Leonard S. Schleifer – President and Chief Executive Officer
Jason Kantor – Credit Suisse Securities
Regeneron Pharmaceuticals Inc. (REGN) Credit Suisse Healthcare Conference Call November 14, 2012 9:30 AM ET
Jason Kantor – Credit Suisse Securities
Good morning. Good morning, and welcome to the Credit Suisse Healthcare Conference. My name is Jason Kantor. I'm the newest biotechnology analyst on the platform. And of course that means they make me go first in the morning. It's really my great pleasure to introduce the first company of the day, which is Regeneron Pharmaceuticals. I've known this company for a long time and they've got a special relationship with Credit Suisse. And for those of you who have been following the story, it's been a remarkable several years, and a remarkable last 12 months. And it's my pleasure to welcome to the podium Leonard Schleifer, who is the CEO of Regeneron. Len?
Leonard S. Schleifer, M.D., Ph.D.
Thank you, Jason. It’s great to be here. Thanks to all of you for getting up nice and early to hear our talk. Before I get started, of course let me remind you that we will be making some forward-looking statements. So I would encourage you to study our risk factors, which you can find on our website with our SEC filings, or ask Dr. Aberman or Mr. Goldberg, who are here, who can provide you how to get those. We go to a lot of different conferences.
I can honestly say this happens to be my favorite conference, not because it's such a great conference, not because Jason gave me such a great introduction, but because it was at this conference that we met Dr. Aberman, who now works for the company. He used to have Jason's job, so be careful, Jason. He used to have Jason's job and he did a little analysis on the company, and reached a positive conclusion, and rather than sharing with his investors he just came to work for us. And that was when the stock was in the low $20s. So we appreciate the Credit Suisse for providing that.
What I want to talk to you about today is where we see the company going. What are we trying to accomplish? And what I think our main mission is, is to build a self-renewing biopharmaceutical company that provides products to patients that make a difference, and that provides a growth investment for our shareholders. Our plan is coming together nicely, after the first 20 odd years where didn't come together nicely.
And I think I can, I hope I'll be able to convince you that, when we end, that we have all the ingredients in place to build this long-term, self renewing biopharmaceutical enterprise. We've got the essential ingredients now in place, our revenue drivers, and I'll get into the details of what our sources of revenue are. We also have, it's not good enough just to have revenue, we also have revenue that can actually drive profitability of the company. And we have a financial and business model that allows us, in our very first full quarter of selling our first major product EYLEA, we were profitable, and we'll talk about how we think that will drive us to continued long-term profitability.
But even with a good product, and a good set of products, you still need a strong research and development team. And we were very lucky, my partner, since we opened up the labs at Regeneron back in 1989 George Yancopoulos has built an incredibly productive research and development organization. And we're very unusual in that that time we got our first blockbuster across the finish line, we still had a robust pipeline in place, so we didn't have to sort of scurry around and think what's next.
And along the way, we've also been able to build the human and physical infrastructure for manufacturing operations to people with sophisticated, with drug development, drug discovery, and now all the way through sophisticated people doing commercialization, including sales and marketing and reimbursement.
So, let's take a look at some of the elements that we think have to be in place to develop this long-term, sustainable biopharmaceutical growth company. And first look at the revenue drivers. This is for illustrative purposes only, don't try and take a picture and measure how big each bar is and make you think we are trying to guide you to something.
But our main point is that we already have revenue in place with EYLEA, and we'll talk about how that, in itself, will be a growth opportunity for a variety of reasons, including demographics geography and additional indications. But beyond that, it's not just the EYLEA story. We've got our anti-PCSK9 cholesterol story. We've got sarilumab, our anti-IL-6 receptor in rheumatoid arthritis, and we've got a host of other antibodies in various stages of development, that I think is quite unusual for a company in its first year of commercialization of its first important product. So over the long-term, we hope we can add to this, and we hope that all these drivers, and the whole pipeline, can provide long-term growth for our shareholders.
As I said, having revenues isn’t good enough. We know that we need profits, and we’ve been hunting for profits for a long time. In fact we’ve had 23 lean years. I don’t think the Bible suggested it was supposed to be that long, but we’ve had many lean years, and now we first got to a profitable year. And the way we got there is through EYLEA. And we expect EYLEA, which is Regeneron’s approved drug in the US for age-related macular degeneration, wet AMD, to drive us to a short, near-term, and long-term profitability.
We own a 100% of the profit of that product, and the profits derived from that, in the US. We have gross margins out of the factory that are expected to average about, or a little bit more, than 90% over the life of the product. The product, because it is sold to a specialty practice group, that is the retinal specialist, and there’s only a few thousand or so of those, it’s pretty easy to put a full field force when you’re talking about – only you need to have maybe 100 plus or minus, or so people in the field, and another 100 plus or minus supporting that. And so you can, if a drug truly is going to have in the $1 billion sales potential, then you really can drive profitability and I think it’s pretty obvious, just on the backs of that, and that’s exactly what happened. Because of the efficiency in which you can do this, we were profitable from the very get go in our first quarter on the market. And we expect to continue that surely for the rest of this year and into the future. But it’s not just EYLEA, we have – and not just EYLEA in the U.S. we have a 50%. 50-50 profit sharing deal with Bayer HealthCare, our partner for EYLEA outside of the US. And we share profits with Sanofi on a variety of our programs, including our ZALTRAP, as well as our antibody program, which includes PCSK9, sarilumab, which I'll talk more about in a little while.
The Sanofi relationship, which has been a wonderful relationship, and we really enjoy working with Sanofi's team, all aspects from early stage science work and development work, right through to commercialization work. The relationship that we have with Sanofi uniquely positioned us, and positions us for the future, to be able to leverage EYLEA without consuming all the profits from EYLEA, and yet still have a big investment in a frankly outside product pipeline. So basically, as you recall, Sanofi provides us, through the end of 2017, funding at $160 million a year for the preclinical and discovery work that we do. And then they provide 100% of the antibody development expenses for programs that they opt into, until any given program has a successful Phase 3, and then we contribute 20% just for that program.
But if you this creates an enormous opportunity for us to move a pipeline along, but retain that profitability that EYLEA was able to drive us to. So the Sanofi collaboration is really – was put in place with that vision and now that's coming to pass, that it's allowing us to really over-invest. What are we investing in? We have 10 antibodies in the clinic. And I'm proud to say all of that is based upon proprietary Regeneron work, our Velocimmune technology, our discovery capabilities, our development capabilities, 10 antibodies that we brought to clinical trials, two of them that are already in Phase 3. And six of these are partnered with Sanofi. And so I think our goal of getting 20 to 30 antibodies over the life of the Sanofi agreement to the point of an IND, I think is something that we expect we should be able to attain.
The R&D spending that we leverage is quite remarkable. Last year there was almost, that is in 2011, and it's significantly more in 2012, and will be more in 2013, we’ve been able to leverage $750 million of funding that our partners, Sanofi and Bayer, and some from us have put into a pipeline. That's a big investment for our company in 2011 that didn't have an approved product, and it's a big investment even for a company that's a product like EYLEA this year.
The other ingredients for our long-term growth do include our manufacturing facility we just announced Yesterday that we are expanding that facility in New York State. We already have in place nearly 60,000 liters of capacity. We make all the antibodies, all of the three approved products that we have, and everything that we supply for Sanofi. Bayer we have alternative sources of developing. And we have the ability, therefore, to control our pipeline, not just on the discovery side, but on the manufacturing side, which is a lot of accumulated knowhow that we've put in place there.
The company is growing. We ended last year with somewhere around 1,900 employees. And I can tell you, when you speak about employees, we are extremely proud, extremely proud that we were ranked the number one global biopharmaceutical employer by Science Magazine. That's a real important metric for us, because without our employees feeling good about the place, you're just not going to get really high quality people, you’re not going to retain them, you’re not going to get the efforts you want to be able to execute on our plan.
Let’s take a look now at some of the details, so you’ve heard about the big picture which is we got revenue drivers, we can get to profitability, we’ve got a robust pipeline, we’ve got the human and physical infrastructure. Let’s, peel back the onion a little bit to take a look at some of the details behind all this. EYLEA is obviously our most important product right now and we believe EYLEA can provide growth over multiple years. EYLEA really is a growth story within the single product.
The third quarter on the market, the third quarter on the market we had net sales of $244 million. That is probably puts us on track for being one of the most successful launches in the biopharmaceutical industry. And that was something we didn’t partner with anybody to do in terms of the launch there, that’s something all Regeneron and as I said we control all the products there.
We launch into a big market. The wet AMD market alone was $1.5 billion in the U.S. during calendar year 2011. We have the opportunity to expand that market substantially because although the market, the dollar market was $1.5 billion. There is bad leakage if you will or half of the – more than half of the market in 2011 was lost to Avastin use. So if everything was converted to branded you could see what the market opportunity would be. But in addition to expanding the market opportunity by capturing some of this off-label Avastin use, we also think the market is going to go grow and have a few more words to tell you about that based on the demographics.
Beyond that we can derive more benefit from EYLEA by having geographic expansion with Bayer and that launch is now into way and we’re going to see, by the end of year, launches in Europe, in Asia, in South America, and that's all going to, I think, roll out over the course of the next year-to-year and a half, where we should be around the globe with EYLEA, and deriving 50% of the profits from those sales with Bayer. But in addition to driving geographically our product, and demographically, we can also drive the product through additional indications. We just got an approval just for the wet, macular edema associated with central retinal vein occlusion.
We are well on our way in Phase 3 trials, multiple Phase 3 trials, enrolled for diabetic macular edema, and we're looking at other indications as well. So EYLEA really can be I think a growth story for many years to come. Based on the results to date, we've had to consistently up our guidance. Our latest guidance now is that expect a full year 2012 net sales to be in the range of $790 million to $850 million. If we hit that target, we really be amongst the top launches in the history of our industry.
The market dynamics are not stagnant. And remarkably enough, the third quarter on the market, we captured 40% of the branded market share, and we didn't even have all the indications that our competition had. So 40% of the branded market share, we were able to capture in our third quarter on the market. The branded market, however, we didn't just steal that from our competition, we didn't just take market share away, that because if you look at the quarter-over-quarter growth, that is from 2011 third quarter to 2012 the most recent quarter, the branded market grew by 44%. 44% growth in the branded market, our competition shrunk a little bit, and we came on and provided the sum total of that 44% growth. A lot of that growth I think can attributed to three main areas. There were additional indications for our competition Lucentis, in diabetic macular edema. There was growth in the market itself in terms of the aging and demographic. This is a growing population. And I think there was a switch from Avastin to branded anti-VEGF. We were clearly getting some of these switches.
Let me just take a moment to talk a little bit about Avastin, so everybody understand that Avastin has used off-label. It’s aliquoted from the cancer products by compounding pharmacies, and the compounding pharmacies then provide the syringes to the doctors at a substantially lower price than the branded Lucentis for EYLEA. Compounding pharmacies have been the subject of a lot of debate. The fact is the Congressional Hearing going on today, I think, where the FDA commissioner is going to be testifying about how to regulate these, I can tell you that everybody at Regeneron, who always put pacing first. I think it’s obviously a terrible health, public health tragedy to have so many people who have been infected and people who have died from compounding pharmacy contaminations of a variety of products.
Avastin has had its small share, fortunately, of several outbreaks of contamination, or the wrong product, or things of that nature. And so I think there will be regulation, and we would certainly support regulation, anything that would make Avastin safer would be good for our patients, and our doctors. So we don’t have any real axe to grind here, other than making sure that people invest the resources to make sure that if you're going to use Avastin that it can be viewed as regulated by the FDA and it's safe as other products that are regulated by the FDA.
So we do expect continued growth from gaining market share from Avastin. We'll have to see how that plays out. We do expect, however, some slowing of growth related to the elongation of the interval. Remember, the way our product is dosed, it's dosed monthly for three months, and according to the label, it's then switched to every other month dosing. Most doctors I think are now using treatment extend, but whatever the regimen, the interval is expanding. I think that the reason the product took off so well this year, frankly, is that the doctors were tried it. They tried it in their most difficult patients and, at least according to the reports that they've given, there were nine consecutive reports at the recent Retinal Society meetings, that indicated that in difficult to treat patients were switched to our drug, the doctors felt they were seeing a favorable response.
So I think when doctors try a drug and test it, and feel good about it, that is the ingredient that helps make a difference in the launch. We've given our guidance and I should mention that our guidance are based on our discussions. We've not done this before in terms of selling this product in all four quarters. The seasonality, according to our distributors, you would suggest that you might lose about a week of sales between Thanksgiving, the New Year's, Christmas holidays, and in the northeast, the weather related shutdowns that occurred.
Okay. We've also got ZALTRAP approved with our partner, which is our first foray into oncology. I don't think this, from Regeneron's point of view, is going to be a big commercial impact, or big financial impact we have substantial amount of money we have to pay back to our partner Sanofi on this product. But what I’m hopeful for is if we can make this product into even better product by combining it with something that might be able to improve its efficacy. The efficacy of the anti-VEGF class in eye diseases is dramatic, it takes patients who can’t see let’s say they can’t see enough to read and many can read. They can’t see enough to drive and they can drive. Instead of losing three lines of vision on an eye chart, you can gain lines of vision on an eye chart. That’s a big important effect; unfortunately the effect of this class of drugs and cancer isn’t as great.
You’re talking about months, if you will, at most of difference in survival, although it can make a difference for some patients. And so the anti-angiogenesis hypothesis and cancer hasn’t played out as well as we would hope. In patients, our idea is to combine this with a another anti-angiogenesis agent such as the Angiopoietin-2 antibody. Angiopoietin-2 is another very important player in this field; it’s something that was discovered at Regeneron by George Yancopoulos and his colleagues. We are very excited, we are now with Sanofi this antibody is now being tested, and being starting development to combine it with our ZALTRAP.
So we would hope that we can actually make bigger inroads into patients with cancer. We beyond our EYLEA, we do have substantial other late-stage and early-stage opportunities. Let me spend a little bit of time talking about cholesterol lowering in our antibody 727. The cardiovascular disease is still, if terms if you want to live long avoiding cardiovascular disease should be an important part of your strategy. More than several thousand people die everyday and cardiovascular disease claims more lives each year than cancer, respiratory diseases and accidents combined, it is a major killer.
There’s no questions that statins, the first statin that was brought to market was actually discovered and brought to market by my chairman Roy Vagelos when he was at Merck, this whole pathway was figured out in terms of LDL receptor and how everything works and why this – why you can target this pathway was based on the work of Mike Brown and Joe Goldstein. Mike and Joe won the noble prize for this work and they are also in Regeneron’s board of directors. So we’re pretty familiar with the cholesterol hypothesis and we know that LDL is when you’re talking about cholesterol, LDL is the validated and real deal here.
I don’t have time to get into the whole pathway we can talk about it in the breakout but suffice it to say there are millions of people who can’t get to their goal and we know that goals are not, maybe not be as low as they should be that is how low your LDL cholesterol should be. If you look at these kinds of charts you would think that lower is better and there’s no question. There’s some more epidemiological data from people in rural China for example, lower is better. The data from the Jupiter study suggested that the greatest benefit of survival in that study was in patients who got their LDL cholesterol between 25 and 50.
So the question is can we do that, people are recognizing that the goal should come down but it’s been very hard to do that if you look at variety of studies, what you find is, is that the majority of people are uncontrolled, not at their goal and there many people who are tolerant. We need better ways to lower cholesterol.
If you look at our approach, anti-PCSK9, you can see that it doesn’t matter where you look you can get 60% to 70% lowering with a single shot given every other week. This is if you've never taken a statin, if you do take a statin, if you take a low dose, if you take a high dose, it really doesn't matter, wherever you are, we can lower your cholesterol dramatically.
We're very excited about this, of course not alone. Amgen's excited about this. Pfizer's excited about this, Roche, and so forth. But so far we're the first to begin a large Phase 3 program with our partner Sanofi. These slides will be up on our website. I don't have time to go through them in all the details. This is going to be more than a 20,000 patient program, this ODYSSEY, if you will, as they call it. We believe can get us across the finish line first, based on a regulatory approval, based on cholesterol lowering. And then followed by outcome studies to be added to the data package later on. It's a very exciting opportunity. We also have our late stage rheumatoid arthritis anti-IL-6R, anti-IL-6R is gathering a lot of support in interest as a drug that might be used in monotherapy. We're developing this product to try and get to in sub-Q, and we were in Phase 3 studies.
We also have a program in pain, anti-NGF. this class was put on hold, but now the FDA, after a unanimous opinion by the advisory panel that it was okay to proceed, Pfizer's just been released from hold. We've got our paperwork pending and we hope to be released in the very near future. This is a big opportunity. I have to say that, in closing, Regeneron has all the ingredients that I started with from the beginning, of having products, being able to drive to profitability, be able to have a robust pipeline, have a business model with our partnership with Sanofi that allows us to continue to invest, yet still delivering profits to our shareholders, so we are very excited after a couple of decade, so working exactly as we planned. Thank you very much.
Jason Kantor – Credit Suisse Securities
Great. And if you could all come, please join us if you would like, we are going to be having a breakout session in the Sedona Room. Thank you. Great job.
[No Q&A session for this event]
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