Regeneron Pharmaceuticals Inc

NASDAQ:REGN

Earnings Call Transcript 2017-Q4

[Operator]

Welcome to the Regeneron Pharmaceuticals Q4 2017 Earnings Conference Call. My name is Jason, and I will be your operator. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Also, please note this conference is being recorded.

I will now turn the call over to Manisha Narasimhan. You may begin.

[Manisha Narasimhan, Regeneron Pharmaceuticals, Inc.]

Thank you, Jason. Good morning, and welcome to Regeneron Pharmaceuticals' Fourth Quarter and Full Year 2017 Conference Call. An archive of this webcast will be available on our website under Events for 30 days. Joining me on the call today are Dr. Leonard Schleifer, Founder, President and CEO; Dr. George Yancopoulos, Founding Scientist, President and Chief Scientific Officer; 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 today include forward-looking statements about Regeneron. Such statements may include, but are not limited to, those related to Regeneron and its products and business, sales and expense forecasts, financial forecasts, development programs, and related anticipated milestones, collaborations, finances, regulatory matters, intellectual property, pending litigation 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 that statement.

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, 2017, which will be filed with the SEC later today. 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 calls. Information regarding our use of non-GAAP financial measures and a reconciliation of those measures to GAAP is available in our financial results press release, which can be accessed on our website at www.regeneron.com.

Once our call concludes, Bob Landry and the IR team will be available to answer further questions. With that, let me turn the call over to our President and Chief Executive Officer, Dr. Len Schleifer.

[Leonard S. Schleifer, Regeneron Pharmaceuticals, Inc.]

Thank you, Manisha, and good morning to everyone who has joined us on the call and webcast today. 2017 was a strong and significant year for Regeneron with important progress on clinical, commercial and regulatory fronts and solid financial results. We received regulatory approval for two important new drugs: Dupixent, an IL-4, IL-13 inhibitor for the treatment of moderate to severe atopic dermatitis; and Kevzara, an IL-6 receptor antibody for the treatment of rheumatoid arthritis. Both of these drugs have been approved in the U.S., Europe and Japan, with launches under way in several countries.

Our innovation engine continues to be productive. We currently have 15 product candidates in clinical development and expect to advance four to six new product candidates into the clinic this year. Our commercial pipeline and regulatory progress give us confidence that we are well positioned for sustainable, long-term growth. Importantly, two of our product candidates, dupilumab for allergic diseases and cemiplimab for cancer, each represent a single molecule with the potential for significant opportunities across multiple diseases and are truly pipelines within a product.

Turning now to EYLEA, I would like to address the demographic trends that continue to favor EYLEA, the opportunities in diabetic eye diseases which tend to be underdiagnosed and undertreated, an issue we plan to address, and our thoughts on some of the recent competitive developments. EYLEA has been in the market now for over six years in the United States and despite no price increase since launch, it has continued to deliver impressive growth.

EYLEA net sales grew 11% year-over-year in the U.S. and 19% year-over-year outside the U.S. Much of the recent growth in the U.S. was driven by demographic trends with an aging population, as well as an overall increase in the prevalence of diabetes. These demographic trends are expected to continue in the coming years, providing an opportunity for continued growth.

Focusing on diabetic eye diseases, currently the majority of patients with diabetic eye disease are underdiagnosed and undertreated, and even when they are treated, they may not be receiving optimal anti-VEGF therapy, which in several studies has been shown to be superior to laser therapy. Patients with diabetes are at risk for losing vision, because of diseased blood vessels in the eye. Vascular leak leads to retinal swelling and vision loss, or what is known as diabetic macular edema, a major indication where EYLEA is currently approved.

Based upon physician survey data, approximately between 25% and 30% of our total EYLEA net sales in the United States come from DME. It is estimated that only 8% of patients diagnosed with DME receive treatment with an anti-VEGF agent representing an important growth opportunity for EYLEA. The efficacy of EYLEA in DME has been proven over years in multiple studies including those performed by independent groups. As a reminder, data from the NIH-sponsored comparative effectiveness Protocol T have demonstrated at the end of one year when the primary endpoint was assessed, EYLEA treatment resulted in significantly greater gains in visual acuity compared to both Lucentis and Avastin, particularly in those who had vision worse than 20/40.

Diabetic retinopathy without diabetic macular edema, an indication we are investigating EYLEA in Phase 3, is another important and attractive opportunity. About 3.5 million people in the United States are diagnosed with diabetic retinopathy without diabetic macular edema. Of these, about 1 million patients have either proliferative diabetic retinopathy or severe non-proliferative diabetic retinopathy. And it is these patients who have the greatest unmet need and are at high risk for profound vision loss.

The majority of patients with proliferative diabetic retinopathy are currently being treated with pan-retinal photocoagulation or laser therapy. In the CLARITY study in patients with proliferative diabetic retinopathy published in The Lancet, EYLEA resulted in superior visual outcomes compared to laser treatment. We anticipate in the first half of the year, top line data from our Phase 3 study of EYLEA in diabetic retinopathy, followed by a potential regulatory submission later this year. In addition, the DRCR.net is also conducting an independent Phase 3 study of EYLEA in the diabetic retinopathy indication.

In addition to well established efficacy and safety, another important aspect for physicians and patients is to have flexible dosing regimen that includes monthly dosing for those patients who may benefit from more frequent dosing as well as having the flexibility to have a longer interval between doses. EYLEA provides this important flexibility for physicians and patients and is approved for monthly as well as every other month dosing.

In addition, we have submitted an sBLA for every three-month dosing in wet AMD and expect an FDA decision in August. As a reminder, in our Phase 3 studies, we demonstrated that about 50% of patients could be dosed every 12 weeks. We also continue to advance our preclinical research on extended release and gene therapy approaches.

We are focused on continuing to maintain our leadership position with EYLEA in the retinal space. Like you, we are well aware of emerging potential competitors for EYLEA. We will continue to execute on our long-term strategy, which includes growing the overall market, specifically in diabetic eye diseases, expanding the treatment interval options in the label and gaining approval in additional indications. We do not expect any new entrants until about the latter half of 2019. And even if approved, the first potential competitor will be limited initially to the wet AMD indication.

EYLEA has set a very high bar by demonstrating efficacy and safety across a spectrum of retinal diseases, both in company-sponsored as well as independently-conducted studies. The retinal community has deep experience with EYLEA with about 8 million injections given in the United States alone since launch. There has been significant concern and debate as to whether long-term treatment with anti-VEGF agents can maintain early vision gains.

For example, in a five-year follow-up of the NIH-sponsored CATT study comparing Lucentis and Avastin, early visual gains obtained with anti-VEGF agents were not maintained over the long term. And in fact, visual acuity reported at year five was below baseline levels prior to treatment and patients had lost on average over three letters compared to their original baseline, and 20% of patients had regressed to become legally blind.

Some have raised theoretical concerns that chronic VEGF inhibition in the eye might result in deleterious effects such as geographic atrophy. But in contrast to the observation with intraocular Lucentis and Avastin in CATT and the theoretical concerns about chronic VEGF inhibition, we have shown that chronic regular treatment with EYLEA results in visual gains that were maintained through four years of follow-up.

At the upcoming angiogenesis meeting at the Bascom Palmer Institute (sic) [Bascom Palmer Eye Institute], real-world data on visual acuity outcomes following treatment with intravitreal anti-VEGF agents will address the issue of whether underdosing is contributing to poorer visual outcomes over the long term.

As a reminder, a variety of retinal diseases are treated by the same specialists, who can choose which buy-and-bill products they want to use in their practice. We believe the extensive data, combined with real-world experience, broad label and treatment flexibility offered by EYLEA will make it an attractive treatment option for years to come. It will be quite a while before any emerging competitor can come close to matching the breadth of approved indications and the depth of long-term experience offered by EYLEA.

Two potential competitor programs you may have been hearing about are a bispecific Ang2 and VEGF antibody and a single-chain antibody fragment VEGF inhibitor, and many of our investors have asked for our thoughts on the competitive threats they pose. Both of these are studying higher molar concentrations of their drugs compared to the currently approved anti-VEGF drugs, with the primary goal of increasing visual acuity and/or extending the interval between injections.

For example, the doses being investigated with the bispecific RG7716 are between two to seven times the molar concentration of the Lucentis comparator in the trial. The single-chain antibody fragment, brolucizumab, also known as RTH258, studied doses that were up to 12 times the molar concentration of EYLEA. Despite this twelvefold increase in molar dose in both Phase 3 studies, the high dose of brolucizumab did not demonstrate superiority to EYLEA in terms of visual acuity, nor did it consistently extend the dosage interval to 12 weeks in all patients as almost half the patients failed quarterly treatments and had to be returned to more frequent dosing. Brolucizumab demonstrated statistical non-inferiority to EYLEA on vision in both studies. It was, however, slightly numerically albeit not statistically inferior to EYLEA on vision in both studies.

There is a known potential risk of arterial thromboembolic events following the intravitreal use of VEGF inhibitors as stated in our label as well as the Lucentis label. The Lucentis label additionally states that fatal events occurred more frequently in patients with diabetic macular edema and diabetic retinopathy at baseline who were treated with monthly Lucentis. Therefore, given the high molar doses studied by both potential competitors, it will be important to see the assessment by regulatory authorities regarding the balance of safety and efficacy that these new agents might provide, particularly in the elderly and in diabetics before we are able to evaluate the extent of competitive risk to EYLEA.

Turning to Dupixent, our drug for the treatment of moderate to severe atopic dermatitis, it continues to gain momentum in the ongoing launch. Global fourth quarter net sales of Dupixent were $139 million, representing a 56% increase compared to the third quarter of 2017. Apart from a dip in the early part of the year due to the holidays and required reauthorizations at the beginning of the year, we are continuing to see a strong weekly number of approximately 500 new-to-brand scripts as tracked by the NBRx number.

The prescriber number has increased to over 8,500 and the first renewal rate remains high at above 90%. The feedback from physicians and patients continues to be positive about the efficacy and safety of the product although we are hearing some frustrations about the processes that payers have put in place in order to get the prescription approved, even where formulary decisions have been made. We and our collaborator, Sanofi, are working to ensure that eligible patients have fair access to this important breakthrough medication.

Our market research indicates that some health care providers are prescribing Dupixent to their most severe patients, which suggests there is significant continued growth potential. We continue to work on raising patient awareness and on educating patients and health care providers about new treatment options as well as working on improving access. The launch of Dupixent outside the United States is under way with the drug now approved in several European countries and in Japan.

The emerging clinical data with dupilumab strengthened our belief that the IL-4/13 pathway is a key driver of several allergic or type 2 diseases. We have recently submitted a supplemental BLA for dupilumab in the uncontrolled asthma setting and expect a regulatory decision in the second half of this year. George will provide you with an update on the ongoing development programs with dupilumab in several indications. We, along our collaborator, Sanofi, have recently increased our financial commitment to these programs in an effort to accelerate and expand the dupilumab and IL-33 antibody programs. Bob will address the details of the financial agreement.

The launch of Kevzara for the treatment of rheumatoid arthritis is under way in the United States as well as in countries outside the U.S. On the access front in the U.S., we have payer contracts that took effect at the beginning of the year with some offering favorable positioning and market access for Kevzara. Outside the U.S., the drug continues to receive favorable reimbursement reviews and country-specific launches are under way.

Turning now to Praluent, we will be presenting data from the 18,000 patient ODYSSEY cardiovascular outcomes study on March 10 at the meeting of the American College of Cardiology. To be clear, the study has not yet been unblinded. We believe that the PCSK9 inhibitor class holds tremendous promise despite the slow initial uptake, and we look forward to providing you with additional information after the outcomes data become available.

2018 will be an important year for Regeneron with several significant events anticipated, including two new potential approvals, dupilumab in asthma and cemiplimab, our PD-1 antibody in advanced cutaneous squamous cell carcinoma, which will mark our entry into the exciting and rapidly evolving field of immuno-oncology. We anticipate completion of the cemiplimab BLA submission in the first quarter and are preparing for the launch. While our initial indication will be advanced cutaneous squamous cell carcinoma, additional studies are either under way or planned in several other indications, including first and second line non-small cell lung cancer and cervical cancer.

As recently announced, we along with our collaborator, Sanofi, have increased our investment in immuno-oncology with the aim of advancing and accelerating these important programs. On the corporate front, we have recruited a new head of commercial who will be joining us later in the quarter.

With that, I would now like to turn the call over to George.

[George Damis Yancopoulos, Regeneron Pharmaceuticals, Inc.]

Thank you, Len, and a very good morning to everyone who has joined us today. As Len mentioned, 2018 is shaping up to be a very busy and important year for Regeneron. I'd like to begin with Dupixent in atopic dermatitis where the drug is currently approved for use in adult patients. However, there is an unmet need in pediatric atopic dermatitis patients where the current treatment options are limited.

We are conducting three Phase 3 studies in atopic dermatitis in children between the ages of 6 months and 17 years. The first of these in children between the ages of 12 and 17 years is fully enrolled, and we expect to report data by midyear and submit a supplemental BLA in the United States in the second half of the year.

In asthma, we have reported positive data from three separate pivotal studies of dupilumab with profound benefits on the two major endpoints of exacerbations and improvement in lung function as measured by FEV1. These improvements were observed in the overall population and were even more pronounced in the patient population with a more allergic phenotype as defined by biomarkers such as eosinophils corresponding to approximately half of the patients in these studies.

One of our pivotal studies was conducted in a severe patient population that was dependent on oral steroids. In this severe population, patients treated with dupilumab saw significant reduction in their exacerbations as well as improvements in their lung function. These findings were even more striking since more than half the patients in this study were able to completely eliminate their use of oral steroids. We, along with our collaborator, Sanofi, have submitted a supplemental BMA (sic) [BLA] (18:53) in the asthma indication and look forward to a regulatory decision in the second half of the year.

A Phase 3 study of dupilumab in pediatric asthma patients between the ages of 6 and 11 years is ongoing. We have compelling Phase 2 data for the use of dupilumab in other allergic indications as well, including nasal polyps and eosinophilic esophagitis, and have scientific rationale to believe that dupilumab could be used in several additional indications including food and inhaled allergies.

Two Phase 3 studies of dupilumab in nasal polyps are now fully enrolled, and we expect top line data at the end of the year. Our positive Phase 2 data in eosinophilic esophagitis was believed to result from unidentified food allergies, bolsters our belief that dupilumab has the potential to be used in food allergies themselves. This was further supported by our preclinical models which have shown that dupilumab accelerates and improves desensitization to food allergens.

Our first study in people with food allergy will be with peanuts and conducted in collaboration with Aimmune Therapeutics. We expect to initiate this Phase 2 study in the second half of the year. We also expect to initiate a Phase 2 study of dupilumab for desensitization of patients with allergies to airborne allergens later this year.

One of the most exciting opportunities and benefits that dupilumab can provide to patients is that it may be able to simultaneously address multiple manifestations of allergic disease in the same patient. As has been widely appreciated previously, and as confirmed in many of our own studies, patients suffering from one allergic disease often suffer from another. For example, in our atopic dermatitis program, about 40% of the patients had asthma and up to 50% of the patients had allergic rhinitis.

In initial attempts to explore such opportunities in allergic patients, we recently reported in the Journal of Allergy and Clinical Immunology that dupilumab significantly improved allergic rhinitis associated nasal symptoms in patients with uncontrolled persistent asthma.

Regeneron 3500, our antibody to the interleukin 33 ligand, is an exciting program that we believe has the potential both on its own as well as in combination with dupilumab to bring benefit to patients. Research performed by our Regeneron Genetic Center team has provided genetic validation for interleukin 33 as a strong target.

For example, there are common gain-of-function variants in interleukin 33 that increase the risk of asthma, while loss-of-function mutations conversely decrease the risk. Preclinical data that we have generated has shown that IL-33 could work in a manner that is complementary to dupilumab. We're currently planning studies of this IL-33 antibody in asthma, COPD and atopic dermatitis.

I'd like to turn now to immuno-oncology, which continues to be one of the most exciting areas of development for us and where we have adopted a multipronged approach encompassing checkpoint inhibitors such as cemiplimab, our PD-1 antibody, bispecific antibodies as well as other modalities. Having multiple approaches available under one roof will give us the flexibility and nimbleness to explore the use of combination therapies.

We view cemiplimab as the foundational therapy upon which we will build additional combinations in a thoughtful and logical manner. Our recent positive study with cemiplimab in patients with advanced cutaneous squamous cell carcinoma, most of whom had failed surgery and multiple lines of prior therapies, demonstrated an impressive response rate of 46%, which is among the highest observed to-date with a PD-1 targeting agent in solid tumors.

Importantly, a majority of the responses were durable. The safety profile observed has been generally consistent with this class. Based on these data, we expect to complete our regulatory submission to the FDA by the end of the first quarter, with the European Union submission expected in the first half. Cemiplimab has been granted breakthrough designation status by the FDA for cutaneous squamous cell carcinoma.

Because of the intense activity in the PD-1/PD-L1 space with over 1,000 ongoing clinical studies, many were surprised that we were able to identify an important unmet medical need setting that yielded such robust demonstration of activity and which has provided us with a fast-to-market opportunity. To be clear, we view cutaneous squamous cell carcinoma as a significant and important opportunity on its own. However, and just as importantly, this cancer setting allowed us to obtain a foothold into the arena of immuno-oncology and we hope will establish cemiplimab as a foundation for our future combination approaches.

We're also making significant progress with cemiplimab in our other indications such as first and second line non-small cell lung cancer, and several other settings where we either have ongoing or planned studies. We're exploring the use of cemiplimab both as monotherapy and also in combination with other molecules such as our own additional checkpoint inhibitors, immunomodulator such as CD38 and multiple vaccine approaches, and perhaps most interestingly, in combination with molecules coming from our bispecific platform.

Speaking of our bispecific technology, we think it can offer opportunities related to those seen with cell-based therapies such as the CAR T approaches. We believe if our bispecifics can approach the level of activities seen with the CAR Ts, their ease of production and administration, which is more akin to that of traditional biologics, might provide a major advance for patients. Our lead program here, a CD20/CD3 bispecific continues to advance in the clinic. After careful dose escalation process to mitigate the side effects of cytokine release syndrome, we have recently reported dosing levels that have achieved 50% response rates without any dose limiting toxicities. And we continue dose escalation.

We are encouraged by the activity that we are observing at these higher dose levels and look forward to reporting these data as they mature at a future meeting. We expect to move two additional CD3 bispecific candidates into the clinic this year, a bispecific antibody to MUC16 and another to BCMA.

Fasinumab, our Phase 3 NGF antibody program for pain continues to advance in the clinic with Phase 3 studies, in osteoarthritis and chronic lower back pain. We don't have time to discuss all of our early stage programs or the additional candidates that we plan to advance into clinical development this year. However, one early stage program that I would like to highlight is the combination of our activin A and GDF8 antibodies. Regeneron scientists made the discovery that activin A might be as, if not more, important than GDF8, also known as myostatin, for controlling muscle mass in primates.

Consistent with this, we recently announced that a combination of our activin A and GDF8 antibodies resulted in dose dependent increases in muscle volume of up to 8% after a single dose in normal healthy volunteers with an acceptable safety profile. We're expecting to commence follow-up clinical studies of this combination. As a reminder, we're also studying our activin A antibody alone as monotherapy in the ultra-orphan disease, fibrodysplasia ossificans progressiva or FOP.

Lastly, I want to take a moment to comment on our recently announced consortium of biopharma companies to help fund the study of (26:30) 500,000 individuals in the United Kingdom Biobank. The Regeneron Genetics Center expects to carry out and complete this work by the end of next year, providing a near-term treasure trove of genetic insights, coupled with clinical imaging and other rich genotype data which is available in the UK Biobank. Importantly, these results will be made available publicly, providing the first such big data research resource that all researchers worldwide will have access to.

Many believe that this will serve as a great accelerant for both academic and biopharma research. We think it makes a great statement that so many from the biopharma community have stepped forward to help co-fund this effort including, AbbVie, Alnylam, AstraZeneca, Biogen and Pfizer.

And with that, I would like to turn the call over to Bob Landry.

[Robert E. Landry, Regeneron Pharmaceuticals, Inc.]

Thank you, George, and good morning, everyone. Regeneron posted strong fourth quarter 2017 financial results. We finished the year with continued sequential growth within our global EYLEA franchise, positive momentum with our U.S. Dupixent launch, the execution of several business development transactions and expanded funding for cemiplimab and dupilumab under our Sanofi collaboration.

In the fourth quarter of 2017, we earned $5.23 per diluted share from non-GAAP net income of $607 million. For the full year 2017, we earned $16.32 per diluted share from non-GAAP net income of $1.9 billion. This represents a year-over-year increase in non-GAAP diluted EPS and net income of 72% for the fourth quarter, and a year-over-year increase of 44% in non-GAAP diluted EPS and net income for the full year of 2017.

Regeneron's fourth quarter 2017 non-GAAP net income excludes non-cash share-based compensation expense, the $25 million upfront payment made in connection with our agreement with Decibel Therapeutics, the income tax effect of non-GAAP reconciling items, and a onetime provisional charge related to enactment of the Tax Cuts and Job Act (sic) [Tax Cuts and Jobs Act], a full reconciliation of GAAP to non-GAAP earnings is set forth in our earnings release which can be found on our website.

Total revenues in the fourth quarter of 2017 were $1.58 billion and $5.87 billion for the full year 2017, which represented year-over-year growth of 29% for the three months ended December 31, 2017, and 21% for the full year of 2017.

EYLEA net product sales in the United States were $975 million in the fourth quarter of 2017 and $3.7 billion for the full year of 2017, compared to $858 million in the fourth quarter of 2016 and $3.32 billion for the full year of 2016, which represents an increase of 14% and 11% respectively. U.S. EYLEA distributor inventory experienced a slight increase as compared to the third quarter of 2017, yet remained within our normal one- to two-week targeted range.

Ex-U.S. EYLEA net product sales, which are recorded by our collaborator, Bayer, were $637 million in the fourth quarter of 2017, representing a 28% increase over the fourth quarter of 2016 on a reported basis and 23% on a constant currency basis. For the full year of 2017, global EYLEA net product sales were nearly $6 billion.

In the fourth quarter of 2017, Regeneron recognized $231 million from our share of net profits from EYLEA sales outside the United States and $802 million for the full year of 2017. Total Bayer collaboration revenue for the fourth quarter of 2017 was $297 million and $938 million for the full year of 2017. In the fourth quarter of 2017, the company reported that the results from two Phase 2 studies of EYLEA, in combination with nesvacumab, an antibody to ANG2 did not provide sufficient differentiation to warrant Phase 3 development. Consequently, Bayer collaboration revenue in the fourth quarter of 2017 includes $37 million of revenue related to the acceleration of the recognition of deferred revenue from the upfront payment previously received from Bayer.

Total Sanofi collaboration revenue was $200 million for the fourth quarter of 2017 and $877 million for the full year of 2017. The Sanofi collaboration revenue line item primarily consists of reimbursement of Regeneron-incurred R&D expenses, reimbursement of Regeneron-incurred commercialization-related expenses, and the recognition of deferred revenue from the antibody and immuno-oncology upfront payments, partly offset by our share of losses in connection with the commercialization of antibodies.

Global sales of Dupixent, Praluent and Kevzara, as recorded by our collaborator, Sanofi, for the fourth quarter of 2017 were: Dupixent, $139 million; Praluent, $63 million; and Kevzara, $9 million. For both Dupixent and Kevzara, the sales were almost exclusively U.S.-based.

Despite higher Dupixent and Praluent sales in the fourth quarter of 2017, our share of losses in connection with commercialization of Dupixent, Praluent and Kevzara was $114 million, compared to a loss of $126 million in the fourth quarter of 2016. As a reminder, we anticipated a higher Alliance loss in connection with the commercialization of antibodies in the fourth quarter of 2017 versus the third quarter as the Alliance's profitability was negatively impacted this quarter by increased global launches to support Kevzara and Dupixent.

Regeneron's share of losses in connection with the commercialization of antibodies for the full year 2017 was $443 million as compared to losses of $459 million for the full year 2016.

The fourth quarter 2017 Sanofi collaboration revenue did benefit from an acceleration of the recognition of deferred revenue in connection with the termination of the Antibody Discovery Agreement on December 31, 2017. However, as mentioned during last quarter's call, the $130 million of 2017 annual funding from Sanofi under the Antibody Discovery Agreement was fully utilized during the first nine months of 2017, which attributed to the lower reimbursement of Regeneron R&D expenses realized this quarter as compared to the first three quarters of 2017.

In the fourth quarter of 2017, other revenue was $107 million versus $52 million during the fourth quarter of 2016. This increase was primarily due to the reimbursements from our collaborator, Teva, for the development of fasinumab along with a $35 million fasinumab development milestone the company earned and recognized into revenue. For further details you can find a summary of the full year components of other revenue in the MD&A section of our 10-K, which will be filed later today.

Turning now to expenses. Non-GAAP R&D expenses was $444 million for the fourth quarter of 2017 and $1.78 billion for the full year of 2017. Our non-GAAP unreimbursed R&D expense, which is calculated as the total non-GAAP R&D expense less R&D reimbursements from our collaborators, was $265 million for the three months ended December 31, 2017, and $877 million for the full year 2017. Our press release includes all the information that is required to calculate unreimbursed non-GAAP R&D expense. For 2018, we'd like to reaffirm our previously provided guidance for non-GAAP unreimbursed R&D to be in the range of $1.23 billion to $1.33 billion.

Next, non-GAAP SG&A expense was $348 million for the fourth quarter of 2017 and $1.11 billion for the full year 2017. As noted, on our November 2017 earnings call, we realized a higher SG&A spend level in the fourth quarter of 2017 as compared to the first three quarters of 2017, primarily due to incremental spend on our two recently launched products, Dupixent and Kevzara, an increase in commercialization related expenses associated with EYLEA as well as prelaunch expenses for the anticipated 2018 U.S. approvals for cemiplimab in cutaneous squamous cell carcinoma and dupilumab for asthma. The increased 2017 fourth quarter spend was also influenced by the acceleration of discretionary expenses to secure tax deductions in 2017.

We reaffirm our previous guidance for non-GAAP SG&A expense in 2018 to be in the range of $1.35 billion and $1.45 billion. The increase in our forecasted 2018 non-GAAP SG&A expense is primarily driven by increased commercial support for Dupixent, both atopic dermatitis and potential asthma indication, EYLEA with an increased focus on diabetic eye disease, Praluent which incorporates increased spending post ODYSSEY OUTCOMES results and cemiplimab.

Sanofi reimbursement of Regeneron commercialization related expenses, a line item found within Sanofi collaboration revenue, was $118 million for the fourth quarter of 2017 and $369 million for the full year of 2017. We reaffirm our full year 2018 guidance for Sanofi reimbursement of Regeneron commercialization related expenses in 2018 to be in the range of $450 million and $500 million.

Non-GAAP cost of goods sold and non-GAAP cost of collaboration and contract manufacturing increased for the fourth quarter 2017 compared to the same period in 2016 primarily due to drug substance manufacturing costs associated with the sales of Dupixent and increases in Limerick's manufacturing start-up costs which were anticipated. We are pleased to report that in December 2017, our facility in Limerick underwent a successful FDA preapproval inspection, resulting in a license to manufacture Praluent for the U.S. market.

Turning now to taxes. Our effective tax rate was 69% and 42% for the fourth quarter and full year 2017, respectively, as compared to approximately 26% and 33% for the fourth quarter and full year 2016. The effective tax rate for both the fourth quarter and full year 2017 was negatively impacted by the provisional charge related to the remeasurement of the company's U.S. net deferred tax assets upon the December 2017 enactment of the Tax Cuts and Jobs Act, partly offset by the tax benefit associated with stock-based compensation.

Excluding the impact of the Tax Cut and Jobs Act, our effective tax rate would have been 10% and 27% for the fourth quarter and full year 2017. For the full year 2018, we are reaffirming our guidance for our effective tax rate to be in the range of 15% to 19% which includes the estimated impact of the Tax Cuts and Jobs Act. As discussed at the JPMorgan conference last month, the 2018 benefit that we expect to realize from U.S. corporate tax reform is being reinvested into the business by increasing our investment in research and development and additional expansion of our U.S. facilities to support future growth. This has been incorporated into our 2018 guidance.

From a cash flow and balance sheet perspective, we ended the fourth quarter of 2017 with cash and marketable securities of $2.9 billion and generated full year free cash flow in excess of $1 billion. Our capital expenditures for the full year 2017 were $273 million. As we enter 2018, we are reaffirming our previous capital expenditure guidance of between $420 million and $500 million. Our principal driver of increased capital expenditures in 2018 is for the expansion of a portion of our facilities at our Rensselaer, New York manufacturing location as well as expenditures for our Limerick manufacturing facilities, and continued expansion and renovation of our laboratory space within our Tarrytown, New York facilities.

Finally, as announced in early January, Regeneron and Sanofi agreed to accelerate and expand the investment for the clinical development of cemiplimab to a minimum of $1.64 billion, an increase of nearly $1 billion over the budget set forth in the original immuno-oncology licensing collaboration agreement and to allocate additional funds to certain activities relating to the development of dupilumab and Regeneron 3500, our IL-33 antibody.

As part of the agreement, the company agreed to grant a limited waiver of the lockup in the amended and restated Investor Agreement so that Sanofi may sell up to an aggregate of 1.4 million shares of Regeneron common stock through the end of 2020, representing approximately 6% of the shares of Regeneron common stock Sanofi currently owns. If we do not elect to repurchase such shares from Sanofi, Sanofi may sell the applicable number of shares subject to certain daily and quarterly limits in one or more open market transactions.

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

[Manisha Narasimhan, Regeneron Pharmaceuticals, Inc.]

Thank you, Bob. Jason, that concludes our prepared remarks. We'd now like to open the call for Q&A.

[Operator]

Thank you. And our first question comes from Alethia Young from Credit Suisse.

[Alethia Young, Credit Suisse Securities (NYSE:USA) LLC]

Hey, guys. Thanks for taking my question. I just want to talk a little bit more about immuno-oncology. It seems like it's kind of under-appreciated when we talk to investors, but can you talk a little bit more about your PD-1 strategy and your bispecific strategy? How does it all fit together, and maybe just a little bit more color on what you're doing in BCMA? Thanks.

[Leonard S. Schleifer, Regeneron Pharmaceuticals, Inc.]

George?

[George Damis Yancopoulos, Regeneron Pharmaceuticals, Inc.]

Sure. We're very excited obviously about our PD-1 program and that, as we noted, I think we surprised a lot of people by finding an important indication, which was very responsive to our antibody and where we're hoping to get a rapid approval. And as we've said, we think this setting is actually a pretty important one, perhaps on par with that of melanoma and with substantial growth opportunity. But as we also said, we think that not only is it an important indication in and of itself, but it serves as a foundation to have our PD-1 antibody serve as a foundation for combination approaches going forward.

We have a series of additional combination opportunities, some of which we've already initiated, whether it'd be with things like a variety of vaccines, in many cases that we're partnering with, or with additional checkpoint inhibitors that we've developed internally. But perhaps we're most excited about our bispecifics. As we've noted, our first bispecific is finally getting to dosing levels that are showing pretty substantial efficacy in our early trials. And we think if our bispecifics start approaching, which we think they're beginning to, the sort of type of responses that people are reporting with CAR Ts, they could really represent a very, very important opportunity.

And the thing that's also exciting about it is, our strategy includes both combining our bispecifics with our PD-1 as well as our bispecifics with each other. We have a number of bispecifics that at least, in our preclinical model, look like they can be additive, if not synergistic in their responses. And because these are all coming from our laboratories and we have the abilities to study them preclinically as well as the ability to expedite studying them clinically, we think this offers an enormous opportunity for us to really try these combinations and look for advances that they can actually provide together.

So, for us, it's a very exciting opportunity. We think we already have our foothold, as we said, and we hope in the near future to be establishing, not only our first bispecific but a series of additional bispecifics as we said where we will be putting at least two in the clinic this year and a whole series of them shortly thereafter. So we think it's an exciting time, and it's a lot of opportunity.

[Manisha Narasimhan, Regeneron Pharmaceuticals, Inc.]

Operator, next question please.

[Operator]

Thank you. Next, we have Geoffrey Porges from Leerink Partners.

[Geoffrey C. Porges, Leerink Partners LLC]

Thanks very much, and I appreciate the question. A financial one and an R&D one quickly. Bob, on the SG&A, it stepped up significantly and you highlighted that, and it looks as though it's going to be annualizing in 2018 as much the same rate as Q4. Could you talk about what the drivers are there? Have you sort of stood up your sales forces yet for both asthma and for the PD-1? And is there any sense that you might be able to redeploy some of your commercial expense away from Praluent over towards Dupixent, some of those other opportunities perhaps tighten up on that SG&A ratio? And then, quickly, just George, could you tell us what sort of dosing you expect to be likely for your bispecifics that you've learnt more about the characteristics of the first one?

[Robert E. Landry, Regeneron Pharmaceuticals, Inc.]

Sure, Geoff. I'll answer the first one. And probably something that we haven't given a ton of color about, but with regards to kind of our fourth quarter SG&A spend, we always kind of get this annual seasonal EYLEA increase as we have to kind of reauthorize the insurance coverage and the reverification processes that have again. Obviously, the docs like this, so when the EYLEA patients come in the early January, the insurance is already in place and this is not a kind of a whole new start for them. So we do incur a decent amount of incremental spend that you don't necessarily see during the first three quarters in 2017 in the fourth quarter. And again, we did something similar in 2016.

Again, as we incurred in the fourth quarter of 2017, we are picking up spend for Kevzara and Dupixent. Again, after controlling Praluent for the first three quarters, we did additionally have an increase in Praluent fourth quarter spend. And as I alluded to, we did accelerate, Geoff, some 2017, in particular, G&A expenses into the fourth quarter. That probably ideally would have been a January incurrence. So, again, that's creating a little bit of the bump that you're seeing when you compare to the first three quarters of 2017.

As we get into 2018, again, we're putting a lot of money with regards to Dupixent in atopic dermatitis. We also have a lot of money laid out with regards to the launch of ASTHMA, which as you know, is going to be a very, very competitive field. And again, we continue on with Kevzara and we're assuming positive ODYSSEY OUTCOMES results on Praluent and we're putting the necessary dollars behind that.

[George Damis Yancopoulos, Regeneron Pharmaceuticals, Inc.]

Okay. And, Geoff, this is George. Just regarding to your question about the bispecifics, I think that a couple of very important things that we learned, and I think these are some of the reasons why this is such an attractive class and in particular may offer some advantages over some of these cellular therapy approaches, where a lot of the major concern is controlling the cytokine release storm and other adverse events in which the cells might be attacking the host. Most importantly, we've learned that we can actually gradually up the dose in time in an individual patient. So we can start with a lower dose, gradually remove the target, and so we don't get an immediate blast of cytokine release storm. And then we continue to dose up. And we've now gotten up what we reported recently at ASH, our doses between 5 milligrams to 8 milligrams in terms of efficacy, where we reported these efficacy numbers of about 50% response rates and we also reported there that we had gotten to 12 milligram as a dose and we reported the safety profile there, but now we've even gone further beyond that dose.

These are still relatively low doses compared to standard biologics, but we've certainly seen that it seems like it really dramatically ups the efficacy range when you get to these levels. But I think a huge advantage here is understanding that you can gradually increase the dose and this way you really ameliorate the onset of these adverse events and you can keep them under control and then get up to the higher doses.

And then, of course, another major advantage is, if need be, you can back off the dose if you actually have to. But as a class now, I think that we understand the doses that we have to get to for efficacy, but also how to gradually get to those doses in an individual patient so that they can be well-tolerated.

[Geoffrey C. Porges, Leerink Partners LLC]

Great. Thanks very much.

[Manisha Narasimhan, Regeneron Pharmaceuticals, Inc.]

Next question, please.

[George Damis Yancopoulos, Regeneron Pharmaceuticals, Inc.]

(47:58) I had a question for Geoff, by the way. I remember you said, oh, if in our muscle program we produce 5% to 10% increases in muscle mass, you'd get pretty excited. So what do you think about that?

[Leonard S. Schleifer, Regeneron Pharmaceuticals, Inc.]

He has no time to answer. Right now, he's already shut out of the line. Next question.

[Operator]

Thank you. And next we have Chris Raymond from Piper Jaffray.

[Christopher J. Raymond, Piper Jaffray & Co.]

Thanks. Had a question on fasinumab and also Kevzara, if you don't mind. So just on fasinumab, just looking at the long-term safety study in way of the knee (48:32), I think, which looks to be reading out this year. I wonder if you could maybe put some brackets around the sort of margin of error on the safety side in terms of what you think will be acceptable in light of the need for obviously non-opioid alternatives. And then also on Kevzara, I think it's fairly clear now that offering a lower cost is not necessarily an important thing for payers and PBMs, especially in the immunology space and in fact may even hurt you. Just wondering if you can talk about what can be done now with Kevzara to inflect that revenue curve upward. Thanks.

[Leonard S. Schleifer, Regeneron Pharmaceuticals, Inc.]

Right. So maybe George will comment on the NGF and, this is Len, I'll take the Kevzara question.

[George Damis Yancopoulos, Regeneron Pharmaceuticals, Inc.]

Right. As you said, the story with NGF we think is one where there's an enormous opportunity balanced by a significant risk. I think a lot of people are aware of the risk about this issue of potentially accelerating arthritis in some patients and the question is the degree of tolerance of this acceleration. And remind you, one of the theories for this acceleration may simply be that when you cause pain relief, people over-use their joints but still the mechanism is not that well understood. In terms of the benefit/risk profile and understanding what could be tolerated, we can't answer that exactly, but we think that what we're using as a sort of barometer is that these patients are already late stage patients, who are in many cases candidates for total joint replacements. So I think that that's a good way to sort of gate the adverse events and how they're impacting.

If overall, you're not causing an increase in the total number of joints that are adversely affected to the point where you need to get a total joint replacement and, if anything, if maybe you're preventing such events, while in some patients you're causing this acceleration, I think that would be considered a favorable benefit/risk profile if overall in the vast population you're relieving pain. So if you're relieving pain in the large percentage of the population and you're not contributing or, if anything, you're preventing total joint replacements, I think that would be viewed as a profound positive.

[Leonard S. Schleifer, Regeneron Pharmaceuticals, Inc.]

As to the Kevzara question, we refuse to believe that a drug with the strong profile that Kevzara has and the favorable pricing that we have offered cannot make sense in an environment where cost of medicines is a major concern. We applaud the actions of CVS, who gave us – who recognized that and gave us a good position on the formulary. We would be very disappointed and we'll be very vocal if it can't be that a drug with such good properties and such favorable pricing can't make strong headway. So we've got our work cut out. Our new head of commercial is up to the challenge and so we will report back to you as we go.

[Manisha Narasimhan, Regeneron Pharmaceuticals, Inc.]

Next question, please.

[Operator]

Thank you. Next we have Ying Huang from Bank of America Merrill Lynch.

[Ying Huang, Bank of America Merrill Lynch]

Hi. Good morning. Thanks for taking the questions. First one maybe on ODYSSEY OUTCOMES study since it's going to read out soon. Your competitor Repatha did not show any benefit in cardiovascular mortality. So how important do you think it will be for your drug Praluent to show that benefit? And then secondly, can you talk about life-cycle management strategy for EYLEA now that it seems Ang2 is not going to be going forward into Phase 3? Thank you.

[George Damis Yancopoulos, Regeneron Pharmaceuticals, Inc.]

Sure. So just to cover ODYSSEY, I don't think that it's worth, Ying, speculating too much on what this result or what that result might be since we don't know the results, but we'll know the results by the March 10 ACC event. So I think we'll all look at the events together basically and we'll be able to judge then. About EYLEA.

[Leonard S. Schleifer, Regeneron Pharmaceuticals, Inc.]

In terms of EYLEA, let me just say that I think we've tried to highlight a couple of things. People ask us a lot about competition. I think it takes a lot to compete in this space. You need a drug that can be given as safely and effectively. You need a drug that can be given as frequently as monthly because patients who turn out that every other month is not enough, doctors desperately want to be able to give them monthly and you need to have that in the label so you can get reimbursed for that higher dosing. You need a drug that has evidence of the long-term maintenance of vision, which has been a question in this field, and you need a drug that has all the indications covered.

The new entrants have yet to start or are only about to start Phase 3 trials. The RTH258 is just about to start or maybe just getting under way in terms of a DME and so they'll be coming to market sometime we believe in 2019 based on their disclosures which would come to market without, as far as we can tell, a monthly label so you can't use it monthly and without a DME label since they haven't even started their Phase 3 trials.

And, of course, when we developed EYLEA we struck a very careful balance which is what we tried to emphasize between safety and efficacy. When you give these anti-VEGF agents in the eye, they go into the systemic circulation. In fact, the very doctor who presented the RTH258 data was the one who was most critical that he didn't want to give our drug to his grandmother because of some subset and the risk of some systemic thromboembolic event.

When you now start to give 6 to 12 times the molar dose into the eye, it's hard to ignore the fact that safety, particularly for example in diabetics, which hasn't been evaluated yet, and the careful safety evaluation that the agency will give that's going to be an important part of this whole formula. So I don't think that the – the demise of EYLEA I think has been greatly exaggerated as the saying goes.

But in terms of following on, we too struggle when you've got to the heart of a disease which is excess VEGF causing leakiness of blood vessels, and you can block VEGF so exquisitely, you're not going to get too much down the road by adding other agents. We looked at Ang2. Others looked at PDGF. We looked at it. We didn't see a difference. It would not surprise us if the bispecific from Roche showed some nice activity because they're testing against 0.3 milligrams of Lucentis at a strong multiple of that dose.

In terms of our own efforts, we've got as we mentioned preclinical work ongoing in formulation to give you longer-term delivery of EYLEA as well as gene therapy. But at the end of the day, we all got to this field got to the heart of this disease pretty quickly, and that's why it's been hard for anybody to surpass these very powerful anti-VEGF agents. George, you want to add to that a little?

[George Damis Yancopoulos, Regeneron Pharmaceuticals, Inc.]

Yes. I just want to build on that just a little bit. We have been working very hard for a very, very long time, more than 20 years now, to build on the benefit that EYLEA provides. And obviously, it's been hard because the bar has been set so high with EYLEA, and I think Len referred to the data. Just imagine that.

I mean, with brolucizumab, they gave 12 times the molar dose of EYLEA, and they could not demonstrate any advantages vis-à-vis their primary endpoint visual acuity. In fact, as Len mentioned, they were numerically inferior in both studies. And they couldn't also extend substantially on the interval meaning that almost half their patients failed their quarterly interval. So that allows them to maybe allow to have about 50% of the people or so on quarterly dosing, which is just like EYLEA.

So EYLEA has such a high bar, and the only way that so far people are trying to address it is by giving much, much higher molar doses and these molar doses are not really achieving demonstrable, at least in terms of visual acuity or in terms of interval, any advantages. And I think it just shows the bar has been set very high, and I think the flip side is the safety concern.

And when you have something that you have such a long track record with safety, and with also long-term demonstration of ability to maintain the visual gains. That's something else that Len referred to. There's no other agents which have been shown in long-term studies to actually maintain the initial vision gains. That's a very, very high bar, and when Len refers to treating relatives or parents, I think that right now EYLEA would certainly for me be the drug of choice based on the safety and efficacy profile to be treating anybody that I care about.

[Ying Huang, Bank of America Merrill Lynch]

Thank you.

[Manisha Narasimhan, Regeneron Pharmaceuticals, Inc.]

Operator, we have time for one last question. I know there are many people in the queue, who we're not going to be able to get to on the call, but please send me an e-mail and we'll follow up with you after the call.

[Operator]

We have Cory Kasimov from JPMorgan.

[Cory W. Kasimov, JPMorgan Securities LLC]

Hey. Good morning, guys, and thanks for the question. I actually had two of them regarding Dupixent. First, I'm wondering if you could talk more about the payer process for Dupixent that's led to some of the frustration you mentioned in your prepared remarks. Curious what's maybe new or different there. Is it unforeseen step that it's prior auth or something else and kind of how you see this dynamic evolving over the course of the year?

And then the second part of the Dupi question is asking just about the relative breakdown of atopic dermatitis patients between adults, adolescents and pediatrics. I know you just started the ped Phase 3, but how much of an interim boost might that adolescent patient population represent given that you'll have Phase 3 data there in 28 (59:05). And is this also a population where you still see a lot of the comorbidities that are so common in pediatric patients? Thanks a lot.

[Leonard S. Schleifer, Regeneron Pharmaceuticals, Inc.]

Thanks, Cory, for the questions. On the second one, we don't have a quantitative answer for you at this time in terms of what we might see the uptake in pediatrics or adolescents, but we do know there are a lot, a lot of patients there. But until we get the label and et cetera, et cetera, and able to promote it, we really can't give you too much of a feel.

In terms of the frustrations we mentioned, the process that Sanofi and Regeneron have undertaken has actually gone very well. Remember we had very rapid coverage from CVS and Express Scripts, almost first day coverage there, literally. And we have continued to grow. In summary 80%, 85% of the plans have made some sort of a decision already on coverage. So we're doing well on that.

The frustration I was referring to was that we still hear that, unfortunately and regrettably, and we hope to shine a light on that – perhaps we should start a hashtag, #deniedRx. But people, despite being on the right side of the need, the appropriate patients, failed all the right agents and then some, the paperwork has gotten frustrating because I think payers are concerned about the size of this class. And in some cases, they're using their standard tricks. We're going to have to figure out ways to fight back. If somebody wants to tweet about Rx, #deniedRx, it would be okay with me. We'd love to collect some of these stories and hear about how the paperwork has been – or the denials have been unfair.

We're not suggesting there's a new problem out there that's unique to Dupixent. This is an industry-wide problem that the payers are making it tougher. Praluent is a very good example. Payers are making it very tough for doctors to fill out the forms. We've made some progress now and some of the payers certainly are acting responsibly. It's not a monolith out there. And we want to get as many people on the drug who should be on the drug, and make that process as easy as we can.

Thanks, Cory.

[George Damis Yancopoulos, Regeneron Pharmaceuticals, Inc.]

Well, we should just add that just to remind you, you said we were early in our program with the pediatric atopic dermatitis. One of our Phase 3 studies is fully enrolled and for the 12 to 17 age group, we hope to submit a supplemental BLA by the end of this year. So we're hoping that that opportunity is, in terms of benefiting the younger patients, is going to be pretty forthcoming.

[Manisha Narasimhan, Regeneron Pharmaceuticals, Inc.]

Operator, that concludes our call for today. And as I mentioned, we'll be available in our office for follow-up questions.

[Operator]

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating, and you may now disconnect.