Regeneron Pharmaceuticals CEO Discusses Q3 2012 Results - Earnings Call Transcript

 |  About: Regeneron Pharmaceuticals, Inc. (REGN)
by: SA Transcripts


Good morning ladies and gentlemen and welcome to the Regeneron Pharmaceuticals conference call to discuss the third 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 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.

Michael Aberman

Thank you, Kevin. Good morning and welcome to Regeneron Pharmaceuticals’ third quarter 2012 conference call. An archive of this webcast will be available on our website in the newsroom page for at least the next 30 days. Joining me on the call today are Dr. Leonard Schleifer, Founder, President and Chief Executive Officer; George Yancopoulos, Founding Scientist, President of Regeneron Labs and Chief Scientific Officer; Murray Goldberg, Chief Financial Officer and Bob 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 businesses, development programs, collaborations, finances, taxes, 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 September 30, 2012 which was 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 calls. Information regarding our use of non-GAAP financial measures and a reconciliation of these measures to GAAP is available in our third quarter 2012 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 the call over to our President and Chief Executive Officer, Dr. Len Schleifer.

Leonard Schleifer

Thanks, Michael. Good morning to everybody. And thanks for joining us. I am happy to report another successful quarter for Regeneron both in terms of our financial performance as well as our progress in our pipeline. Starting with EYLEA, we reported a US EYLEA net sales of $244 million this quarter representing a 26% growth over the second quarter of this year.

Given the EYLEA results and current market trends, we are increasing our full year US EYLEA net sales guidance from our previous range of $700 to $750 million to our new guidance of 790 million to 850 million.

Our guidance takes into consideration that the combination of the Thanksgiving and end of year holidays could lead to as much as one less week of potential sales. The strong US EYLEA sales helped deliver our third consecutive profitable quarter with non-GAAP net income of $217 million, which translates into non-GAAP fully diluted earnings per share of $1.89. Murray Goldberg will provide color on our financial performance later in the call.

In the meantime, please note that this quarter's profits included two onetime milestone payments. A $15 million milestone from Sanofi for the US FDA approval ZALTRAP also known as ziv-aflibercept in combination with FOLFIRI for patients with metastatic colorectal cancer that is resistant to or has progressed following an oxaliplatin-containing regimen and a $15 million milestone from Bayer Healthcare for the approval EYLEA in wet AMD in Japan. With the strong results reported today, we can expect our first profitable full year since our inception.

It has also been a busy quarter on both the regulatory and clinical development fronts. In addition to the ZALTRAP approval in the US, we received US FDA approval for EYLEA for the treatment of macular edema following central retinal vein occlusion or CRVO. We are pleased to be able to provide another treatment option for the physicians and patients that are impacted by this condition.

This is also an important step towards our goal of driving long term growth for EYLEA through new indications. Outside the United States, our partner Bayer Healthcare has received several regulatory approvals for EYLEA including Japan, Australia, Columbia and most recently Brazil.

In addition in Europe the committee for medical products for human use also known as the CHMP recommended that EYLEA be approved for wet AMD and we expect marketing authorization by year end. Bayer Healthcare plans to launch EYLEA in Japan, the EU, Australia and other countries beginning later this year and continuing into 2013.

Turning to our antibody pipeline, we announced the initiation of a broad Phase III program for our PCSK9 antibody, REGN727 for lowering LDL cholesterol. We also announced the full enrollment of our first Phase III trial MOBILITY for sarilumab our antibody targeting the IL-6 receptor in rheumatoid arthritis and have also initiated a second trial in the broad SARIL-RA program with sarilumab that we call the target trial.

Our earlier stage programs continue to move forward with new antibodies entering the clinic such as our novel oncology antibody targeting OB-3 and we have started a combination trial with our two antibody and ZALTRAP.

Let me now hand the call over to our Chief Scientific Officer, George Yancopoulos to give more details on the developments in our pipeline. Following George, we will hear a commercial update from Bob Terifay, a financial update from our Murray Goldberg. And finally, I'll come back to make some concluding remarks before turning the call over to question-and-answers. George?

George Yancopoulos

Thank you, Len. The third quarter has been another busy one for us. This quarter was particularly gratifying with two FDA approvals Len mentioned in the United States. Although, we have enjoyed numerous regulatory approvals over the past year, we certainly appreciate that. In this industry drug approvals are not common place. We're extremely proud of the accomplishment of all the groups of Regeneron who contribute to the success.

ZALTRAP also known as ziv-aflibercept was approved in combination with FOLFIRI for patients with metastatic colorectal cancer that is resistant to or has progressed following an oxaliplatin-containing regimen.

ZALTRAP is the only anti-VEGF agent approved in this setting. We received approval for ELYEA in the setting of macular edema following Central Retinal Vein Occlusion or CRVO. While the commercial opportunity for CRVO is not as large as wet AMD or diabetic macular edema where we have two fully enrolled phase 3 trails, the vision loss associated with CRVO can be catastrophic to patients.

ELYEA demonstrated significant efficacy in our COPERNICUS and GALILEO trials in CRVO patients with 56% and 60% three line gainers for the ELYEA arm versus 12% and 22% for the sham control arm of these trails at week 24, compared with baseline. Mean change in visual acuity improved by 17.3 and 18.2 letters with ELYEA as compare to a four letter loss in COPERNICUS and a 3.3 letter gain in GAILILEO with the sham control arm on over the first 24 weeks of the study.

The most common adverse reactions 5% or more reported in patients receiving ELYEA were conjunctival hemorrhage, eye pain cataract, vitreous detachment, vitreous floaters and increased intraocular pressure. We believe that ELYEA offers an important new treatment option for patients with this potentially blinding disease.

Turning to our late stage R&D pipeline, as we reported in our last conference call, early in the third quarter, Sanofi and Regeneron announced the launch of the 22,000 patients global Phase III program for Regeneron 727, our PCSK9 antibody for lowering LDL cholesterol. This program called Odyssey consists of more than 10 clinical trials to evaluate the safety and efficacy of Regeneron 727 in a broad range of patients.

At the upcoming American Heart Association meeting in Los Angeles, we will present some novel analysis from our Phase II program for Regeneron 727. We along with our partner Sanofi will be hosting a webcast and teleconference for investors on Monday, November 5th from the American Heart Association annual meeting to provide some additional perspective on our Phase III program. Details on that event will follow shortly and will be posted on the Investor Relations section of our website.

I am also very pleased to announce today that the global Phase III mobility trial for Sarilumab are subcutaneous IL-6 receptor antibody for rheumatoid arthritis is now fully enrolled. The mobility trial which is part of the global SARIL-RA Phase III program is evaluating Sarilumab in combination with methotrexate in adult who have moderate-to-severe active rheumatoid arthritis with an inadequate response to methotrexate. With enrolment now complete, we expect results from the study in 2014.

In addition, we have now initiated another Phase III study in the SARIL-RA program called the TARGET trial. TARGET is now recruiting and will evaluate Sarilumab in combination with non-biological disease modifying anti-rheumatic drugs, also known as DMARD, in adult patients with moderate-to-severe RA who have an inadequate response to for our intolerant drug or more TNF alpha inhibitors.

Patients, who complete the mobility or TARGET studies, will be eligible to enrol in the (inaudible) which is the Phase III long term safety and efficacy study. We will be announcing additional Phase III studies of Sarilumab in 2013.

Another pipeline up in advance development is our NGF antibody Regeneron 475. Earlier this year, an FDA advisory committee voted unanimously in favor of providing clinical path forward for developing anti-NGFs for pain associated with osteoarthritis, which we believe represents a significant market opportunity. We are working with the FDA to define the next steps.

Turning to our earlier stage programs, we are particularly excited about developments in our oncology pipeline. During the third quarter, we initiated with Sanofi the first clinical trial combining one of our novel anti- angiogenic antibodies with ZALTRAP. In this case, it is our antibody to angiopoietin 2 called Regeneron910. While this is clearly an early first step, we are strong believers in the need to combine different anti-angiogenic modality to improve the impact of angiogenic agents for the treatment of cancer and we are looking forward to testing this and other novel combinations.

We also advanced into clinical development another novel oncology antibody that forced outside the Sanofi collaboration. Regeneron 1400 targets ErbB3 an emerging and important target in the epidermal growth factor family.

In addition to on-going trials with EYLEA and ZALTRAP, we now have 10 antibodies in the clinic of which six are partnered with Sanofi. We also have additional earlier stage projects that are advancing towards the clinic and we look forward to updating you as they move forward in development.

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

Bob Terifay

Thank you, George. We continue to be proud of the successful launch today of EYLEA or aflibercept injection. And the third quarter was no exception, as evidenced by $244 million in sales.

The overall penetration of EYELA into the wet AMD market continued to grow during the third quarter, both in terms of newly treated patients as well as patients switching for bevacizumab and ranibizumab.

Importantly much of this growth came from new retinal practices that appeared to have been bevacizumab only practices in the past.

There are two reasons why physicians reported they are adopting EYELA. First, the convenience of the dosing regimen and secondly, efficacy. Retinal specialist satisfaction with the efficacy of EYLEA was underscored at the recent annual scientific meeting of the American Society of Retinal Surgeons or ASRS, which took place in August. At this meeting there were nine independently prepared presentations from retinal practices around the country that reported their positive initial experiences with EYLEA, specifically in patients switched from ranibizumab for bevacizumab. These data provided additional insight into the differentiated product reception of EYLEA in this specific switch population.

Turning now to reimbursement, remember that EYLEA is a buy and build product and it’s not successful reimbursement is key. We continue to witness successful reimbursement in wet AMD from all the regional Medicare carriers, secondary and supplemental insurers and commercial and private payers. All targeted commercial payers are now covering EYLEA with many of them now having published coverage policies.

As I mentioned last quarter, as of July 1st we were given the temporary Q-code which will be followed by permanent J-code which we expect in January of 2013. As you know, the Q-code facilitates an automated reimbursement. In our experience so far, there has been a streamlining of the reimbursement process following the Q-code. Since the Q-code is issued, physicians indicate that the average time for reimbursement of Medicare claims has improved. We remain very pleased with the growth of EYLEA and wet AMD to-date.

As you know another avenue of growth for EYLEA is expansion into other indications. And we’re happy to report that in the third quarter EYLEA received approval for the treatment of macular edema following CRVO in the US Given that EYLEA was only approved for five working days in the third quarter it’s too early launch of the macular edema following CRVO indication to gauge impact on sales. What I share with you is as of today all Medicare carriers have reported that they are reimbursing for EYLEA in this new indication.

Turning to our guidance for EYLEA net sales for the remainder of the year, we’re cognizant in with a couple of important factors. As you know we’ve now penetrated the vast majority of accounts that have been identified as ranibizumab accounts. We also have several hundred accounts now purchasing EYLEA that were not identified as ranibizumab account. The numbers of accounts that treat wet AMD and have not yet purchased EYLEA are limited.

Second, we see the patients continuing EYLEA therapy are moving towards less frequent dosing. Importantly for the coming quarter, we also expect some seasonality with the Thanksgiving and Christmas holidays in the quarter, as we expect many practices to be closed for the last week of the year and some patients will likely delay injections until after the holidays.

Beyond the US we see tremendous opportunity for EYLEA. The ex-US wet AMD market is just as big if not bigger than the US market. In the third quarter, we along with our ex-US partner Bayer HealthCare announced that EYLEA had received a positive opinion for the Committee for Medicinal Products for Human Use to the EU.

Bayer launched EYLEA for the treatment of wet AMD in various Europe territories following approval, which is expected later this year. EYLEA has also been approved for the treatment of wet AMD in Australia, Japan, Columbia and Brazil with launches anticipated beginning late this year.

I would now like to turn for ophthalmology to oncology, what we made our first foray in the third quarter with the approval of ZALTRAP also known as ziv-aflibercept. We co-commercialized ZALTRAP with our partners Sanofi.

Interest in the use of ZALTRAP in its approved medical setting for historically there was no therapy demonstrated to improve overall survival in combination with the standard of care chemotherapy regimen Folfiri, it’s highlighted by the $8.3 million in net sales recorded by Sanofi in the United States from August 20th to September 30th.

With that, let me turn the call over to Murray Goldberg.

Murray Goldberg

Thank you, Bob and good morning to everyone. I’m very pleased to discuss our financial results for the third quarter of 2012, which was the third consecutive quarter of profitability for Regeneron. Total revenue this quarter was $428 million, which included EYLEA net sales of $244 million and ARCALYST net sale of $5 million.

As Len already mentioned, the revenue for the quarter included a $50 million milestone from Sanofi and a $15 million milestone from Bayer which I’ll discuss in a moment.

In terms of EYLEA, net sales have now grown from a $124 million in the first quarter to a $194 million in the second quarter to $244 million this past quarter. We now forecast full year US EYLEA net sales of $790 to $815 million. EYLEA inventory held by distributors in the third quarter was consistent with prior quarters at about one to two weeks of sales.

Sanofi collaboration revenue for the third quarter was $145 million and has a number of components, including reimbursement of our R&D expenses for preclinical and clinical research within our antibody collaboration, as well as our share of the loss associated with preparing for commercialization of ZALTRAP and then launch in August, plus the ZALTRAP milestone payment. As you heard from Bob, we’re very pleased with the $8 million that ZALTRAP net sales in the third quarter, representing about six weeks of initial sales.

During the initial launch period, we expect ZALTRAP to operate at a loss. In this quarter our share of that loss was about $7.5 million. Looking forward, we expect this loss to increase, as Sanofi launches ZALTRAP around the world, following approval in each country. The case impact of these early losses on us is litigated by the $50 million approval milestone that we received in the third quarter.

Note also, that even after ZALTRAP turns profitable, we’re obligated to begin to repay Sanofi for our share of development costs. So, we do not expect to show profits from ZALTRAP on our income statements for at least the next couple of years.

For the third quarter, Bayer Healthcare collaboration revenue was $27 million and represent Bayer’s reimbursement for their share of EYLEA development expenses that we incurred. It also includes the $15 million milestone that we received for the approval of EYLEA in Japan. As Bayer launches EYLEA in each country outside the US, we will start to share commercialization expenses and profits and losses from commercialization in these countries, except for Japan where we receive a royalty on sales. We also expected $10 million milestone in the fourth quarter from Bayer Healthcare upon pricing approval of commercialization of EYLEA outside the US.

Cost of goods sold in the third quarter was $20 million or 8.1% of total net product sales consistent with our prior guidance of cost of goods sold, averaging less than 10%. As a reminder, this includes royalty expense in connection with our agreement with Genentech relating to  ophthalmic sales of EYLEA in the US.

Turning to R&D, non-GAAP R&D expense was $145 million compared to $120 million in the third quarter last year.

If we net out R&D reimbursements from our collaborators, from our R&D expense line, our net non-GAAP unreimbursed R&D expense for the third quarter 2012 was $38 million similar to the $37 million in the second quarter this year.

We expect total unreimbursed non-GAAP R&D expense for the full year to range between $160 million to $200 million which implies a fourth quarter unreimbursed non-GAAP R&D expense of $50 to $90 million.

This potential substantial increase in the fourth quarter is primarily due to the fact that we expect full year discovery pre-clinical spending under the Sanofi antibody agreement to exceed the amount that Sanofi is obligated to reimburse. The difference will all fall into the fourth quarter. Therefore fourth quarter unreimbursed R&D expenses should not be extrapolated as a run rate for 2013.

With respect to SG&A, our non-GAAP SG&A expense for the third quarter was approximately $40 million compared to $28 million in the same quarter of 2011. We now expect our full year 2012 non-GAAP SG&A expense to be in the $160 to $180 million range below our prior guidance of $180 to $210 million.

As a reminder, non-GAAP R&D and non-GAAP SG&A expenses exclude non-cash share based compensation expense.

Turning now to the bottom line, we reported non-GAAP net income of $217 million for the third quarter which translates into non-GAAP fully diluted EPS of $0.89. Non-GAAP EPS excludes non-cash share-based compensation expense and non-cash interest expense related to our senior convertible notes. On a GAAP basis, we reported net income of $191 million and fully diluted EPS of $0.72.

Included in both the GAAP and non-GAAP EPS are the two onetime milestones totaling $65 million that went directly to the bottom line.

Now that we have reported three consecutive quarters of profitability, it seems appropriate to begin discussing and looking ahead to book and cash income taxes.

We currently have significant net operating loss carry-forwards and tax credit carry-forwards available to offset future taxable income. In fact, given the magnitude of our existing NOL and tax credit carry-forwards, plus significant additional tax deductions we expect in connection with future employee exercises of stock options, we do not expect to pay any significant cash income taxes through at least 2014.

On a book basis, things are more complicated. Even though we have a large amount of NOLs in tax credits that are available to offset future taxable income, under GAAP, we are not allowed to show a deferred tax asset on our balance sheet due to our outstanding history of operating losses, prior to 2012. Rather, we fully offset our deferred tax assets with what is called evaluation allowance.

In each of the past three quarters, when we reported net income, consistent with GAAP, we released enough of this evaluation allowance to offset that net income so that there was no need to provide for any book taxes on that income.

Once we have a sustained history of quarterly profitability, we would be required to release a significant portion or all of the valuation allowance. In that quarter, we will recognize a large onetime, non-cash income tax benefit on our income statement. Since this is a onetime, non-cash benefit, we expect to exclude it from our non-GAAP earnings in that quarter.

From then on, consistent with GAAP, we will provide for book taxes on our net income each quarter using our estimated corporate tax rates which we expect to initially be around 40%. As our business continues to grow and we optimize business and financial management strategies, we anticipate that this tax rate will decline overtime.

It bears repeating that even though we may begin to report book income taxes on our financial statements, we do not expect to pay any significant cash income taxes in the near future. We have not yet determined whether to include cash taxes or book taxes in our non-GAAP earnings calculation at the time we begin to report book taxes.

Our non-GAAP fully diluted shares in the third quarter were approximately a $116 million and include 16 million shares attributable to stock options, restrictive stock and warrants and 4.7 million shares attributable to our convertible notes, accounted for using the 'if converted' method.

At September 30th, we have $583 million of cash, restricted cash in marketable securities. In addition, our trade receivables continue to increase and we're $507 million at the end of the quarter which is a reflection of our growing EYLEA sales and long commercial terms.

Thank you and with that I'll turn the call over to Len.

Leonard Schleifer

Thanks Murray, Bob, George, the rest of the Regeneron team for delivering a great quarter. This marks our third quarter of profitability in a row as well as a strong quarter of revenue and earnings growth. We hope this is indicative of what we strive to deliver over the long term, strong top and bottom line growth.

In order for us to fulfill this promise we have to continue to continue to invest in R&D and deliver with our pipeline. As always, we thank the patients and their families who use our medicines and enroll in our clinical trials. Let me close by saying that we have always believed that Regeneron’s success is due to its outstanding group of talented and dedicated employees.

Thus we are particularly proud that during this quarter, these employees and others recognize Regeneron as the best place to work in the industry as reflected by Science Magazine’s recent ranking of Regeneron as the world's number one Bio Pharmaceutical employer.

With that, let me turn the call back over to Michael and open up the call for questions-and-answers.

Michael Aberman

Thank you, Len. Kevin if you could now open the call for Q&A period.

Question-and-Answer Session


(Operator Instructions) Our first question comes from Robyn Karnauskas with Deutsche Bank.

Robyn Karnauskas - Deutsche Bank

I guess first question, you have given in the past the percentage of sales of new patients versus previously treated, could you update that? And second on PCSK9, what would be the first trial you think to roll and read out? And how do we think about timelines for data read outs for PCSK9? Thanks.

Michael Aberman

Okay. So let me take the second question first, as far as PCSK9 goes, we're going to have an event at the American Heart Association with Sanofi and so that’s probably a better form to give you guidance on the various aspects of the program, it's coming up not too long Robyn, so if you can hold on till early part next month, you get your answers I hope.

As far as the specific movement whether the patients are coming from switches, how many switches, whether they're bad and whether they're Lucentis, we really aren’t going to get into that much detail. Bob can you give some general color on where we stand on market share and reiterate that?

Bob Terifay

Sure. In the past we've given you information from physician surveys. We’d like to try to get more focus on the actual numbers. So I think what we can tell you is that it best and has about 15% of the overall market at the present time. Among the two products that are specifically approved for use in retinal diseases, total sales were $636 million.

Our share of those sales is about 40%. So overall what you can look at is, in the marketplace for anti-VEG-F therapies used in the eye, we have about a 20% market share. Now I remind you that Lucentis is approved but BRVO, CRVO and DME. So part of those sales are for other uses. So, our share is at least 40% or 20% of the AMD market. The other thing I can tell you from our surveys with retinal specialist which is a good indicator of where things are going is that our share of new patients is currently similar to that for Lucentis. So, we are gaining ground and things look very good for the future.


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

Chris Raymond - Robert Baird & Company

Just, one of the dynamics that has kind of hit the news, since the quarter closed is this issue around the meningitis outbreak with compounding pharmacies. Understanding that you don’t want to perhaps give too much color on the quarter, I know you talked about the holidays being hit, but can you maybe talk about the initial reaction you’re hearing from docs in terms of this news item as it relates to Avastin use? And is there anything we should know about that?

Leonard Schleifer

Thanks for that question Chris. You know, of course at Regeneron like most ethical pharmaceutical companies, our concerned for patients is always paramount and obviously our thoughts go out to all who affected by this tragedy and it really is a tragedy, it’s a bit of a black mark on the US drugs supply system which here therefore we’ve had a really, I’d say excellent track record.

It’s worth noting that when all of us think about FDA approvals, that it tempting to think only in terms of the safety and efficacy of the product as measured in clinical trials but there is much more to it. And an important part of the approval process includes inspection of the facilities where the drug will be manufactured and therefore it covers not just the drug but the entire supply chain including manufacture and distribution.

In addition, the FDA also has well specified guidelines and recommendations on the ongoing pharmacovigilance with management. So, you know that has not being the case based on the newspaper reports in the compounding pharmacy industry. So I think that there is value to using an FDA approved product. We recognize that there are cost differentials between the off label use of Avastin and the branded products. But nevertheless, we do think that the branded products have important attributes to offer.

As to whether or not there will be a structural change in the use of Avastin based on any regulatory or new regulations or laws that may emerge, I think it’s just too early to tell whether there will be a psychological change over from Avastin to wanting people want to use an FDA product, we think that’s possible. People give you all sorts of opinions on that, but we just don’t have any data yet. But I think, over the next quarter or two we should be able to give you a little bit more information. Obviously, we’re going to monitor very carefully what’s going on in Washington and what’s going on in the marketplace. Next question, please?


Our next question comes from Joseph Schwartz with Leerink Swann.

Joseph Schwartz - Leerink Swann

I was wondering regarding the compounded Avastin theme, how much Avastin uses for patients that might have good insurance coverage for EYLEA, but lining up that reimbursement takes time, so physicians might start the patient on Avastin while they wait for payers to approve the patients Is there anything that you can do to encourage more uptake of EYLEA, now you’re your reps have a good story to tell versus just few of the unknown?

Bob Terifay

So we do have a program in place that will cover practices if they do use EYLEA in a patient and then the patient turns out not to have insurance coverage. So that has not deterred physicians from using EYLEA at the initial dosing. Most of the Avastin use quite frankly is in patients who do have insurance, who could benefit from both EYLEA and Lucentis, but the physicians have chosen to use Avastin because of its price. So, that’s a surprising point. We might have thought if you’re already going into this the Avastin was being reserved only for patients who can afford a branded product, but that is clearly not the case. So there is an opportunity to be able to convert patients and we are seeing, we have been, even before this episode switching from Avastin to our products.


Our next question comes from Jim Birchenough with BMO Capital.

Jim Birchenough - BMO Capital

Congratulations on the strong performance. Couple of questions, just following up on the line of inquiry on Avastin. When you look at Avastin practices that have this concern about financial risk, do you have a sense of what proportion are just not set up in terms of having sophisticated reimbursement, people onsite and what proportion do you have the sophistication to be able to build for EYLEA. So that’s the first question.

Second question, just on dose frequency, any sense of what the trends are there in terms of whether we’re starting to see dose and extend having some impact, some of the headwinds you talk about before? And then a quick question for Murray, at the point where we exhaust the NOLs Murray, and you actually start paying cash income taxes, where do you think that 40% rate will have following to? Thanks.

Leonard Schleifer

So Bob do you want to deal with the issue of whether these practices can and cannot set up for reimbursement in the issuing dosing?

Bob Terifay

So Jim that was a good observation. We’re actually picking up these practices that were all advanced and who are smaller practices, who just didn’t have the infrastructure to ensure that they had the reimbursement to stay profitable and early on with the launch of the Lucentis, they had actually lost money. So we do have our reimbursement people spending time with the smaller practices to make them comfortable with how to manage their inventory so that they don’t lose money on the anti-VEG-F agents. However, there are some larger practices that historically for one reason or another chose to be Avastin only practices, that do have the capabilities, but again, we are starting to see making inroads in those practices and we picked up quite bit of our business from Avastin.

Jim Birchenough - BMO Capital

And dosing?

Bob Terifay

In terms of the dosing again, I don’t give the specifics of a physician surveys, but I can tell you that dosing interval is increasing overtime as physicians move from the three loading doses and we are seeing more and more that physicians are moving towards the every eight week dosing interval.

Murray Goldberg

On the tax side Jim, it’s too early to be able to forecast that. Firstly, we don’t really know when we’ll start paying cash taxes, part of that depends on how quickly we generate profits, cumulative profits and what additional NOLs we generate going forward. So we don’t the timing of when that is. And therefore, we don’t really know at that point how far we’ll have advanced and what we have been able to do in order to bring our tax rate down, but certainly it’s an important goal for us to bring our book tax rate down from that and our cash tax rate down from that 40% level.

Jim Birchenough - BMO Capital

Murray, you meant generate not NOLs in the future but income tax credits so right from…

Murray Goldberg

The options are both okay.


Our next question comes from Terence Flynn with Goldman Sachs.

Terence Flynn - Goldman Sachs

I guess one additional follow-up on the injection frequency, I was wondering if you have any survey data regarding injection frequency in the refractory patients, I know at ASRS it seems like the physician reports were kind of variable in terms of the dosing frequency and schedule they’re using those patients. So I was just wondering what your surveys have picked up out there in the market and then second question on the SG&A front, was impressed the leverage again this quarter and I was wondering, if this is the level we should think about as we go into our years here.

Leonard Schleifer

Murray do you want to deal with the SG&A leverage at this point? I mean I don’t think there’s much new here. We know that this is an efficient product to sell and…

Murray Goldberg

The leverage we get is because we’re based in to the same sales force, six sales force, and as Bob indicated, we’re covering just about all the retinal specialist and their practices so that we can expand sales even both for went AMD and additional indications without having to significantly expand our commercial expenses.

Bob Terifay

In terms of refractory patients, if you go back to some of those presentations at ASRS, the physicians have reported that they were frequently dosing Lucentis or Avastin even on less than a monthly dosing intervals. Some of them were dosing every two weeks for example. What we see with EYLEA, is their first goal is to try to alleviate the ongoing retinal edema that existed in those patients and then they do try to increase the interval overtime and we are seeing that they are able to move the interval off and out from two weeks to four weeks or from four weeks to six weeks and over time, they are trying to stretch that. So, we do see that there is a longer interval in the refractory patients with EYLEA, but again, the more important factor that doctors have focused on is to alleviate that retinal edema and hopefully improve vision.


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

Steve Byrne - Bank of America

I wanted to ask you little bit more about this switchers, in general for those physicians that switch a patient from either Avastin or Lucentis over to EYLEA, do they in general, move right into the every other months, dose frequency or do they go to the loading dose?

Bob Terifay

So again, this ties back to part of what we’re talking about refractor patients, many of the switches of people that were inadequately controlled with Avastin or Lucentis, so most of those patients are giving loading doses to start. There are some patients who’ve asked to be switched to EYLEA because of living far away from the retinal practice or because of their travel schedules. In some of those patients, they get the three loads, in some cases they switch over to every eight weeks, but the majority of our switches currently do get three loading doses.

Steve Byrne - Bank of America

And are you finding physicians moving to as needed or PRN dosing with EYLEA to the same level they were with Lucentis or Avastin?

Bob Terifay

It’s a mixed bag, there are some physicians who have chosen to go to a more predictable dosing schedule. So we actually have practices that have moved all their patients to every eight week dosing on a schedule and feel that they are getting very good results and that really is the strength of the product. If you can get to a predictable schedule we don’t have to bring them in for monitoring in between, that saves the practice money, saves the healthcare system money and it is much more convenient for the patient.

There are other physicians who I wouldn’t call it a PRN dosing schedule but they are using a treat extend dosing schedule which is, they try to extend out the dosing interval by checking on the patient’s vision on a regular schedule and then move it out in two week increments overtime and we do see the interval increasing as we go out in time.

Steve Byrne - Bank of America

And one more for you Bob, if a physician were to treat a patient with EYLEA for DME, is it your observation that they can’t get reimbursement coverage for it?

Bob Terifay

So first of all, we do not promote EYLEA for any use other than the labeled indications of whether AMD and macular edema following CRVO. For the most part, payers are reimbursing specifically for those two indications on select basis, if a physician selects to go to payer and try to get reimbursement for DME, it may be possible. But again, we’re focused on our labeled indications.


Our next question comes from Yaron Werber with Citigroup.

Yaron Werber - Citigroup

Nice quarter. So, question for Bob and a question for Murray. Just Bob, in terms of CRVO, may be help us understand a little bit the market, how it’s different from AMD. It’s more of a fixed number of injections market. I am just trying to get a sense. How do you kind of think about the rapidity of the uptake or is this kind of a more of a new patient market i.e. maybe even a faster penetration? And then I have a follow-up to Murray.

Bob Terifay

Sure. So, the CRVO market first of all is relatively small compared to the AMD market, about 10% in terms of the patients. In terms of its management, historically people looked at CRVO as a disease that they manage for a six months to a year and then, well first of all, there were no therapies historically, so they did watchful waiting and unfortunately some people lost their vision permanently. But they did think of it as an acute condition that once the clot resolves, that they wouldn't need therapy anymore.

What we've seen in some of the longer term follow up studies from the Lucentis trials, specifically the horizon RVO trial is that, CRVO is a chronic disease. Patients may need anti-VEG-F therapy for several years and we do see the duration of therapy increasing for CRVO.

I also think CRVO has been undermanaged in the past, because watchful waiting was the norm, we saw people delaying therapy. What we can tell you from our own trial is that patients who delay treatment for more than two months after they experience the initial incident of CRVO, did not do as well as those who received immediate anti-VEG-F therapy. So we think there's an educational opportunity on RVO. We are focusing our medical specialists on working with physicians to identify more CRVO patients and treat them early, aggressively and chronically. So it may end up being a larger market than 10% over time and it may follow more the AMD dynamics.

Yaron Werber - Citigroup

And just Murray, for you, when they look at your SG&A currently, I mean you're running around, Q1 was high and even pretty stable Q2 and Q3. I'm just trying to get a sense, is that kind of a good run rate as we think about your base spending from now on. And then R&D aside from this one time pop, I guess my question, is this going to be a onetime pop or is this going to be something that recurs at the end of every year, as you might just decide to spend more than Sanofi is reimbursing.

Murray Goldberg

Two good questions. In terms of the SG&A, I think as I mentioned earlier, we don't see a need around the EYLEA program for there to be a big increment in commercial expenses in and of itself. I think in terms of G&A you will see some secular trends obviously as the company is growing a lot of those expenses grow with it and the infrastructure necessary to support it, not only the commercial operations but the expansion of our R&D efforts also grows. I think you will see some small increases consistent what you've seen the past aside from the big jump in commercial expenses related to EYLEA.

In terms of your other question, on R&D, we focused on the fourth quarter and the fact of the mechanics of how this is going to work in terms of the Sanofi reimbursement. So whether that will happen in each fourth quarter will depend as you point out how much we spend in terms of our discovery research and how that compares to what's reimbursed. So it's hard to predict that but we’ll try to give you a heads up as we did in this third quarter.

But beyond that, in terms of the total amount aside of this quirkiness of the Sanofi expanding and reimbursement, the overall amount of what's going to happen unreimbursed R&D will also depend on other things like the progress of our NGF program which is not parted if and when that gets up and running those expenses will be unreimbursed R&D. and some of our investment in other antibodies that are not part of Sanofi collaborations such as George talked about ErbB3 which is first coming on board and other antibodies that are already advancing in Phase I.

So we may see some additional spending for those and for as we pursued new technology opportunities also coming out of our own expense. So the overall level of what the unreimbursed R&D would depend on some of these other factors NGF perhaps being a large one of that. So it's an early until we get some feedback from the FDA to talk about when and how much that might be.

Yaron Werber - Citigroup

So we should think about Q4 as 120 base that which was last which was one Q3 plus the additional 50 to 90?

Murray Goldberg

120 plus the 50, that we gave you our full year guidance of 160 to 200, we know that’s a relatively large range, but we wouldn’t take that fourth quarter rate to 50 to 90 and just automatically assume that's going to be the same thing in the first quarter next year.

Yaron Werber - Citigroup

No, no, no of course, but you kind of back into a fourth quarter 170 to 210 would be the range for the fourth quarter in R&D, just trying to bracket that a little bit all in?

Leonard Schleifer

Yes, we can certainly help you if it's still confusing, following our conference call.

Murray Goldberg

And we’ll update this guidance as we get greater clarity in terms of what we’ll be doing with some of the non-Sanofi programs moving into 2013.


Our next question comes from Jason Kantor with Credit Suisse.

Jason Kantor - Credit Suisse

Most of my questions have been asked and answered but I was wondering if you could talk about the potential for the ex-U.S. launch of EYLEA, what you've learned from the U.S. launch? And how you think about, how that drug could be taken up in other countries? What are the factors that could make it move more or less quickly than the U.S.?

Murray Goldberg

Right. So, I think those kind of detailed questions are better left for Bayer, who’s got the rolling more on this one but you can look at the uptake of our product relative to Lucentis’ first four years in the U.S. and you can take a look at the first four years of Lucentis outside the U.S. and then make your own relative guesses on how we’ll do. But if you want more details, I would suggest you talk with our colleagues at Bayer at this point.

Just caution to remember of course, it’s not a monolith outside the United States, you don’t get reimbursement in every jurisdiction. These are multiple roll outs, so it’s not like the United States where we rolled out, even though the market size is probably as large outside the United States as it is in the United States, it’s not as easy to address that market as quickly.

Jason Kantor - Credit Suisse

And then if I could ask another question on the US market, the people that are still using Lucentis predominantly, why are they still doing that? And what are you learning and how can you continue to penetrate those people who maybe who are not early adopters, what is the reason for their sticking with Lucentis versus switching?

Bob Terifay

So, first of all if somebody is doing well on Lucentis, unless they want to be switched for convenience, the physician is not going to switch them off of a therapy that is working. Remember AMD is a chronic disease. So there are a number of patients on continuing Lucentis therapy that aren’t going to be moved. In terms, of new patients, Lucentis does offer a rebate to high volume accounts and that does influence the decision making in certain accounts.


Our next question from (inaudible) with RBC Capital Markets.

Unidentified Analyst

A high level question for you, Lucentis sales were pretty stable this quarter and EYLEA strongly, so can say a bit more about market dynamics that we’re seeing out there. And if you can then specifically, is there some of bolus of patients that are hard to treat, that you think working through and then in terms of future development time for EYLEA, would you do a formal study yourself for the investigator sponsor study in that particular setting, are you good enough and then trials in combination with other agent cancer dose. Thanks.

Leonard Schleifer

I just didn’t hear the last question.

Unidentified Analyst

The second part was that if you can form a big picture then specifically, is there some of bolus of patients that is being worked through, that are hard to treat, would you do a hard to treat study yourself or are the IST good enough? And then lastly combination to studies, if any with EYLEA?

Leonard Schleifer

Well, I think, we’re going to look at the, whether or not it make sense to do a registration study based upon what it would cost, how much it would influence the market, what the endpoints would be. George, want to add anything to that?

George Yancopoulos

Well, certainly this as we’ve already heard a lot of emerging data on these hard to treat patients and we’re certainly seeing how that data matures over time and taken that into consideration as one set in terms of going forward.

Leonard Schleifer

In terms of the first part of your question, I would remind you that Lucentis is relatively stable in sales, but they do have three indications beyond wet AMD. Beyond CRVO, which we share in common with them, they are approved for macular edema following branch, retinal vein occlusion which is a market that is about a third of the AMD market size. And they also are the only product to approve the treatment of diabetic macular edema where there is significant unmet medical need and so there are part of those Lucentis sales, are those uses which has offset the decline in the AMD.

Unidentified Analyst

Okay. Then if I can just ask on the bolus to you, the condition of bolus?

Leonard Schleifer

There are constantly patients who the physician determines are refractory or inadequately controlled with other therapies. Not everyone gets to a dry retina especially on a predictable dosing schedule. So we continue to see switches, but the number of switches or the numbers of switch available patients is lower than when we first launched.

Bob Terifay

So remember this will constantly be a sort of a very dynamic and cycling market. You have patients who will stop therapy, these are the elderly patients. Right now we’re only getting approximately half of the branded market going in and therefore a quarter of the overall market and therefore the 75% of the market that are potential bolus patients if you will, that will accumulate as they continue to go. If we gather more and more of the frontend new patients, then obviously that would go down. So it’s very hard to model per-se, to take. If you’ve got a great model, send it along to us.

Unidentified Analyst

Can I speak on sarilumab since nobody seems to ask on that?

Bob Terifay

We’re getting very late in time and we have a few more question, and sorry, so we’re going to take two more questions, operator.


Your next question comes from Philip Nadeau with Cowen and Company.

Philip Nadeau - Cowen and Company

Just to first, just looking for an update on your PDGFF efforts, when can that enter the clinic and when can we see data? And then second on ZALTRAP pricing, there was a prominent cancer institution here in New York City that recently made some noise about ZALTRAP’s pricing. So, it’s really been clear to me how many refractory patients used low-dose Avastin versus high-dose. Could you give us some sense of how you think ZALTRAP is actually priced relative to the actual Avastin dose that’s being used in refractory patients? Thanks.

Bob Terifay

As part of the pricing and all that issue, we should really have only one spokesperson for that and that’s been Sanofi’s. People are more than happy to discuss those issues with you. If you need a contact, we’ll give you a contact there. In terms of PDGF, George, you want to make any comments about that?

George Yancopoulos

Yes, we certainly find the very preliminarily data very interesting, we recognized that it’s very hard to understand that the magnitude of the benefit in these small studies where we’ve certainly seen our experiences that you can get differences that are due to chance and it’s hard to know what the exact benefit is. We certainly think that it’s going to be a very interesting but very complicated development path going forward. How to incorporate another agent another series of injections? How many are going to be needed? What’s the benefit is going to be required and so forth. So it’s going to be a very competitive clinical development path and very interesting. And we’re certainly not going to give guidance on what our approach is going to be right now other than that it’s going to be very interesting. As I said, it’s going to be very complicated. How do we incorporate another injection to the process? And we’ll be hopefully entering very soon to the clinic and giving you more information about our pogrom.

Bob Terifay

So we hope next year to be in the clinic. Good, Michael, turn it back over to you we have one more.

Michael Aberman

Actually given the time, it’s already 9:30, I think we’re going to wrap it up here. I apologize to anybody who didn’t make it on the call obviously. We will be available immediately following this call to answer any further questions. So again, operator this concludes our third quarter call. Thank you everybody for participating.


So ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.

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