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Regeneron Pharmaceuticals Inc. (NASDAQ:REGN)

Q2 2012 Earnings Call

July 25, 2012 8:30 am ET

Executives

Dr. Leonard Schleifer – President, Chief Executive Officer

Murray Goldberg – Chief Financial Officer

George Yancopoulos – Chief Science Officer, President – Regeneron Research Labs

Robert Terifay – Senior Vice President, Commercial

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

Analysts

Steve Byrne – Bank of America

Alethia Young – Deutsche Bank

Chris Raymond – Robert W. Baird

Terence Flynn – Goldman Sachs

Jim Birchenough – BMO Capital

Yaron Werber - Citigroup

Biren Amin – Jefferies

Mani Mohindru – ThinkEquity

Joseph Schwartz – Leerink Swann

Ted Tenthoff – Piper Jaffray

Phil Nadeau – Cowen & Company

Geoff Meacham – JP Morgan

Operator

Good morning ladies and gentlemen and welcome to the Regeneron Pharmaceuticals conference call to discuss the second quarter 2012 financial results. My name is Kevin and I’ll be your coordinator today. At this time, all participants are in a listen-only mode. We will conduct a question and answer session towards the end of this conference call. As a reminder, this conference is being recorded for replay purposes.

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

Dr. Michael Aberman

Thank you, Operator, and good morning and welcome to Regeneron Pharmaceuticals’ second quarter 2012 conference call. An archive of this webcast will be available under Events and Presentations for 30 days. Joining me on the call today is Dr. Leonard Schleifer, the Founder, President and Chief Executive Officer; George Yancopoulos, Executive Vice President, Chief Scientific Officer and President of Regeneron Research Labs; Murray Goldberg, Chief Financial Officer, and Robert Terifay, Senior Vice President, Commercial. After our prepared remarks, we’ll open the call for Q&A.

I would also like to remind you that remarks made on this call that are not historical in 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 its products and business, sales forecasts, financial 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, or SEC, including its Form 10-K for the year ended December 31, 2011 and Form 10-Q for the quarter ended June 30, 2012 which we filed this morning. Regeneron does not undertake any obligation to update publicly any forward-looking statement, whether as a result of new information, future events or otherwise, 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 are available in our financial results press release, which can be accessed on our website. Once our call concludes, myself and the IR team will be available to answer further questions.

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

Dr. Leonard Schleifer

Thanks, Michael. Good morning to everyone. In terms of the agenda for today, following my brief introductory remarks, George Yancopoulos, Chief Scientific Officer, will provide an update on our pipeline. Bob Terifay, Senior Vice President of Commercial, will then provide an update on the EYLEA launch, and Murray Goldberg, our Chief Financial Officer will wrap up with financial highlights before I offer some concluding remarks and we open the call for questions and answers.

Today we are happy to report a very successful quarter as our team continues to execute on the ongoing launch of EYLEA, also known as intravitreal aflibercept injection. We saw strong quarter-over-quarter growth with U.S. net sales of $194 million, representing a 57% increase over the last quarter. Given the trajectory of the launch to date, tempered by the potential for less frequent dosing as doctors increase the interval between injections of EYLEA, we are increasing our full-year U.S. EYLEA net sales forecast to between 700 and 750 million from a prior 500 to 550 million. If we achieve this new forecast, EYLEA will become one of the best drug launches in the history of the biotechnology industry. In a few minutes, Bob Terifay will go into some more details on the launch.

Importantly, the strong EYLEA sales growth translated into even stronger earnings growth where we saw non-GAAP net income rise more than 2.5-fold from $40 million last quarter to slightly over $100 million in the second quarter of 2012, which translated into non-GAAP fully diluted earnings per share of $0.90. Obviously we are pleased by both the performance of EYLEA as well as its ability to fuel the Company’s earnings. The ability to translate sales growth into strong earnings growth while still investing heavily in our robust and internally discovered pipeline that includes 10 antibodies into addition to our three traps, highlights our relatively unique business model.

Our PDUFA date in the U.S. for our SBLA for EYLEA for CRVO is September 23, and an approval would further expand the EYLEA opportunity. As a reminder, the strong commercial results for EYLEA only reflect the launch of EYLEA in the U.S. Outside the United States, our partner Bayer Healthcare has already receiving marketing approval in two countries – Australia and Colombia – and we are awaiting regulatory decisions in the EU, Japan, and other countries. We expect the global launch to start toward the end of the year.

To that end, during the second quarter Bayer Healthcare consummated an agreement with Santen, the market-leading ophthalmology company in Japan to co-promote EYLEA in Japan. We think this will accelerate the launch and further bolster the opportunity in Japan.

Beyond EYLEA, we await FDA action on our application to market Zaltrap or aflibercept injection for intravenous infusion in combination with a Folfiri chemotherapy regimen for patients with metastatic colorectal cancer that was previously treated with an oxalplatin-containing regimen. We are also advancing our robust pipeline, including our late stage Phase III programs: sarilumab targeting the IL6 receptor, and Regeneron 727 targeting PCSK9. Let me highlight PCSK9 briefly because that is a program that is generating a lot of excitement, not only within Regeneron but within the clinical community and pharmaceutical industry.

Surely, we have a lot of competitors but we believe we are in the lead and are committed to trying to stay in front. We and our partner, Sanofi, just announced that we have initiated our broad 22,000 patient Phase III program known as Odyssey. In addition, Sanofi has formed a dedicated development unit for the program, emphasizing their commitment to this important investigational agent.

With that, let me turn to our Chief Scientific Officer, George Yancopoulos, to highlight some of the important achievements in our pipeline during the second quarter.

George Yancopoulos

Thanks, Len. Our clinical and regulatory teams continue to be extremely busy with three BLAs currently under review at the FDA and regulatory decisions expected in the next few months. First, Zaltrap for the treatment of previously treatment metastatic colorectal cancer has a PDUFA date of August 4. We are only a few days away from the PDUFA date and are hopeful for a timely approval.

While we do have a substantial development cost repayment obligation to Sanofi that will limit our recognition of any profits for Zaltrap for some time, Zaltrap potentially represents our first commercial foray into oncology. As a reminder, we have been pioneers in the field of angiogenesis, so it is particularly satisfying to be able to look forward to making Zaltrap, our VEGF trap, available to patients. Moreover, in our clinical pipeline are two antibodies to novel angiogenesis targets – angiopoieten 2 and Dll4 – that have the potential to improve upon VEG-F inhibition alone.

Second, we had previously submitted our SBLA for EYLEA for the treatment of central retinal vein occlusion, or CRVO, which has a September 23 PDUFA date. We also will be following the upcoming FDA advisory committee meeting on anti VEG-F therapy for DME very closely as both of our Phase III trials for EYLEA in DME, Vista DME and Vivid DME, are fully enrolled. As a reminder, outside the U.S. approval in DME can come within one year of efficacy data while in the U.S. current FDA guidance requires two years.

We have also started enrollment in a Phase III trial for branch retinal vein occlusion, or BRVO; and finally, we are less optimistic for the supplemental BLA for ARCALYST, or rilonacept, for the prevention of gout flares in patients initiating uric acid lowering therapy, which has a PDUFA date of July 30. As most of you know, an arthritis advisory committee convened by the FDA voted against approval of ARCALYST in this indication. While the advisory committee’s decision is not binding on the FDA, we have low expectations for an approval in this indication at this time and are working to determine the appropriate path forward. We continue to market ARCALYST for the treatment of CAS.

Turning to our antibody pipeline, we now have advanced two antibodies from a broad antibody collaboration with Sanofi into Phase III testing – Regeneron 727 for cholesterol lowering, and sarilumab for rheumatoid arthritis. As Len mentioned, Regeneron 727 is our cholesterol lowering PCSK9 antibody which continues to garner a great amount of interest from the clinical community as a potential first-in-class new treatment for high cholesterol. During the second quarter, we presented positive Phase II data at a late-breaking session of the European Atherosclerosis Society and also announced publication of these data in The Lancet. Our Phase II program as a whole showed that Regeneron 727 can significantly reduce LDL cholesterol, also known as the bad cholesterol, up to more than 70% in a variety of settings, including in patients who are not at goal on maximum doses of other background lipid lowering therapies such as high dose statins. In the Phase II program, injection site reactions were the most common adverse event, and rare cases of hypersensitivity reaction were also reported.

With that in mind, Sanofi and Regeneron announced just a few days ago the launch of the 22,000 patient global Phase III program for PCSK9, called Odyssey, which will consist of more than 10 clinical trials to evaluate the safety and efficacy of Regeneron 727 in a broad range of patients. This will be the first Phase III program evaluating a PCSK9 targeted therapy. As described in our press release last Friday, the Phase III program will test the efficacy and safety of Regeneron 727 in a variety of patients with high unmet medical needs, such as patients with familial hypercholesterolemia and those with elevated cardiovascular risk who cannot reach their LDL cholesterol goals with current standard lipid lowering therapies. The market opportunity is large, with 10 million patients in the U.S. alone who are not at goal despite being on existing therapies.

LDL cholesterol lowering remains the primary objective for the management of hypercholesterolemia, and this has been supported by a large body of data. Based on our end of Phase II discussions with the U.S. and European regulatory authorities during the second quarter, we expect LDL cholesterol to be the primary endpoint for our regulatory filings and the basis for our initial approval. Obviously, this depends on an acceptable safety profile in the Phase III studies and no sea change in the regulatory view around LDL as a valid surrogate endpoint. The Odyssey program includes a large cardiovascular outcomes trial that will enroll approximately 18,000 patients and will start later this year. We expect this trial to be well underway at the time of the BLA filing for Regeneron 727, but we do not anticipate that the final results of that trial will be a prerequisite for filing.

Sarilumab, our subcutaneous IL6 receptor antibody for rheumatoid arthritis continues to enroll patients in the Phase III mobility trial. There is growing excitement about the IL6 class of drugs, given data recently presented for ACTEMRA, or tocilizumab, an approved IL6 antibody, in a head-to-head study versus Humira, or adalimumab, the leading anti-TNF for the treatment of rheumatoid arthritis. There are 2.7 million patients treating worldwide for RA each year. We look forward to initiating additional sarilumab Phase III studies with our partner, Sanofi, later this year.

Another positive development for our pipeline, as we mentioned on our last call, was an FDA advisory committee’s unanimous vote in favor of a role for the ongoing development of anti-nerve growth factor – anti-NGF – agents for pain associated with osteoarthritis. Pain represents an enormous unmet need and it is estimated that 25 million patients worldwide suffer from moderate to severe osteoarthritis, and about 4 million of them are intolerant to or poorly responsive to existing therapies. We also can report that we have had discussions with the FDA and look forward to updating you on the clinical development plans for our anti-NGF antibody, Regeneron 475, once they are finalized. As a reminder, we have full sole rights to Regeneron 475.

I’d like to now turn the call over to Bob Terifay to provide an update on the EYLEA launch.

Robert Terifay

Thank you, George. Our commercial organization is thrilled with the reception that EYLEA has received in the wet AMD market, as evidenced by the 56% growth in our net product sales for the second quarter to $194 million. We believe that there are several factors that have contributed to the huge strength of our launch. Our market research suggests that EYLEA enjoys an increasing level of market awareness. This market awareness, combined with the fact that EYLEA offers clinically equivalent efficacy to monthly Lucentis, or ranibizumab, with the convenience of less than monthly dosing; and secondly, that many doctors continue to switch patients from Lucentis and off-label Avastin, or bevacizumab, to EYLEA has allowed to establish what we believe is a very strong foothold in the wet AMD market.

Based on qualitative market research surveys that we conducted towards the end of June of 2012, EYLEA has now been used in approximately 90% of all accounts where Lucentis has been used, up from the 70% that was reported in the first quarter. Clearly, this indicates that some of our growth this past quarter came from an increase in the number of accounts that are using EYLEA. In terms of penetration and/or market share within these accounts, our market research suggests that EYLEA has now captured approximately 14% of the overall wet AMD anti-VEGF market by volume. This is an increase from the 10% market share that we estimated on our first quarter earnings call.

Based on qualitative market research survey results, we estimate at the time of our survey, patients continuing on EYLEA represent approximately 40% of our sales. Thirty-five percent comes from wet AMD patients new to anti-VEGF therapy, and the remaining 25% come from patients switching from other anti-VEGF therapies. In terms of our switches, our new market research indicates that about half of the switches are coming from Avastin. Both efficacy and the convenience of less than monthly dosing are cited as the key drivers for starting our naïve patient and switching a patient to EYLEA from either Avastin or Lucentis.

In order to better understand the dynamics of this market, including the reason why patients switch to EYLEA, we look forward to the upcoming American Society of Retinal Surgeons meeting in Las Vegas in August where there will be a special session devoted to independently prepared presentations from several retinal practices around the country reporting on their initial experiences with EYLEA in this specific patient population of switches.

There are several factors that influence a successful drug launch. One of the key drivers for a buy and bill product such as EYLEA is successful reimbursement. To this end, we’ve made an effort to streamline and facilitate the reimbursement process. We continue to see successful reimbursement from all of the regional Medicare carriers, secondary and supplemental insurers, and commercial and private payors. All targeted commercial payors are now covering EYLEA with several commercial payors now have published coverage policies. We have also seen broad adoption by hospital formularies.

We expect to receive our permanent J-code in January of 2013 and anticipate that this will further streamline the automated EYLEA claims process and provide an additional degree of comfort to those accounts who might have been sitting on the sidelines, awaiting confirmation that reimbursement would not be an issue for them. In the meantime, on July 1 our temporary Q-code for EYLEA went into effect. A Q-code is a temporary but specific code for EYLEA that results in automated reimbursement. To ensure as seamless a transition as possible to the Q-code from the miscellaneous J-code, we have in place a team of regional business managers who are working closely with physician office managers to facilitate reimbursement. We’ve already seen that certain Medicare carriers who had slow processing turnaround times for claims submitted using a miscellaneous J-code have already processed claims more quickly using the EYLEA-specific Q-code that only became available on July 1.

While these sales metrics are reassuring and we expect continued growth in EYLEA usage, we are mindful that it is unrealistic to expect this pace of growth to continue for the remaining two quarters of the year. With more and more of our sales coming from patients continuing on EYLEA treatment, we do expect an impact on patients moving from the monthly loading dose phase to less monthly dosing regimens, including the every-other-month dosing regimen recommended in the EYLEA prescribing information. We also expect to see a decline in the number of patients available in each practice to be switched to EYLEA from other VEG-F inhibitors.

In addition, since we’ve now penetrated about 90% of the accounts that are known to have used Lucentis, we expect a slowdown in the rate of new account growth. On the other hand, as doctors gain experience with EYLEA in both naïve patients and switches, we also expect further share gains in both of these segments. Bottom line is that we expect continued growth for EYLEA but at a slower rate in the second half of the year.

As a result, we are increasing our full-year EYLEA U.S. net sales forecast to 700 to $750 million. If our new forecast is achieved, it would make EYLEA one of the top biopharmaceutical product launches of all time.

Turning outside the United States, which we expect to be a significant contributor to EYLEA growth in 2013 and beyond, EYLEA was recently approved for the treatment of wet AMD in both Australia and Colombia. In addition, our partner Bayer Healthcare has filed for the wet AMD indication in Europe and Japan and we anticipate approval and launches on a country-by-country basis in Europe and Japan starting at the end of this year and continuing throughout 2013. Bayer has also announced that they plan to submit a filing and CVRO indication shortly following ex-U.S. wet AMD approvals.

As Len mentioned earlier, Bayer entered into a co-promotion agreement with Santen in Japan. We and Bayer expect this agreement will allow EYLEA to have broader and faster reach into the Japanese ophthalmology community. As part of this agreement, we’ve converted our profit split in Japan into a tiered royalty of between 33.5 and 40% on EYLEA net sales in Japan.

While the EYLEA launch is only just the beginning, its initial early success increases our confidence that EYLEA can continue not only to deliver near-term growth through the continued launch in wet AMD in the United States and shortly outside the United States, but also long-term revenue growth through expansion into new indications globally.

Now let me turn it back to Len.

Dr. Leonard Schleifer

Thanks, Bob. Before moving to Murray to review the financial results, let me take a moment to address the competitive landscape in wet AMD and our long-term vision for Regeneron and ophthalmology. EYLEA represents the culmination of years of internal research and development for Regeneron in the field of angiogenesis, where we were early pioneers and made seminal discoveries. We were not the first anti-VEGF to reach the market for the treatment of eye diseases; in fact, EYLEA is the third approved anti-VEGF product after Macugen and then Lucentis. However, our goal is for EYLEA to become the global market leader.

Given this history, we are very aware that research and innovation will not stop at EYLEA, and patients and physicians will be looking for the next innovation in the treatment of wet AMD. Thus, we continue to invest in research to not only find ways to improve EYLEA but also to find novel approaches and targets to treat wet AMD and other eye diseases. For example, in the Sanofi collaboration we are developing an angiopoieten 2 antibody for cancer that, based on preclinical data, may also have potential to be developed for the treatment of diseases of the eye.

Over the last several years, our scientists have also been exploring the role of platelet-derived growth factor, or PDGF, in angiogenesis. We currently have a high affinity PDGF antibody in pre-clinical development that we expect to be in the clinic in 2013. As a reminder, Sanofi has certain option rights to our antibodies.

It is important to note that a blocking PDGF does provide an added benefit over VEG-F inhibition alone in diseases of the eye. We believe it is important to try and develop a potent inhibitor, combine it with the best VEG-F blocker, and attempt to develop it as a single co-formulated injection if possible. Importantly, we know firsthand how long and difficult the road to the market can be, as it took approximately four years from the first patient enrolled in our Phase III EYLEA program to our initial launch in the U.S. As such, from what we see in the competitive landscape now, we don’t expect any new entrants to the wet AMD market before the 2017-2018 time frame. That said, we are committed to investing to maintain our leadership position through continued innovation.

With that, I would now like to turn the call over to Murray, who will review our second quarter financial results.

Murray Goldberg

Thank you, Len, and good morning to everyone. I’m very pleased to discuss our financial results for the second quarter of 2012 which brought Regeneron to a new milestone with over $100 million of non-GAAP profit in a quarter. Total revenues in the second quarter were $304 million. This included $194 million of EYLEA net sales and about $6 million of ARCALYST net sales. The gross to net adjustment for EYLEA sales was similar to last quarter at approximately 7.5%. For EYLEA, this quarter’s distributor inventory remained consistent with prior quarters at about one to two weeks of inventory on hand. As a result, EYLEA net sales included a modest increase in distributor inventory of about $10 million.

Collaboration revenue was $98 million in the second quarter. This primarily included Sanofi’s reimbursement to us of $92 million for antibody and Zaltrap R&D expenses that we incurred, offset by approximately $8 million in pre-commercialization expenses for Zaltrap that Sanofi incurred and that we reimbursed them for. Our reimbursement to Sanofi is accounted for as contra-revenue.

Looking forward in 2012, this line will include growing pre-commercialization expenses for Zaltrap in preparation for potential launch in a variety of countries at the end of this year and next year. Our share of these pre-commercialization expenses would potentially be at least partially offset by an approval milestone of $50 million if we were to receive regulatory approval from the FDA.

Bayer Healthcare collaboration revenue was about $9 million in the second quarter and primarily represents Bayer’s cost-sharing of some of the EYLEA development expenses that we incurred. As EYLEA launches globally, Bayer Healthcare collaboration revenue will also include our share of the pre-commercialization expenses and our share of the profits and losses from commercialization outside the United States, as well as potential approval and sales milestones from Bayer.

Cost of goods sold in the second quarter was $22 million or 10.9% of net product sales overall and about 10.5% for EYLEA. This includes royalty expense in connection with our Genentech license agreement relating to ophthalmic sales of EYLEA in the U.S. It also includes inventory write-offs and reserves of approximately $6.5 million that increased cost of goods sold for the quarter.

Non-GAAP R&D expense was $136 million for the second quarter this year, about the same as in the second quarter last year. If we back out R&D reimbursements from our partners during the quarter from our R&D line, our net non-GAAP unreimbursed R&D expense for the second quarter was $37 million compared to $34 million in the first quarter. We anticipate that this net R&D expense will continue to trend upward through the remainder of 2012 and would increase much faster if antibodies outside the Sanofi collaboration, such as our NGF antibody Regeneron 475, move into advanced stage clinical trials.

Non-GAAP SG&A expenses were $40 million for the second quarter this year compared to $20 million in the second quarter last year. The increase in SG&A expense versus last year is primarily due to the fully-burdened cost of the EYLEA field force and other EYLEA commercialization-related expenses. In April, we provided full-year non-GAAP SG&A expense guidance of 180 to $210 million. In the event that the FDA does not grant approval for ARCALYST for the prevention of gout flares in patients initiating uric acid lowering therapy, which is what we currently expect, our non-GAAP SG&A would be on the lower end of that range. As a reminder, non-GAAP R&D and non-GAAP SG&A expenses exclude non-cash share-based compensation expense.

Turning to the bottom line, we reported non-GAAP net income of $102 million for the second quarter which is equivalent to non-GAAP fully diluted EPS of $0.90. Non-GAAP net income excludes non-cash share-based compensation expense and non-cash interest expense related to our convertible senior notes. On a GAAP basis, we had net income of $77 million or $0.70 per diluted share. For the full year, we expect to be profitable on both a GAAP and a non-GAAP basis.

As you will note, despite turning profitable for the quarter, we have not provided for a tax liability as we have released a portion of our full valuation allowance against our large balance of net operating loss carry-forwards and other tax credits. When we transition into showing consistent profits, we’ll provide more guidance on the accounting treatment of these NOLs and tax credits. On a cash basis, we do not anticipate that we will have a cash tax liability for at least several years.

Our non-GAAP fully diluted average shares outstanding in the second quarter were approximately 115 million shares and include about 16 million shares attributable to stock options, restricted stock, and warrants accounted for using the treasury method, and about 5 million shares associated with our convertible notes accounted for using the if-converted method.

At June 30, we had $597 million of cash and marketable securities compared to 811 million at year-end 2011. The decrease is primarily attributable to the extended payment terms on EYLEA sales. As you will recall, in connection with the launch of EYLEA, we offered our distributors extended payment terms and they in turn offered physicians extended payment terms of up to six months to provide ample time for physicians to receive reimbursement from Medicare and other insurance providers for their EYLEA usage. At June 30, our trade receivables totaled about $350 million, almost all related to EYLEA sales. Now that we are in the ninth month of launch, those receivables have begun to be paid down though the account balance continues to increase because of our growing EYLEA sales. For the second half of this year, we currently expect to be cash positive.

Thank you, and with that I’ll turn the call back to Len.

Dr. Leonard Schleifer

Thanks Murray, Bob, George. This was truly another great quarter for Regeneron. Let me conclude today’s call by making a few comments about the bigger picture for Regeneron.

This quarter marks another step forward towards our goal of becoming a leading biopharmaceutical company, as well as a long-term growth company for investors both in terms of revenue and earnings. At a time when many large pharmaceutical companies are cutting back their research, shutting down major research centers and looking externally for innovative science and product opportunities, we are investing in research, investing in our people, and expanding our manufacturing capacity. We are also seeing our past investments and collaborations bear fruit with a robust pipeline that has multiple BLAs under review at the FDA, 10 antibodies in the clinic, two of which are in Phase III, and additional new antibodies expected to enter the clinic by the end of this year and each year thereafter.

All of these products and product candidates were invented at Regeneron by Regeneron scientists and Regeneron Laboratories, led by George Yancopoulos, our Chief Scientific Officer and my partner since the founding of the company over 20 years ago. This is an exciting time for Regeneron, and I want to again thank our dedicated employees who have helped us achieve our goals, the many investors who have stuck with us for a long time, patiently waiting to see us reach this point, and all the patients, their family members and physicians who have participated in our clinical trials and will continue to contribute to our future.

With that, let me turn the call back over to Michael for questions.

Dr. Michael Aberman

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

Thank you, and Operator, if you could please open the call for questions.

Question and Answer Session

Operator

[Operator instructions]

Our first question comes from Steve Byrne with Bank of America.

Steve Byrne – Bank of America

Hi. I wanted to drill into your survey results a little bit more, Bob. You mentioned 14% share of wet AMD by volume. I assume that’s by patients. I was wondering if out of that 35% that is for patients naïve to anti-VEGF, can you comment on what your share is of that pool of patients, what portion of those are being treated with EYLEA relative to alternative VEG-Fs?

Robert Terifay

So Steve, to clarify, the way we have calculated our share is based upon eyes, so the equivalent of that would be a vial of drug. In terms of market share, I just need to remind you – these were market shares projected by physicians in a qualitative survey in June. It is not based on a chart audit or anything, so it’s physician perceptions. Now, what they’ve reported is that the market share overall, as well as the new patient market share, are fairly similar at about 14%; but again, it’s qualitative. It’s not a chart audit.

Steve Byrne – Bank of America

And one geographic region I didn’t hear mentioned about was Brazil. Is Bayer looking into the opportunity in that country?

Robert Terifay

Bayer is looking globally. We haven’t discussed filing strategies outside of EU and Japan as of yet.

Dr. Leonard Schleifer

But you can be sure that over time they’ll be in every significant market.

Dr. Michael Aberman

Great. Next question, please?

Operator

The next question comes from Robyn Karnauskas with Deutsche Bank.

Alethia Young – Deutsche Bank

This is Alethia on behalf of Robyn. Congrats, guys, on a strong quarter, not only in rev but in earnings, too. Can you just talk about what you’ve learned in the U.S. that would be applicable around the doctors for the global launch of EYLEA, please?

Dr. Leonard Schleifer

Yeah, it’s a good question. When we launched the product, of course, we were very pleased that we had what you would say is a front-line label – that it’s indicated for the treatment of wet AMD. But of course, doctors tend to try a new drug in their most difficult patients, and what we learned is that that turns out to be a great strategy for us because they were very pleased with how that turned out, whether it was switches or people who weren’t getting adequate response or still wet, and you’ll hear more about that in the presentations, I think, from some of these practices in the retinal meetings in August in Las Vegas. But I would say that the big thing to remember is that the EU and the rest of the world are not one market like the United States is, so you don’t know exactly how things are going to play; and this may play great in one place and in another place it may be driven solely by negotiating price, and someplace else it may be just driven by how well the sales people there are ready. But I think that if there’s one overriding thing that we’ve learned and I think Bayer obviously has learned is that the docs like the product, so the more we can get doctors to start using the product, that becomes our best selling effort.

Dr. Michael Aberman

Next question?

Operator

Our next question comes from Chris Raymond with Robert Baird and Company.

Chris Raymond – Robert W. Baird

Thanks. You know, I’m not sure I caught all the detail that you had on your developmental efforts with the anti-PDGF and the angiopoieten 2. Could you maybe just go back and give a little bit more detail – is it your plan to develop a co-formulated VEG-F PDGF therapy, or is this separate? And are these two agents – PDGF and angiopoieten – are you going to pursue these in parallel? Can you maybe just give us a little bit more detail on that, please?

Dr. Leonard Schleifer

Right. I don’t want to get into the details of our development plans and strategy, because this is a competitive area. But let me just make another comment or a reiterated comment I made when we presented our opening remarks, which is that the effect that’s been reported to date with a PDGF aptamer was a rather modest effect of about four letters difference between Lucentis alone, and it took two different injections to get that. What we think the lesson there is, is that (a) there should be caution, and if there’s more questions we can drill down why there should be caution, of whether or not that is going to repeat in further studies; second, we believe that a modest effect size like that would best be delivered to the marketplace if you had a co-formulated – that is, you could inject once into the eye. And finally, we believe that if you’re going to go down this path, you want to go down the path with the best PDGF blocker that you can, and the aptamer—we don’t think that the aptamer necessarily—like anything else, the first one may or may not be necessarily the best one.

Dr. Michael Aberman

Next question?

Operator

Our next question comes from Terence Flynn with Goldman Sachs.

Terence Flynn – Goldman Sachs

Hi, thanks for taking the question. Congrats on another solid quarter. I guess I had two – one is on the guidance front. If you can just maybe give us your thoughts on where you see the greatest uncertainty in your guidance. Is it either at the front end so that new patients coming on, or is it at the back end in terms of the transition from induction to maintenance dosing? And then just a follow-up on the PDGF front – can you tell us, maybe walk us through some of the challenges of potentially including two antibodies in one injection? And that’s it for me, thanks.

Dr. Leonard Schleifer

So Bob, if you want to deal with the first question, and then we can deal, George, with the second one.

Robert Terifay

Sure. So we are encouraged by the survey results that indicate that we have an annuity of patients at this time; the continuing patient segment is growing. Now remember, the dosing for patients is three initial monthly doses followed by dosing every eight weeks, and we do see that in both the naïve as well as the switch patients, that the dosing interval is expanding beyond that four weeks after the initial loading dose period. So we’ll see fewer injections in those continuing patients once they get past the initial monthly loading dose phase.

However, we do see growth in new patients, which is exactly where we expect to get our revenues from; and as you would expect, there was a pool of patients ready for switching that is not drying up but decreasing because there was some pent-up demand. So I think what you’ll see is fewer injections in the continuing, decreased overall number of switches, and we’ll have continued growth in the new.

Dr. Leonard Schleifer

How that equation gets solved obviously creates the uncertainty in the marketplace. George, do you want to address the issues of co-formulation and things like that?

George Yancopoulos

Well the good news about trying to combine or co-formulate two very similar types of biologics is that the technical or scientific hurdles are relatively minor, so there really aren’t too many technical hurdles with co-formulation. Of course, there will be regulatory issues, and probably the most difficult issue is of course trying to get the dose and the regimens correct. Obviously, I’m sure you’re all aware, that’s the most complicated thing about this, and it’s going to take a large number of studies and attempts and so forth to figure out if there is a benefit to adding a second agent, how best to dose, and interval and frequent that second type of an agent. It’s going to be obviously very challenging for the whole field, including for us, to do that.

Dr. Leonard Schleifer

George, could you address the reproducibility of small effects and what we’ve learned in that?

George Yancopoulos

Right. I guess what Len is referring to is in the existing Phase II data with the PDGF agent, there was an apparent difference of about four letters with the double dosing, giving two injections of both the PDGF agent as well as an anti-VEGF agent. And obviously these results are very interesting and exciting, and they suggest that there may be a combination benefit. On the other hand, reason for concern and caution is simply that obviously in small studies like these, the relative differences between two dose groups, even if in a particular study it may appear statistically significant, are not necessarily always reproduced when done again.

So just to give you a very simple example, two dosing groups that look in our integrated analysis to be no different, two different dosing regimens that we tried in our large Phase III program where each study was more than twice as large as the reported PDGF study, in one study the relative difference between agents was four letters, and then in the other study the relative difference between the two agents went two letters in the opposite direction, meaning that there was a six-letter swing between the two studies, which as I said each one was more than twice as large as the Phase II studies just reported for the PDGF agent. So though there’s reason to be excited, and we’ve certainly been pursuing this pathway for many years, and as Len said we think we may have a top candidate for combination type studies, there’s a lot of reason for caution about whether there really is a benefit; and even if there is, I think there’s going to be a lot of effort required to figure out how to optimize such a co-therapy.

Dr. Leonard Schleifer

Good, George, and I think we’ll go on to the next question. One last point before we go on on that issue is that one has to be careful also about how selective these patients were, how generalizable it is. You don’t know if diabetics were treated and there were other restrictions. So I think there’s a lot of time and things to be done and learned. We’re clearly paying close attention.

Next question?

Operator

Our next question comes from Jim Birchenough with BMO Capital.

Jim Birchenough – BMO Capital

Hey guys. Let me add my congratulations. Just on the market dynamics and trying to anticipate what proportion of patients might go from induction to maintenance dosing, right now as you look at patients on EYLEA, what proportion are getting monthly dosing versus every two month dosing? And then just wondering if you can help size the treatment-naïve market in AMD, how many new patients do you see coming on each quarter and what’s the share—if you can remind us, what’s the share there in the naïve patients? Thanks.

Dr. Leonard Schleifer

Bob?

Robert Terifay

So I’ll start with the naïve patient. New patients in the wet AMD market coming in are roughly 25 to 30% of the overall market. In terms of where things are settling out on the dosing, it’s really too early because we constantly—as you saw, we have people who are just staring EYLEA, a fairly large group that are, even when they are switched, are generally being started on a monthly loading dose, period. So we’re seeing the dosing interval go out over time. I think we’ll have a better sense in future earnings calls, but it would be premature to give you a specific time right now.

Operator

The next question comes from Yaron Werber with Citi.

Yaron Werber – Citi

Hey, congrats also. Great quarter. If you don’t mind, I just have kind of two questions. One, just help us understand the timing in Europe for approval. It was filed back in June last year, so we’re now kind of almost 14 months into it. So why would the approval be all the way at the end of the year and not earlier than that, and I’m just talking about the approval, not the actual reimbursement approval. And then secondly just as a follow-up to the discussion on the aptamer PDGF, if you look at the previous data – again, admittedly small patient numbers, but very interesting data. It showed really a remarkable ability to dry the eyes. I think one of the concerns is the total number of injections will go down over time as people do treat and extend and they’re using OCT. So what are your thoughts on that?

Dr. Leonard Schleifer

So on the first one regarding the timing, I think Bayer is in charge of that and the timing is what they’ve said. You can pursue that further with them. As far as the PDGF and the drying of the eye, you know, you might recall—you have to remember what it’s being compared to. Lucentis, from our studies, our own head-to-head, had less dry eyes than EYLEA did, and so you’re talking about eyes that are not completely dry as it is under anti-VEGF therapy. And you should also, obviously, remember that there is not a perfect correlation between drying of an eye and visual acuity.

Next question?

Operator

Our next question comes from Biren Amin with Jefferies.

Biren Amin – Jefferies

Yeah, thanks for taking my questions. I wanted to maybe focus on the EYLEA DME ongoing Phase III program, and after the briefing documents released yesterday, it seems FDA prefers proportion of patients gaining three lines over a three-year period, and given the (audio interference) is designed for visual acuity changes at two years at baseline, would you expect to revise Vista trial design based on FDA commentary?

Dr. Leonard Schleifer

I think we’ve had a pretty good discussion with the FDA about our trials, and if after the results of this advisory committee meeting, if there’s anything to do, obviously we’re going to watch it carefully. The FDA accepts both types of endpoints as long as there’s a certain magnitude of effect, and I believe our trial design is also a little bit different. We have an active control of laser versus they had rescue, so the trials are not exactly analogous but we feel comfortable right now with our trial design. But of course, we’ll look at it in light of what gets discussed.

Next question?

Operator

Our next question comes from Mani Mohindru with ThinkEquity

Mani Mohindru – ThinkEquity

Hi, thanks for taking my questions, and my congrats to your team as well. I just wanted to get a better sense of your guidance. You know, you keep coming and surprising us, so trying to see what your thought process is in your updated guidance. Are you including any CRVO estimates there, and are you also taking into account some impact of the newly implemented Q-code that just went into effect earlier this month? Trying to get a sense if those two things are playing into your new guidance. And on the Q-code front, I know it’s very early, but have you seen any kind of impact in the few weeks that it’s been on? Thanks.

Dr. Leonard Schleifer

So two points – we never plan or project or incent based on anything but the proved indication, so that estimate is based solely on our view of the approved marketplace. But we can’t be sure, of course. We don’t always get the data to be sure of what it’s doing, so it’s our best guess, okay? And you say we’re surprising you – we get surprised as well, and so it really is our best estimate.

The other question you had is whether the Q-code has seen any effect. I think in Bob’s opening remarks, he said that we’ve already seen just since July 1 claims getting paid based on Q-codes. That obviously only took a few weeks, because we’re only a few weeks into July, to get paid, which is a large decrease in the time to pay compared to—prior to the Q-code in some cases.

Bob, you want to amplify on that?

Robert Terifay

So as Len said with regards to the CRVO, we’ll wait and see when the claim comes; but I’d just remind everyone, CRVO, although it’s an important indication to add to our breadth of claims for EYLEA, CRVO in terms of the number of patients eligible for anti-VEGF therapy is about 10% of the wet AMD patient population. So CRVO is going to be a fairly small marketplace, but it does expand the utility of EYLEA if we get that claim.

Dr. Michael Aberman

Okay, next question?

Operator

Our next question comes from Joseph Schwartz with Leerink Swann.

Joseph Schwartz – Leerink Swann

Thanks very much, and congratulations on the outstanding performance. I was wondering, just to follow up on your last statement, why did you not pursue branch retinal vein occlusion when you did the central RVO studies? Thank you.

Dr. Leonard Schleifer

In fact we are pursuing it; it’s just a matter of there’s a lot going on. We had AMD, DME, CRVO, and BRVO is enrolling as we speak.

Next question?

Operator

Our next question comes from Ted Tenthoff of Piper Jaffray.

Ted Tenthoff – Piper Jaffray

Great, thank you very much, and my congrats too. Just as you come and look to the upcoming PDUFA dates, in particular with respect to Zaltrap, what are your preparations with Sanofi for potential launch there, and what else should we be expecting from that program over the next 12 to 18 months?

Dr. Leonard Schleifer

Right, so I think that Sanofi is a highly experienced player in the oncology marketplace. They’re taking the rowing oar on that. Obviously, we work with them and we meet communities and all that, but we’re going to rely heavily on their really outstanding experience in this area.

In terms of what’s to come over the next month, I think that either George or I mentioned that this is the beginning, we hope, of our entry into oncology, and clearly we would like to make the effects of anti-VEGF therapy even better for patients. While there is clearly a survival effect in our studies, we would like to have seen a bigger effect and we think perhaps by combining it in a clever way with several, one or more of our anti-angiogenesis agents that are already in the clinic or trying to identify patients who might do better or not have side effects of what have you, we certainly are trying to amplify those effects.

Next question?

Operator

Our next question comes from Phil Nadeau with Cowen & Company

Phil Nadeau – Cowen & Company

Good morning. Thanks for taking my questions, and let me add my congratulations on the quarter. Just a couple of follow-up questions on the—

Dr. Leonard Schleifer

I missed that. Sorry, go ahead. You broke up here.

Phil Nadeau – Cowen & Company

Oh, sorry. I just said let me add my congratulations on the quarter. Just some follow-up questions on the Q-code. Could you tell us from a physician or patient perspective how much easier this makes the logistics of prescribing EYLEA? Is there any less paperwork, or is it just that claims get paid back faster? And then related to that, if claims are getting paid back faster, can you give us some sense of how much longer you’re going to keep your extended payment terms?

Robert Terifay

Yeah, so many of the carriers required under a period where we had a miscellaneous J-code additional paperwork such as copies of the approval letter, documentation of the claim, the use for wet AMD, and that did require extra paperwork for the offices and oftentimes there’s been a changeover in the computer systems that process claims, and there’s been a slowdown especially on these manual-type claims. So with the Q-code, many of the carriers have said they don’t’ require that documentation upfront any more because there is now a specific code for EYLEA, so it is easier for many offices to file. And as we’ve said, we have seen in some of the carriers around the country that were slow on claims processing because of these manual procedures, that—we only got the Q-code on July 1 and we’re seeing claims come through already in some of those practices, so it’s very encouraging.

Dr. Michael Aberman

I think we have time for one more question, Operator.

Operator

Our next question comes from Geoff Meacham with JP Morgan

Geoff Meacham – JP Morgan

Good morning, guys. Thanks for taking the question. Just a few on the PDGF – so you guys are in Phase I next year, but just curious if you’ve actually selected a single antibody candidate so far, and maybe anything you can tell us about what you’ve seen I models in combination with EYLEA. And then the third part to this is—I guess, should we infer from the PDGF that your bias is to develop one organically and to not partner? Thanks.

Dr. Leonard Schleifer

All great questions, but I think we probably have said more than we are comfortable saying, frankly. We don’t want to get into much more detail since it’s a pretty competitive space, Geoff.

Dr. Michael Adler

All right, so that wraps up the call for today. I want to thank everyone for participating and everyone for calling in, and we look forward to working with you in the coming quarters.

Operator

Ladies and gentlemen, this does conclude today’s presentation. You may now disconnect and have a wonderful day.

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