was not really clinically meaningful. Can you make any comments around that?

Yes. So as far as the second question goes, as I said, you are beating a dead horse there. We're going to let the DRCR publish and speak and address the data. And when you see the full data set, come back and talk to us and talk to Genentech.

Actually, it's a live horse. It's just that it's still in the barn and it hasn't gone out yet, so you can't see exactly what it looks like.

As far as where Ang2 and PDGF combinations might fit in, I think that there's some preclinical data. As you might be aware, that would suggest a more restricted application for the PDGF, not wanting to use it in the DME setting. We'll see whether or not we can go broader in both settings, frankly, with Ang2 and EYLEA combinations.

So Amgen recently announced that they're increasing enrollment for the OUTCOMES trial by 5,000 patients so that they will get the OUTCOMES data no later than 2017. I was wondering if you can comment on your evaluating the OUTCOMES trial for alirocumab?

That's a very good question, Ying, but we have no comment. I'm sorry.

The next question comes from the line of Matt Roden from UBS.

I have a question on the different horse, this one from the pipeline. And George, I guess, you have to think about where -- or I'm sure that you're considering very carefully where to invest your R&D dollars. We realized bringing in a new product cycle forward takes a lot of money, a lot of time. And I just wondered if you could talk about the rationale for bringing forward a preclinical PD-1 antibody at this point. We understand that the checkpoint inhibitors, particularly PD-1, represent a paradigm shift and providing combination approaches is one of the ways to differentiate within that. But what are your thoughts on that versus focusing on other checkpoint inhibitors, where arguably you could be more in front of the pack? And this is a little bit specific to PD-1, but it's more like I want to better understand the rationale for how you pick your projects to bring forward?

All right. What we think that it's still very early in the game in terms of understanding the best and optimal way to use these various immuno regulators and checkpoint inhibitors. And we think it's very important to have our own foundation therapy to be used in a variety of combination approaches, both with other immuno regulators, but also with other classes of therapeutics as well. So we're taking a long-term view here that the real solutions, the real advances are still yet to come. And it's important to have a collection of the important players in the game to be providing the optimal combination solutions to patients in an efficient and economically feasible way as well. So it's a long-term strategy. We believe that it's very early in the game, and we're very excited about it.

And I think, as George has already said in some of his public talks that having more than -- if you need combinations of these, if you could have both of them, then you can control the cost with patients as well. And I think that's going to be important because we can't keep adding on expensive therapy on top of expensive therapy.

I think that's a very important point. And I should also say that even our early-stage PD-1 trials, we're going to be trying to do different things than have been done before. So even our early studies may suggest a new insight and be able to provide better benefits to patients even before we get to latest stage combinations as well.

Our final question comes from the line of Phil Nadeau with Cohen and company.

Just a question on the alirocumab patent challenge with Amgen. Can you give us some sense of the publicly available milestones that will happen between here and your launch? Amgen's obviously asked for preliminary injunction, and it seems like the time is kind of tight for a judge to make that decision. So what will we see between here and kind of your PDUFA date coming from the judge -- or coming from the case?

The only thing we can say is we don't expect this lawsuit to impact our plans. But the details of how this unfolds, et cetera, et cetera, are probably going to be fairly complicated and have a bit of a rollercoaster in terms of lots of activities, little activity, but that's all we have to say, Phil, at this point.

Operator, that's going to be the exit call. So I want to thank, everyone, for joining us for this call. As we mentioned before, if you give us a few minutes, we'll be in our office for follow-up questions.

Thank you, ladies and gentlemen. That concludes the presentation. You may all disconnect.