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Regeneron Pharmaceuticals Inc. (NASDAQ:REGN)

Q4 2011 Earnings Call

February 13, 2012 8:30 am ET

Executives

Dr. Leonard Schleifer – President, Chief Executive Officer

Murray Goldberg – Chief Financial Officer

Robert Terifay – Senior Vice President, Commercial

Dr. Michael Aberman – Vice President, Strategy and Investor Relations

Analysts

Jim Birchenough – BMO Capital

Jason Kantor – RBC Capital Markets

Josh Schimmer – Leerink Swann

Alethia Young – Deutsche Bank

Chris Raymond – Robert W. Baird

Steve Byrne – Bank of America

Biren Amin – Jefferies

Mani Mohindru – ThinkEquity

Yaron Werber - Citigroup

Geoff Meacham – JP Morgan

Phil Nadeau – Cowen & Company

Operator

Good morning ladies and gentlemen. Welcome to the Regeneron Pharmaceuticals Conference Call to discuss the fourth quarter and full-year 2011 financial results. My name is Latoya and I’ll be your coordinator for today. At this time, all participants are in a listen-only mode. We will conduct a question and answer session towards the end of the call. As a reminder, this call is being recorded for replay purposes.

I would now like to turn the call over to Dr. Aberman, Vice President of Strategy and Investor Relations for Regeneron. Please proceed, Dr. Aberman.

Dr. Michael Aberman

Thank you very much. Good morning and welcome to Regeneron Pharmaceuticals’ Fourth Quarter and Full-Year 2011 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; Murray Goldberg, Chief Financial Officer; and Robert Terifay, Senior Vice President, Commercial. After our prepared remarks, we will open the call for questions and answers.

I would like to also remind you that remarks made on this call that are not of historical nature may be forward-looking statements about Regeneron and are subject to a number of risks and uncertainties. Actual events and our actual results may differ materially. Such remarks may include but are not limited to those related to Regeneron and it’s products and business, sales forecasts, development programs, collaborations, finances, regulatory matters, intellectual property and competition, all of which involve a number of risks and uncertainties. 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, including it’s Form 10-K for the year ended December 31, 2010 and Form 10-Q for the quarter ended September 30, 2011. Regeneron does not undertake any obligation to update publicly any forward-looking statement, whether as a result of new information, future events or otherwise, unless required by law.

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 these measures to GAAP is available in our financial results press release, which can be accessed on our website. Once our call concludes, the IR team will be available to answer further questions.

With that, let me turn it over to our President and Chief Executive Officer, Dr. Len Schleifer.

Dr. Leonard Schleifer

Thank you, Michael, and good morning to everyone. I apologize in advance – I have a cold and a cough, and there’s been nothing coming from the labs to deal with it. I want to state that this is our very first quarterly conference call. Some of you may say it’s about time, but we think now it’s time we start as we transform ourselves into a commercial company to start having these calls.

2011 was truly a transformational year for us. It was the year when we advanced our vision of becoming not only a fully integrated biopharmaceutical company, or a FIBCO, but also hopefully a long-term biopharmaceutical growth company. We submitted three BLAs in the U.S. and celebrated the approval and launch of a potentially major product, EYLEA. We also reported positive Phase II results for two antibodies in our collaboration with Sanofi which are now in Phase III testing. In a survey conducted by the Journal of Science, we were voted the second best biopharmaceutical company to work for.

As we look forward to 2012, we see another exciting year ahead of us with the continued launch of EYLEA for wet AMD in the U.S. and the potential for FDA approval for our products or product candidates in three new indications: EYLEA for central retinal vein occlusion, ZALTRAP for previously treated metastatic colorectal cancer, and ARCALYST for the prevention of gout flares. Beyond the U.S., we see potential approvals and launches across the globe for both EYLEA and ZALTRAP with our partners, Bayer Healthcare and Sanofi.

Turning to the launch of EYLEA for wet AMD in the U.S., we are pleased to report that the launch continues to go extraordinary well and exceeds our expectations on many fronts. Only a relatively short time ago in early January, we reported that our fourth quarter 2011 EYLEA sales were 24.8 million, which was many-fold higher than most analysts were predicting for the six weeks of sales at that time. We also provided a preliminary forecast for 2012 EYLEA U.S. sales of 140 to 160 million. As we said back then, this forecast was based on only six weeks of sales data.

With another six weeks of EYLEA sales results, we have some added confidence in the EYLEA sales trends. In the first six weeks of 2012, we have seen an increase in weekly demand from a large number of doctors and practices, good repeat ordering trends, favorably reimbursement trends, and positive feedback from physicians. In fact, we have now shipped over 30,000 vials to physicians offices since our launch in November.

As a result, we are increasing our 2012 EYLEA net sales forecast from 140 to 160 million, up to 250 to 300 million. To be clear, while we have an additional six weeks of information, the launch is still early and therefore this is significant uncertainty inherent in this forecast.

The benefit of less than monthly dosing with efficacy that is clinically equivalent to monthly ranibizumab appears to have resonated strongly with the AMD community, as has our pricing. We believe that EYLEA with its less frequent dosing offers an attractive new treatment option and provides an important alternative to wet AMD patients and physicians. With over 30,000 vials shipped to physicians, we are also gathering our post-market safety data to file our first post-marketing safety report with the FDA. In doing that, we can report that there have been no new adverse events not seen in our clinical trials described in our label or that were inconsistent with the known risks of intravitreal injection. As many of you know, intravitreal injections with anti-VEGF therapy are associated with known complications, particularly ocular complications such as endophthalmitis and retinal detachments.

Post-injection intraocular inflammation, such as sterile endophthalmitis, is a known risk following intravitreal injections of anti-VEGF agents and triamcinolone, incidence rates that are reported in the literature and can vary from 0.02 to 0.3% and has also been reported to occur in clusters. There have been approximately 14 cases of adverse events consistent with sterile endophthalmitis and a single isolated case of culture-positive endophthalmitis reported to Regeneron with the use of EYLEA since launch. This translates to a rate of 0.05% per injection, similar to that which we’ve seen in our clinical trials and within the range that has been reported with other anti-VEGF agents. Eleven out of the 14 cases of sterile endophthalmitis were reported by a single group practice of six retinal specialists, and 9 of these 11 cases were accounted for by a single physician within the practice. The cases could not be traced to a single lot of drug nor a single delivery of commercial vials. Vials from the same lot have been used widely throughout the country, including the other physicians in this practice.

Excluding this one practice, the rate of intraocular inflammation reported to Regeneron following EYLEA was approximately 0.01%, or 1 in 10,000. We are working closely with the practice involved to better understand this cluster and in the process of disseminating the information we have learned to retinal physicians. We have informed the FDA as per the normal course. To be clear, we do not believe that the data available indicates that EYLEA is responsible for this cluster.

In terms of reimbursement, the comprehensive program that we have rolled out, including EYLEA 4U and extended commercial terms, have been very well received. We have now received parts of reimbursement from all of the regional Medicare administrative contractors, giving us confidence that payors do understand the important of EYLEA as an option for patients with wet AMD. We have also seen positive responses in reimbursement from many of the commercial payors. This is not to say that we don’t have more work to do and do not face continued reimbursement hurdles, until we receive a permanent J code, which is expected in January 2013.

While EYLEA and wet AMD is the focus in the near term, we view EYLEA as a pipeline within a product and are working diligently towards advancing EYLEA in other indications, namely central retinal vein occlusion where we have filed a supplementary BLA and have been granted a PDUFA date of September 23, and diabetic macular edema where we have two Phase III studies that are ongoing, one of which – the U.S. study – is fully enrolled. We plan on initiating shortly a Phase III study in branched retinal vein occlusion.

Our ex-U.S. collaborator, Bayer Healthcare, has submitted regulatory applications for EYLEA in wet AMD in Europe, Japan and other countries, and we expect approval in these territories beginning in the second half of this year. Bayer has also started a Phase III trial in wet AMD in China in the fourth quarter of 2011. We believe that this is an important market as evidenced by the fact that in 2010 there were approximately 540,000 newly diagnosed wet AMD patients over the age of 50 in China.

EYLEA is a driver of both near-term and long-term value to the Company and its shareholders, but Regeneron is more than just about EYLEA. We firmly believe that we have the key elements that are fundamental to achieving sustained long-term growth, namely near and long-term revenue drivers, a pathway to profitability that is driven by the profit margins of our products and product candidates and the attractive terms of our collaboration agreements, a wide, strong and rapidly advancing pipeline, and our solid infrastructure of people and manufacturing capabilities.

Our commitment to transform science into medicine is reflected in our robust and rapidly advancing pipeline. In 2011, we filed a supplemental BLA for ARCALYST for the prevention of gout flares in patients initiating uric acid lowering therapies and have been granted a PDUFA date of July 30 of this year. We also initiated UPSURGE, a long-term safety study of ARCALYST. We, along with our partner Sanofi, have submitted a BLA for ZALTRAP for previously treated metastatic colorectal cancer for which we expect a regulatory decision in 2012. Sanofi has also filed a marketing application for ZALTRAP in the EU.

We also reported positive Phase II data from two late stage antibodies in our pipeline, PCSK9 in hypercholesterolemia, and sarilumab, our anti-IL6 receptor in rheumatoid arthritis and have advanced two new antibodies into the clinic. Both the PCSK9 and the sarilumab programs are continuing to advance to Phase III this year. Both programs address significant market opportunities. We look forward to presenting results from two of the Phase II PCSK9 trials at the upcoming American College of Cardiology meeting where one of the trials will be presented in a later-breaker session.

Our pipeline now has a total of 10 antibodies in the clinic, eight of which are being developed in collaboration with Sanofi. At Regeneron, we have always believed that good science wins out and the approval of EYLEA was proof of the validity of this belief. We are well positioned to continue to make important advances in therapeutic areas where there is unmet need and significant commercial opportunity.

With that, I would like to now turn the call over to Murray Goldberg, our Chief Financial Officer, who will review our fourth quarter and full-year financial results.

Murray Goldberg

Thank you, Len, and good morning to everyone. This morning we reported total revenues in 2011 of about $446 million for the full year and $123 million for the fourth quarter. In the fourth quarter, this includes net product sales of $24.8 million for EYLEA and $5 million for ARCALYST. Our gross to net adjustment for EYLEA was 7.3%.

Cost of goods sold in the fourth quarter was $3 million or about 10% of net product sales. This includes an accrual for royalties payable to Genentech under the license and partial settlement agreement that we signed in December relating to ophthalmic sales of EYLEA in the United States. From a cash perspective, we’re not obligated to make any payments to Genentech until cumulative U.S. sales reach $400 million; then, we’ll make a one-time payment of $60 million. Thereafter we’ll pay royalties until May 7 of 2016 of 4.75% on cumulative sales between $400 million and $3 billion, and 5.5% on cumulative sales over $3 billion. In terms of accounting for these payments, we are accruing royalty expense as we recognize sales of EYLEA using a blended mid-single digit royalty rate that reflects both the $60 million payment and royalty obligations based on our estimate of cumulative sales through May 7, 2016.

Non-GAAP research and development expenses rose 6.4% in 2011 to about $497 million, principally in connection with our Sanofi antibody collaboration. Non-GAAP SG&A expenses doubled in 2011 to $94 million, primarily related to the commercialization of EYLEA. We expect further increases in SG&A expenses in 2012 as we prepare for the launch of ARCALYST for the treatment of gout flares. Non-GAAP R&D and SG&A expenses exclude non-cash share-based compensation expense.

We reported a non-GAAP net loss of $34 million or $0.37 per share for the fourth quarter, and a non-GAAP net loss of $161.7 million or $1.79 per share for the full-year 2011. Non-GAAP net loss excludes non-cash share-based compensation expense and non-cash interest expense related to our convertible senior notes.

For the fourth quarter, we reported a GAAP net loss of $53.4 million or $0.58 per share. For the full-year 2011, we reported a GAAP net loss of $221.8 million or $2.45 per share compared to a net loss of $104.5 million or $1.26 per share for the full-year 2010. All these per-share values are for both basic and diluted per-share calculations.

In October 2011, we completed a private offering of $400 million aggregate principal amount of 1 7/8ths% convertible senior notes. Following this, we ended 2011 with approximately $811 million in cash and securities. We believe that financially we’re in a comfortable position to support the required investment, not only for the continued commercial launch of EYLEA but also for the launch of ARCALYST in gout and ZALTRAP in colorectal cancer, as well as for advancing our pipeline and driving us toward profitability.

In terms of financial guidance, as you heard from Len, we’re updating our EYLEA net sales forecast from the previous 140 to $160 million to a new range of 250 to $300 million. We continue to expect COGS for EYLEA, including royalty expense, to be under 10% of net sales.

Thank you, and with that I will turn the call back to Michael.

Dr. Michael Aberman

Thank you, Murray, and thank you Len. That concludes our prepared remarks. We’d now like to open the call to Q&A. As we’d like to give as many people a chance to ask a question as possible, we request that you limit yourself to one question and our team will be available in our office after the call for follow-up questions.

Thank you, and Operator, can you please give instructions and open the call for questions.

Question and Answer Session

Operator

Thank you. Ladies and gentlemen, if you have a question, please press star then one on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, you may press the pound key. Once again, if you have a question, please press star then one.

Our first question is from Jim Birchenough of BMO Capital. Your line is open.

Jim Birchenough – BMO Capital

Hi guys. Congratulations on the strong launch. I just wanted to follow up on the sterile endophthalmitis clustering at that one center. Is there any working hypothesis on what might be underlying that, and I’m interested in particular if whether these cases were in treatment-naive patients or in switch patients, and maybe just a bit more detail on that would be helpful. Thanks.

Dr. Leonard Schleifer

Thanks, Jim. What we know – there is no firm hypothesis at this point. We’re looking at everything. We do know that these patients, we believe they were switched from both Avastin or Lucentis. The doctors there are experienced, so we’re not sure what’s different. We do know that they’re using a different needle than the one that we supply. We don’t know if that’s the issue. Frankly, these clusters occur and sometimes you just never figure it out, but we’re continuing to do this. They were also in naïve patients and well.

I’d say this and remind you, that when you give 30,000 injections, you expect to get some rate of sterile intraocular inflammation as just a fact of intravitreal injections, and these things tend to occur in clusters. Sometimes people figure it out. You’ll see in our letter to the FDA that one person figured out it was—one group figured out it was a needle; another group could never figure out what it was. So we’re going to continue to try and figure this one out as well.

Jim Birchenough – BMO Capital

Okay, thanks Len.

Operator

Thank you. Our next question is from Jason Kantor of RBC Capital Markets. Your line is open.

Jason Kantor – RBC Capital Markets

Thank you and congratulations as well. Just a couple questions on the launch and how you’re tracking it. I’m wondering as you’re doing your guidance, what are your assumptions for the drop-off in the rate of injection going from once a month for three months, then dropping off – are you assuming that there’s a flattening or even a down quarter at any point this year? And I guess when you’re looking at what patients are coming on the drug, how many of these are switching versus newly diagnosed or naïve patients, and is the market actually growing with the introduction of EYLEA because more people are coming back onto therapy?

Dr. Leonard Schleifer

So Jason, thanks for your question. You’ve asked all the questions that I’ve been asking. Unfortunately, I haven’t been getting answers because we don’t really have the answers. We are seeing a significant amount of switching, so we don’t know for those patients how many doses they’ll actually get. We are seeing new patients. We don’t know what the practice pattern will be out there. We have modeled this in a variety of ways; and as I said, these forecasts have inherent uncertainty in them. I wish I could give you more specifics; we just don’t have them.

Jason Kantor – RBC Capital Markets

So you don’t have any sense of what percentage of your patients are coming from—are switching from other drugs, or--?

Dr. Leonard Schleifer

My guess is that the majority are coming from switches, and we’ve heard lots of comments that people are switching even their more difficult patients; but we don’t have any formal data yet.

Jason Kantor – RBC Capital Markets

Thank you.

Operator

Thank you. Our next question is from Josh Schimmer of Leerink. Your line is open.

Josh Schimmer – Leerink Swann

Thanks for taking the question, and congrats as well on the strong launch. Maybe you can give us a little bit of color in terms of the reimbursement process, what hiccups, if any, are out there, if you’re expecting that to improve over the course of the year, and what feedback you have from specialists in terms of their comfort level at this point with reimbursement and whether that’s going to improve over the year as well. Thanks.

Dr. Leonard Schleifer

Thanks for your questions, Josh. I’ll turn that to Bob Terifay, our head of commercial to answer that, please.

Robert Terifay

Yes, so as Len pointed out in the conference call, the Medicare carriers are all now reimbursing for EYLEA, and as you know, the vast majority of these patients are covered by Medicare. We also do have reports of commercial coverage. The real concern that offices have before they widely adopt the product is to ensure that not only is the 80% covered by Medicare reimbursed but also that the patient co-pay is covered, and we are seeing the co-pays work through although the insurers that cover co-pays don’t move as quickly to change their systems, so that is resulting in offices going slowly up front to make sure that they’re going to get reimbursed. That will be the situation over the next several months until all the coverage settles out.

As I say, the Medicare carriers are covering. We are seeing more and more commercial payors coming on board, and thus far the offices are beginning to see the payments come in, so actually things are where we would have expected at this point in a launch with a temporary J code.

Josh Schimmer – Leerink Swann

And does your guidance assume growing comfort with the reimbursement, or are you just still kind of waiting to see how that goes as well?

Dr. Leonard Schleifer

Our guidance tries to take into account all of those factors, Josh; but as you can imagine, there’s so many unknowns, certainly there is some impediment to this launch because of the lack of a permanent J code and some of these reimbursement issues, co-pays and what have you. Nevertheless, the launch is going pretty well; but a lot of uncertainties in terms of dose, number of doses, how many people are going to be loaded, will doctors hopefully file the label or will they do a treatment extend or some other paradigm. We’ve tried our best to model all this, and that’s how we came up with the new guidance for you.

Josh Schimmer – Leerink Swann

Got it. Thanks so much.

Dr. Leonard Schleifer

Thank you. Our next question is from Robyn Karnauskas of Deutsche Bank. Your line is open.

Alethia Young – Deutsche Bank

Hey there, it’s Alethia in for Robyn today. Congrats on the great guidance. Just a couple questions on the specifics behind EYLEA. The run rate looks very strong, but how penetrated is the drug in the community versus bigger stars, and just similar, how big a factor was stocking in doctors’ offices and what’s your expectations on that?

Dr. Leonard Schleifer

So maybe I’ll cover the second, and Bob will cover the first. In terms of stocking, our estimate is that doctors don’t keep much supply at all, perhaps a week at most. The distributors, maybe one to two weeks at most, I would say. Now, in terms of the other part of your question in terms of—Bob, you want to deal with that?

Robert Terifay

So in terms of penetration into practices, what we do know is that approximately 38% of practices that buy Lucentis have bought EYLEA, so we have penetrated the offices pretty well and we do see a good distribution of our usage across practices.

Alethia Young – Deutsche Bank

Great, thanks.

Operator

Thank you. Our next question is from Chris Raymond of Robert W. Baird. Your line is open.

Chris Raymond – Robert W. Baird

Thanks for taking the question. I just wanted to make sure I understand the math a little bit here, and I jumped on a little bit late, so if you guys covered this already. But if I count 30,000 vials that you’ve shipped so far and you back out the last six weeks of 2011, are we talking 20,000 vials through mid-February? Is that kind of the way the math goes?

Dr. Leonard Schleifer

Yeah, 30 minus 10 is 20, correct. We’ll go with that.

Chris Raymond – Robert W. Baird

Thank you. And so are we thinking that—so your numbers, if you think about gross to net adjustments, et cetera, that you’re talking roughly 34 million for the first six weeks of the year?

Dr. Leonard Schleifer

You know, I’ll let you do the math because I don’t want to be nailed down to specifics, et cetera, et cetera. But I think you’re basically on the right track.

Chris Raymond – Robert W. Baird

And was there any dynamic between weekly numbers beginning of the year to, say, mid-February?

Dr. Leonard Schleifer

Yeah, that I can’t tell you; but I can tell you from the first six weeks to the last six weeks, so before the new year to after the new year, there was definitely a pick-up after the new year. And not surprising because a lot of docs—first of all, it was a brand-new launch, and second of all coverage tends to change for patients around the end of the year, and so a lot of doctors actually waited until after the new year so once they started treatment, they knew their coverage wouldn’t be changing out from underneath the patient. So we definitely saw an uptick, an increase in the rate from pre-new year to post-new year.

Chris Raymond – Robert W. Baird

Thanks.

Operator

Thank you. Our next question is from Steve Byrne from Bank of America. Your line is open.

Steve Byrne – Bank of America

Hi. Len, you mentioned the incidence of wet AMD in China. When you consider just total prevalence in that country and taking into consideration government and/or private payor coverage in those larger cities, how would you estimate the market opportunity in China, say versus Europe?

Dr. Leonard Schleifer

Yeah, that’s a great question. I don’t really know how to do that one, and I haven’t been focused on it because this is something that Bayer takes the rowing oar on for us in our partnership. While we split the profits 50/50 outside the United States and we are obviously very interested, they do the mechanics out there and they’re much more in touch with these markets. We can try and ask them and get back to you, Steve. I don’t know the answer.

Steve Byrne – Bank of America

And just a follow-on to that, do you view that 300 patient study in China as being sufficient for approval?

Dr. Leonard Schleifer

I think also we should defer that question to Bayer. I’ll find out. I think that the goal would be that when you combine it with our other studies and you have a Phase III study there, that we would hope we could get approval.

Steve Byrne – Bank of America

Thank you.

Operator

Thank you. Our next question is from Biren Amin of Jefferies. Your line is open.

Biren Amin – Jefferies

Yeah, thanks for taking my questions, and congratulations on the quarter. I was curious – what dynamics are driving the switching from Lucentis to EYLEA, and also have any Medicare plans denied reimbursement to date that you know of? Thanks.

Dr. Leonard Schleifer

Right. So as far as the switching goes, I imagine – and we’ve been to several of the medical meetings where we’ve heard this – that the patients who do not get what the doctors consider an adequate response to either Lucentis or Avastin, because there’s been switches to both, are looking to try something that might give the patients an opportunity to do better. That’s a fairly typical dynamic when a new product comes to the marketplace – many doctors will look at their difficult to treat or patients they don’t think are doing optimally well. And I want to say this – we see this both in Lucentis and Avastin patients, so I would have to say that that dynamic is definitely at play here.

Bob, do you want to address the other question about reimbursement?

Robert Terifay

Yes, in terms of any rejections, in the presence of a miscellaneous J code, there are two potential codes that can be processed on the paperwork for a given insurer, and sometimes if somebody marks down one of them, that particular insurer will not process the paperwork. So what we have seen is the claims have been sent back to offices and then we work through the appeals process, so it seems to be primarily paperwork-oriented. We have had no outright rejections of EYLEA at the current time.

Biren Amin – Jefferies

Fantastic. Thank you.

Operator

Thank you. Our next question is from Mani Mohindru of ThinkEquity. Your line is open.

Mani Mohindru – ThinkEquity

Thanks for taking this call and a great first call. Quick question – I saw that you mentioned that you’re expanding into BRVO. Could you elaborate a little bit more on the opportunity in the BRVO market?

Dr. Leonard Schleifer

Bob, you want to address just in terms of the number of patients and things like that – approximately, do we have that?

Mani Mohindru – ThinkEquity

Or on the (inaudible) doing there, and what kind of a market it opens up for you beyond wet AMD and the end CRVO?

Dr. Leonard Schleifer

So I’ll give you a broad—BRVO in terms of market size falls in between the size of the CRVO market and the AMD market. So it will add a fairly substantial additional market opportunity for EYLEA. As you mentioned, Lucentis is now approved in branch retinal vein occlusion, and physicians are responding very well to the use of anti-VEGFs in that setting.

Mani Mohindru – ThinkEquity

Thank you. I’ll step back in the queue.

Operator

Thank you. Our next question is from Yaron Werber of Citigroup. Your line is open.

Yaron Werber – Citigroup

Yeah, great. Thanks so much and congrats – very nice launch. If you don’t mind, I’m going to sneak in two quick questions. AMD and DME, I’m not sure if you can answer at all, are you seeing any usage yet off-label in that setting? And then I had a question about expenses, if you don’t mind.

Dr. Leonard Schleifer

As far as we know, the predominant use of the product is in AMD; and it’s cost, we don’t discuss that, we don’t promote it, so we really wouldn’t even be in a position to get feedback if they were using it. But from what we hear spontaneously at the conferences and what have you, the discussion is centered virtually completely around AMD, as it should.

Now, I didn’t hear your second question?

Yaron Werber – Citigroup

Depending on what we model—I mean, if you look at the model, the two biggest questions – number one, what’s EYLEA going to sell, but you’ve given us great color there. If we can kind of start thinking about what are you going to record from the collaboration revenue with Sanofi and then kind of what your expenses are going to be, but I guess where I’m going with this is there any scenario by which you could be profitable this year?

Dr. Leonard Schleifer

Murray?

Murray Goldberg

Let me first comment in terms of your question about R&D, which is obviously the largest expense item on our income statement. For the most part at this point, those expenses are related to the antibody collaboration and those are reimbursed by Sanofi, so they’re two big numbers – the R&D expense and the reimbursement from Sanofi – but for the most part, they offset to the extent they’re related to the antibody collaboration.

Is there a scenario in which we could be profitable this year? There is, depending obviously on how big EYLEA’s sales are. As we pointed out earlier, the gross margin on EYLEA sales is quite high – 90% of so – and so depending on how large EYLEA’s sales were, we could be there. But in terms of the forecast sales that we’ve provided today of 250 to $300 million, we do not believe that that would get us there, with the usual caveats of depending on what happens to other R&D expenses that are not reimbursed, et cetera.

Yaron Werber – Citigroup

Great, thank you.

Operator

Thank you. Our next question is from Geoff Meacham of JP Morgan. Your line is open.

Geoff Meacham – JP Morgan

Hi guys, thanks for taking the question. Just one on the intraocular inflammation – I guess it seems like a fairly common A for the class, but it would be helpful to get a history here. Was this something that you guys picked up from the field on your own, or just something that the FDA saw on the AERS database that kind of prompted you guys? And I have a quick follow-up.

Dr. Leonard Schleifer

No, we picked this up through reporting—reports that come directly to the Company, and we’ve been in contact with our medical affairs people with this specific practice as we saw this cluster beginning to emerge.

You had a second question?

Geoff Meacham – JP Morgan

Yeah, second question just is anything else that you’ve seen beyond the intraocular inflammation that is different from the Phase III’s, just on the adverse event side?

Dr. Leonard Schleifer

No, there’s no new signals at all, Geoff; and even this intraocular inflammation is something that if you look at the letter we sent off to the Agency, you can see we gave the history there that we’ve seen intraocular inflammation in our trials, and frankly it’s been well reported in the literature; and you talk to experienced retinal physicians, they all tell you they see it on occasion.

Geoff Meacham – JP Morgan

Fantastic. Okay, thanks.

Dr. Leonard Schleifer

You’re welcome.

Operator

Thank you. Our next question is from Phil Nadeau of Cowen & Company. Your line is open.

Phil Nadeau – Cowen & Company

Good morning. Let me add my congratulations on the launch. Question on 727 and the PCSK9 class. There’s a potential competitor of yours out there who is saying that the FDA sent letters to all the PCSK9 developers, and this competitors characterizes the letters as basically requiring event studies for approval. I was curious whether you or Sanofi has received such a letter, and whether you’d characterize it the same way? Do you think that event studies will be necessary?

Dr. Leonard Schleifer

No, I think you may be mixing up two things. The only letter that we know has been circulated is some general comments that a preclinical review had largely based on pre-clinical theoretical data of what happens if you lower cholesterol too much, and suggesting some preclinical experiments that we should use to address them; and if we didn’t, that that would be a labeling-type issue. As far as outcome studies, we have not received any communication and I don’t believe any other competitor has said publicly that we’re aware of that they’ve received a communication that an outcome study will be required prior to approval.

As for our working assumption now based on our conversations, but obviously these things can change, our working assumption is that we would have a large Phase III safety and efficacy database, and at the time of our submission and obviously approval, we would be well underway for an outcome study, but that outcome study would not be required prior to approval. Of course, if the FDA sees something in the safety database that raises questions, then they could switch appropriately so to require an outcome study. But as of now, we don’t believe that’s going to be necessary prior to the initial approval.

Phil Nadeau – Cowen & Company

Okay, great. Thanks for answering my question.

Operator

Thank you. Our next question is from Jim Birchenough of BMO Capital.

Dr. Michael Aberman

And Operator, this is going to be the last question.

Jim Birchenough – BMO Capital

Hi guys. Thanks for letting me get back in with a follow-up. Maybe for Bob, just trying to get an understanding of potentially the tail here, and that would be hospital formularies where you’re trying to get EYLEA on formulary. It doesn’t happen immediately. We’re hearing about some centers that are finally getting EYLEA on formulary. Can you give us a sense of what penetration you have there, Bob?

Robert Terifay

As you pointed out, Jim, we are starting to see the major eye centers come on board with formulary approvals, but several institutions take several months; so I can’t quantify the percent of hospital formularies but I can tell you that some of the major centers have come on within the last few weeks.

Jim Birchenough – BMO Capital

All right, thanks guys.

Dr. Leonard Schleifer

Okay. Operator, I think we’re going to conclude the call with that.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This concludes the program. You may now disconnect. Good day.

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