News Column

REGENERON PHARMACEUTICALS INC - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

February 13, 2014

The following discussion should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this report. Overview We are a fully integrated biopharmaceutical company that discovers, invents, develops, manufactures, and commercializes medicines for the treatment of serious medical conditions. Our total revenues were $2,104.7 million in 2013, compared to $1,378.5 million in 2012 and $445.8 million in 2011. Our net income was $424.4 million, or $3.81 per diluted share, in 2013, compared to net income of $750.3 million, or $6.75 per diluted share, in 2012, and a net loss of $221.8 million, or $2.45 per share (basic and diluted), in 2011. Net income in 2012 included an income tax benefit of $335.8 million, primarily attributable to the release of substantially all of the valuation allowance against our deferred tax assets. Refer to "Results of Operations" below for further details of our financial results. We currently have three marketed products: EYLEA (aflibercept) Injection, which is available in the United States, EU, Japan, and certain other countries outside the United States for the treatment of wet AMD and macular edema following CRVO. Net product sales of EYLEA in the United States were $1,408.7 million in 2013, $837.9 million in 2012, and $24.8 million in 2011. Bayer HealthCare records



revenue from sales of EYLEA outside the United States. EYLEA net product

sales outside of the United States commenced in the fourth quarter of 2012, and were $472.1 million in 2013 and $19.0 million in 2012. We commenced sales of EYLEA for the treatment of wet AMD in November 2011 and for the treatment of macular edema following CRVO in September 2012, following receipt of regulatory approval in the United States. Bayer HealthCare commenced sales of EYLEA for the treatment of wet AMD in the fourth quarter of 2012 following receipt of regulatory approvals outside the United States, and for the treatment of macular edema secondary to CRVO in the fourth quarter of 2013 following receipt of regulatory approvals in the EU and Japan. Bayer HealthCare has additional regulatory applications for EYLEA for the treatment of wet AMD and macular edema secondary to CRVO pending in other countries. We are collaborating with Bayer HealthCare on the global development and commercialization of EYLEA outside the United States. Bayer HealthCare markets EYLEA outside the United States, where, for countries other than Japan, the companies share equally the profits and losses from sales of EYLEA. In Japan, we are entitled to receive a percentage of the sales of EYLEA, as described below. We maintain exclusive rights to EYLEA in the United States and are entitled to all profits from any such sales. ZALTRAP (ziv-aflibercept) Injection for Intravenous Infusion, which is available in the United States, EU, and certain other countries for treatment, in combination with FOLFIRI, of patients with mCRC that is resistant to or has progressed following an oxaliplatin-containing



regimen. Regulatory applications for marketing authorization of ZALTRAP

for the treatment of previously treated mCRC patients in other countries

have also been submitted and are currently under review by the respective

regulatory agencies.

We and Sanofi globally collaborate on the development and commercialization of ZALTRAP, and share profits and losses from commercialization of ZALTRAP, except for Japan, where we are entitled to receive a percentage of the sales of ZALTRAP, as described below. ZALTRAP net product sales, which are recorded by Sanofi, commenced in the United States in August 2012 and in Europe in the first quarter of 2013, and were $70.2 million in 2013 and $31.7 million in 2012. ARCALYST (rilonacept) Injection for Subcutaneous Use, which is available



in the United States for the treatment of CAPS, including FCAS and MWS, in

adults and children 12 and older. CAPS are a group of rare, inherited,

auto-inflammatory conditions characterized by life-long, recurrent

symptoms of rash, fever/chills, joint pain, eye redness/pain, and fatigue.

Net product sales of ARCALYST totaled $17.1 million in 2013, $20.2 million

in 2012, and $19.9 million in 2011. We do not expect future net product

sales of ARCALYST for the treatment of CAPS to be significant.

Developing and commercializing new medicines entails significant risk and expense. Before significant revenues from the commercialization of our antibody candidates or new indications for our marketed products can be realized, we (or our collaborators) must overcome a number of hurdles which include successfully completing research and development and obtaining regulatory approval from the FDA and regulatory authorities in other countries. In addition, the biotechnology and pharmaceutical industries are rapidly evolving and highly competitive, and new developments may render our products and technologies uncompetitive or obsolete. 49



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Our ability to continue to generate profits and to generate positive cash flow from operations over the next several years depends significantly on our success in commercializing EYLEA. We expect to continue to incur substantial expenses related to our research and development activities, a significant portion of which we expect to be reimbursed by our collaborators. Also, our research and development activities outside our collaborations, the costs of which are not reimbursed, will expand and require additional resources. Our operating results may fluctuate from quarter to quarter and will depend on, among other factors, the net sales of our marketed products, the scope and progress of our research and development efforts, the timing of certain expenses, and the continuation of our collaborations with Sanofi and Bayer HealthCare, including our share of collaboration profits or losses from sales of commercialized products and the amount of reimbursement of our research and development expenses that we receive from collaborators. We cannot predict whether or when new products or new indications for our marketed products will receive regulatory approval or, if any such approval is received, whether we will be able to successfully commercialize such product(s) and whether or when they may become profitable. We have 16 product candidates in clinical development, all of which were discovered in our research laboratories. Our Trap-based clinical programs are: EYLEA, which is in clinical trials for the treatment of DME and macular



edema following BRVO in collaboration with Bayer HealthCare; and

ZALTRAP, which is being studied in combination with our angiopoietin-2

inhibitor (nesvacumab) in oncology in collaboration with Sanofi.

Our antibody-based clinical programs include 14 fully human monoclonal antibody product candidates. The following seven are being developed in collaboration with Sanofi: Sarilumab (REGN88), an antibody to IL-6R, which is being developed in rheumatoid arthritis and non-infectious uveitis;



Alirocumab (REGN727), an antibody to PCSK9, which is being developed for

LDL cholesterol reduction;

Dupilumab (REGN668), an antibody to IL-4R, which is being developed in

atopic dermatitis, asthma, and nasal polyposis;

Enoticumab (REGN421), an antibody to Dll4, a novel angiogenesis target,

which is being developed in oncology;

Nesvacumab (REGN910), an antibody to Ang2, another novel angiogenesis

target, which is being developed in oncology;

REGN1033, an antibody to GDF8, which is being developed in skeletal muscle

disorders; and

REGN2009, an antibody in clinical development against an undisclosed target.

We are developing the following six antibody product candidates independently: REGN1400, an antibody to ErbB3, which is being developed in oncology;

REGN1154, an antibody in clinical development against an undisclosed target;

REGN1500, an antibody in clinical development against an undisclosed target;

REGN1193, an antibody in clinical development against an undisclosed target;

REGN1908-1909, an antibody combination in clinical development against an

undisclosed target; and

Fasinumab (REGN475), an antibody to NGF, which is being developed for the

treatment of pain and is currently on clinical hold by the FDA.

In addition, REGN2176-3, a combination product that is comprised of an antibody to PDGFR-beta co-formulated with EYLEA for use in ophthalmology, entered clinical development in the first quarter of 2014, and is being developed in collaboration with Bayer HealthCare. Development of REGN846, which completed a Phase 1 study against an undisclosed target, was discontinued in the second quarter of 2013. 50



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The planning, execution, and results of our clinical programs are significant factors that can affect our operating and financial results. In our clinical programs, key events in 2013 and 2014 to date were, and plans for the remainder of 2014 are, as follows: Trap-based Clinical Programs: 2013 and 2014 Events to Date 2014 Plans



EYLEA

ÿ Bayer HealthCare received ÿ Regulatory agency decisions



on

regulatory approval for EYLEA in additional applications outside the

certain European and other United States for the treatment



of wet

countries for the treatment of AMD and macular edema secondary



to CRVO

patients with wet AMD and ÿ Bayer HealthCare to file for



China

continued to pursue regulatory regulatory approval for the



treatment

applications for marketing of wet AMD approval in additional countries ÿ Bayer HealthCare received ÿ Bayer HealthCare to file for



additional

regulatory approval for EYLEA in ex-US regulatory approvals in DME and

the EU, Japan, and other certain additional Asia regulatory approvals in

other countries for the treatment myopic CNV

of patients with macular edema

secondary to CRVO and continued to ÿ Regulatory agency decisions on

pursue regulatory applications for applications in the United States and

marketing approval in additional outside the United States for the

countries treatment of DME



ÿ Initiated Phase 3 VIVID EAST-DME ÿ Report two year results from Phase 3

study in Russia, China, and other VIVID-DME study and one-year results

Asian countries from Phase 3 macular edema



following

BRVO study



ÿ Reported positive one year results ÿ File for regulatory approvals in the

from the Phase 3 VIVID-DME and United States and outside the



United

VISTA-DME studies States for the treatment of



macular

edema following BRVO



ÿ Submitted supplemental BLA for

regulatory approval in the United

States for the treatment of DME ÿ Bayer HealthCare filed for



marketing approval in the EU for

the treatment of DME ÿ Reported positive results from the Phase 3 MYRROR study in myopic CNV ÿ Bayer HealthCare submitted the



first application for regulatory

approval for myopic CNV in Japan ÿ Reported positive six month



primary endpoint results for

VIBRANT study in macular edema

following BRVO ÿ Bayer HealthCare opted-in to the



global development and

commercialization outside the

United States for the treatment of

macular edema following BRVO ÿ Reported positive two year results from the Phase 3 VISTA-DME study ZALTRAP ÿ European Commission granted ÿ Regulatory agency decisions



outside the

marketing authorization in the United States on additional European Union for ZALTRAP for applications for ZALTRAP in the patients with mCRC that is treatment of previously treated



mCRC

resistant to or has progressed patients following an oxaliplatin-containing regimen 51



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Antibody-based Clinical Programs:

2013 and 2014 Events to Date 2014 Plans Sarilumab (IL-6R ÿ Initiated ÿ Continue enrollment in Antibody) SARIL-RA-ASCERTAIN and Phase 3 SARIL-RA program SARIL-RA-COMPARE Phase 3 studies in rheumatoid arthritis ÿ Reported positive results ÿ Continue patient from SARIL-RA- MOBILITY enrollment in study SARIL-NIU-SATURN Phase 2 study in non-infectious uveitis ÿ Initiated SARIL-NIU-SATURN ÿ Initiate additional Phase 2 study in clinical studies non-infectious uveitis Alirocumab (PCSK9 ÿ Completed patient ÿ Continue enrollment of Antibody) enrollment in majority of Phase 3 ODYSSEY OUTCOMES Phase 3 ODYSSEY trials and ODYSSEY CHOICE I and II trials ÿ Reported positive results ÿ Report results from from Phase 3 ODYSSEY MONO additional Phase 3 ODYSSEY trial trials ÿ Initiated Phase 3 ODYSSEY CHOICE I and ODYSSEY CHOICE II trials Dupilumab (IL-4R ÿ Reported results for Phase ÿ Continue patient Antibody) 1b studies in atopic enrollment in Phase 2 dermatitis trials ÿ Reported results from ÿ Report results from Phase Phase 2a study in asthma. 2a and Phase 2b studies in Results were also atopic dermatitis published online in the ÿ Initiate Phase 3 studies New England Journal of Medicine. ÿ Reported results from Phase 2 study in atopic dermatitis ÿ Initiated Phase 2b trials in atopic dermatitis and asthma ÿ Initiated Phase 2 trial in nasal polyposis Enoticumab (Dll4 ÿ Continued patient ÿ Complete patient Antibody) enrollment in Phase 1 enrollment in the program expansion of the Phase 1 program Nesvacumab (Ang2 ÿ Continued patient ÿ Complete patient Antibody) enrollment in Phase 1 enrollment in the Phase 1b program program in advanced malignancies ÿ Initiate clinical development in ophthalmology REGN1033 (GDF8 ÿ Continued patient ÿ Complete patient Antibody) enrollment in Phase 1 enrollment in Phase 1 and program Phase 2a programs ÿ Initiated Phase 2a study REGN2009 (target not ÿ Initiated Phase 1 program ÿ Continue patient disclosed) enrollment in Phase 1 program REGN1400 (ErbB3 ÿ Continued patient ÿ Continue patient Antibody) enrollment in Phase 1 enrollment in Phase 1 program program REGN1154 (target not ÿ Completion of Phase 1 disclosed) program REGN1500 (target not ÿ Continued patient ÿ Continue patient disclosed) enrollment in Phase 1 enrollment in Phase 1 program program REGN1193 (target not ÿ Initiated Phase 1 program ÿ Continue patient disclosed) enrollment in Phase 1 program REGN1908-1909 (target ÿ Initiated Phase 1 program ÿ Continue patient not disclosed) enrollment in Phase 1 program REGN2176-3 (PDGFR-beta ÿ Initiated Phase 1 program ÿ Continue patient Antibody in enrollment in Phase 1 combination with program EYLEA) Fasinumab (NGF ÿ On clinical hold ÿ Determine future Antibody) development plan 52



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Critical Accounting Policies and Use of Estimates A summary of the significant accounting policies that impact us is provided in Note 2 to our Consolidated Financial Statements. The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions that affect reported amounts and related disclosures in the financial statements. Management considers an accounting estimate to be critical if: It requires an assumption (or assumptions) regarding a future outcome; and



Changes in the estimate or the use of different assumptions to prepare the

estimate could have a material effect on our results of operations or financial condition. Management believes the current assumptions used to estimate amounts reflected in our consolidated financial statements are appropriate. However, if actual experience differs from the assumptions used in estimating amounts reflected in our consolidated financial statements, the resulting changes could have a material adverse effect on our results of operations, and in certain situations, could have a material adverse effect on our liquidity and financial condition. The critical accounting estimates that impact our consolidated financial statements are described below. Revenue Recognition Product Revenue Product sales consist of U.S. sales of EYLEA and ARCALYST. Revenue from product sales is recognized when persuasive evidence of an arrangement exists, title to product and associated risk of loss have passed to the customer, the price is fixed or determinable, collection from the customer is reasonably assured, we have no further performance obligations, and returns can be reasonably estimated. We record revenue from product sales upon delivery to our distributors and specialty pharmacies (collectively, our customers). We sell EYLEA in the United States to three distributors and several specialty pharmacies. We sell ARCALYST in the United States to two specialty pharmacies. Under these distribution models, the distributors and specialty pharmacies generally take physical delivery of product. For EYLEA, the distributors and specialty pharmacies generally sell the product directly to healthcare providers, whereas for ARCALYST, the specialty pharmacies sell the product directly to patients. For the years ended December 31, 2013, 2012, and 2011, we recorded 76%, 78%, and 42%, respectively, of our total gross product revenue from sales to Besse Medical, a subsidiary of AmerisourceBergen Corporation. Revenue from product sales is recorded net of applicable provisions for rebates and chargebacks under governmental programs (including Medicaid), distribution-related fees, prompt pay discounts, product returns, and other sales-related deductions. Calculating these provisions involves estimates and judgments. We review our estimates of rebates, chargebacks, and other applicable provisions each period and record any necessary adjustments in the current period's net product sales. The following table summarizes the provisions, and credits/payments, for these sales-related deductions; such amounts were not significant during the year ended December 31, 2011. Distribution- Other Sales- Rebates & Related Related (In millions) Chargebacks Fees Deductions Total Balance as of December 31, 2011 $ 0.6 $ 1.5 $ 0.2 $ 2.3 Provision related to current period sales 14.2 45.0 3.0 62.2 Credits/payments (11.8 ) (31.2 ) (2.7 ) (45.7 ) Balance as of December 31, 2012 3.0 15.3 0.5 18.8 Provision related to current period sales 25.9 63.0 1.0 89.9 Credits/payments (24.5 ) (58.6 ) (1.0 ) (84.1 ) Balance as of December 31, 2013 $ 4.4 $ 19.7 $ 0.5 $ 24.6 Government Rebates and Chargebacks: We estimate reductions to product sales for Medicaid and Veterans' Administration (VA) programs, and for certain other qualifying federal and state government programs. Based upon our contracts with government agencies, statutorily-defined discounts applicable to government-funded programs, historical experience, and estimated payer mix, we estimate and record an allowance for rebates and chargebacks. Our liability for Medicaid rebates consists of estimates for claims that a state will make for a current quarter, claims for prior quarters that have been estimated for which an invoice has not 53



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been received, and invoices received for claims from prior quarters that have not been paid. Our reserves related to discounted pricing offered to VA, Public Health Services (PHS), and other institutions (collectively, qualified healthcare providers) represent our estimated obligations resulting from contractual commitments to sell products to qualified healthcare providers at prices lower than the list prices we charge to our customers. Our customers charge us for the difference between what they pay for the products and the ultimate selling price to the qualified healthcare providers. Our reserve for this discounted pricing is based on expected sales to qualified healthcare providers and the chargebacks that customers have already claimed. Distribution-Related Fees: We have written contracts with our customers that include terms for distribution-related fees. We estimate and record distribution and related fees due to our customers based on gross sales. Prompt Pay Discounts: No prompt pay discounts are currently offered to our customers on sales of EYLEA. In connection with sales of ARCALYST, we offer discounts to our customers for prompt payments. We estimate these discounts based on customer terms and historical experience, and expect that our customers will always take advantage of this discount. Therefore, we accrue 100% of the prompt pay discount that is based on the gross amount of each ARCALYST invoice at the time of sale. Product Returns: Consistent with industry practice, we offer our customers a limited right to return product purchased directly from us, which is principally based upon the product's expiration date. We will accept returns for three months prior to and up to six months after the product expiration date. Product returned is generally not resalable given the nature of our products and method of administration. We develop estimates for product returns based upon historical experience, inventory levels in the distribution channel, shelf life of the product, and other relevant factors. We monitor product supply levels in the distribution channel, as well as sales by our customers of EYLEA to healthcare providers and ARCALYST to patients using product-specific data provided by our customers. If necessary, our estimates of product returns may be adjusted in the future based on actual returns experience, known or expected changes in the marketplace, or other factors. Collaboration Revenue We earn collaboration revenue in connection with collaboration agreements to develop and commercialize product candidates and utilize our technology platforms. We currently have significant collaboration agreements with Sanofi and Bayer HealthCare. The terms of these collaboration agreements typically include non-refundable up-front licensing payments, research progress (milestone) payments, payments for development activities, and sharing of profits or losses arising from the commercialization of products. Non-refundable up-front license payments, where continuing involvement is required of us, are deferred and recognized over the related performance period. We estimate our performance period based on the specific terms of each agreement, and adjust the performance periods, if appropriate, based on the applicable facts and circumstances. Although we did not enter into, or materially modify, any collaboration arrangements with multiple-deliverables during the years ended December 31, 2013, 2012, and 2011, any future arrangements with multiple deliverables will be divided into separate units of accounting if the deliverables in the arrangement meet certain criteria, including whether the delivered item or items has value to the collaborator on a standalone basis. Payments which are based on achieving a specific substantive performance milestone, involving a degree of risk, are recognized as revenue when the milestone is achieved and the related payment is due and non-refundable, provided there is no future service obligation associated with that milestone. Substantive performance milestones typically consist of significant achievements in the development life-cycle of the related product candidate, such as completion of clinical trials, filing for approval with regulatory agencies, and receipt of approvals by regulatory agencies. In determining whether a payment is deemed to be a substantive performance milestone, we take into consideration (i) the enhancement in value to the related development product candidate, (ii) our performance and the relative level of effort required to achieve the milestone, (iii) whether the milestone relates solely to past performance, and (iv) whether the milestone payment is considered reasonable relative to all of the deliverables and payment terms. Payments for achieving milestones which are not considered substantive are deferred and recognized over the related performance period. We enter into collaboration agreements that include varying arrangements regarding which parties perform and bear the costs of research and development activities. We may share the costs of research and development activities with our collaborator, or we may be reimbursed for all or a significant portion of the costs of our research and development activities. We record our internal and third-party development costs associated with these collaborations as research and development expenses. When we are entitled to reimbursement of all or a portion of the research and development expenses that we incur under a collaboration, we record those reimbursable amounts as collaboration revenue proportionately as we recognize our expenses. If the collaboration is a cost-sharing arrangement in which both we and our collaborator perform development work and share costs, in periods when our collaborator incurs development expenses that benefit the collaboration and Regeneron, we also recognize, as additional research and development expense, the portion of the collaborator's development expenses that we are obligated to reimburse. Under our collaboration agreements, we share in any profits or losses arising from the commercialization of products. Our collaborator provides us with our estimated share of the profits or losses, based on net product sales less cost of goods sold and shared commercialization and other expenses, from commercialization of such products for the most recent fiscal quarter. Our share of the profit or loss is recorded as collaboration revenue. Our collaborators' estimates of net products sales and related 54



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expenses for such quarter are reconciled to their actual net product sales and related expenses in the subsequent fiscal quarter, and our share of the profit or loss is adjusted accordingly, as necessary. In connection with non-refundable licensing payments, our performance period estimates are principally based on projections of the scope, progress, and results of our research and development activities. Due to the variability in the scope of activities and length of time necessary to develop a drug product, changes to development plans as programs progress, and uncertainty in the ultimate requirements to obtain governmental approval for commercialization, revisions to performance period estimates are likely to occur periodically, and could result in material changes to the amount of revenue recognized each year in the future. In addition, our estimated performance periods may change if development programs encounter delays or we and our collaborators decide to expand or contract our clinical plans for a drug candidate in various disease indications. Also, if a collaborator terminates an agreement in accordance with the terms of the agreement, we would recognize as revenue any unamortized remainder of an up-front or previously deferred payment at the time of the termination. Clinical Trial Expenses Clinical trial costs are a significant component of research and development expenses and include costs associated with third-party contractors. We outsource a substantial portion of our clinical trial activities, utilizing external entities such as CROs, independent clinical investigators, and other third-party service providers to assist us with the execution of our clinical studies. For each clinical trial that we conduct, certain clinical trial costs are expensed immediately, while others are expensed over time based on the expected total number of patients in the trial, the rate at which patients enter the trial, and/or the period over which clinical investigators or CROs are expected to provide services. Clinical activities which relate principally to clinical sites and other administrative functions to manage our clinical trials are performed primarily by CROs. CROs typically perform most of the start-up activities for our trials, including document preparation, site identification, screening and preparation, pre-study visits, training, and program management. On a budgeted basis, these start-up costs are typically 10% to 20% of the total contract value. On an actual basis, this percentage range can be significantly wider, as many of our contracts with CROs are either expanded or reduced in scope compared to the original budget, while start-up costs for the particular trial may not change materially. These start-up costs usually occur within a few months after the contract has been executed and are event driven in nature. The remaining activities and related costs, such as patient monitoring and administration, generally occur ratably throughout the life of the individual contract or study. In the event of early termination of a clinical trial, we accrue and recognize expenses in an amount based on our estimate of the remaining non-cancelable obligations associated with the winding down of the clinical trial and/or penalties. For clinical study sites, where payments are made periodically on a per-patient basis to the institutions performing the clinical study, we accrue expenses on an estimated cost-per-patient basis, based on subject enrollment and activity in each quarter. The amount of clinical study expense recognized in a quarter may vary from period to period based on the duration and progress of the study, the activities to be performed by the sites each quarter, the required level of patient enrollment, the rate at which patients actually enroll in and drop-out of the clinical study, and the number of sites involved in the study. Clinical trials that bear the greatest risk of change in estimates are typically those that have a significant number of sites, require a large number of patients, have complex patient screening requirements, and span multiple years. During the course of a trial, we adjust our rate of clinical expense recognition if actual results differ from our estimates. Our estimates and assumptions for clinical expense recognition could differ significantly from our actual results, which could cause material increases or decreases in research and development expenses in future periods when the actual results become known. No material adjustments to our past clinical trial accrual estimates were made during the years ended December 31, 2013, 2012, or 2011. Stock-based Compensation We recognize stock-based compensation expense for grants of stock option awards and restricted stock under our long-term incentive plans to employees and non-employee members of our board of directors based on the grant-date fair value of those awards. The grant-date fair value of an award is generally recognized as compensation expense over the award's requisite service period. We use the Black-Scholes model to compute the estimated fair value of stock option awards. Using this model, fair value is calculated based on assumptions with respect to (i) expected volatility of our Common Stock price, (ii) the periods of time over which employees and members of our board of directors are expected to hold their options prior to exercise (expected lives), (iii) expected dividend yield on our Common Stock, and (iv) risk-free interest rates, which are based on quoted U.S. Treasury rates for securities with maturities approximating the options' expected lives. Expected volatility has been estimated based on actual movements in our stock price over the most recent historical periods equivalent to the options' expected lives. Expected lives are principally based on our historical exercise experience with previously issued employee and board of directors option grants. The expected dividend yield is zero as we have never paid dividends and do not currently anticipate paying any in the foreseeable future. Stock-based compensation expense also includes an estimate, which is made at the time of grant, of the number of awards 55



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that are expected to be forfeited. This estimate is revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The assumptions used in computing the fair value of option awards reflect our best estimates but involve uncertainties related to market and other conditions, many of which are outside of our control. Changes in any of these assumptions may materially affect the fair value of stock options granted and the amount of stock-based compensation recognized in future periods. In addition, we have granted performance-based stock option awards which vest based upon the optionee satisfying certain performance and service conditions as defined in the agreements. Potential compensation cost, measured on the grant date, related to these performance options will be recognized only if, and when, we estimate that these options will vest, which is based on whether we consider the options' performance conditions to be probable of attainment. Our estimates of the number of performance-based options that will vest will be revised, if necessary, in subsequent periods. Changes in these estimates may materially affect the amount of stock-based compensation that we recognize in future periods related to performance-based options. Income Taxes We recognize deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined on the basis of the difference between the tax basis of assets and liabilities and their respective financial reporting amounts ("temporary differences") at enacted tax rates in effect for the years in which the differences are expected to reverse. A valuation allowance is established for deferred tax assets for which it is more likely than not that some portion or all of the deferred tax assets will not be realized. We periodically re-assess the need for a valuation allowance against our deferred tax assets based on various factors including our historical earnings experience by taxing jurisdiction, and forecasts of future operating results and utilization of net operating losses and tax credits prior to their expiration. Significant judgment is required in making this assessment and, to the extent that a reversal of any portion of our valuation allowance against our deferred tax assets is deemed appropriate, a tax benefit will be recognized against our income tax provision in the period of such reversal. Prior to 2012, we recorded a valuation allowance that fully offset our net deferred tax assets. In the fourth quarter of 2012, based on our evaluation of various factors, including our achievement of a cumulative three-year income position as of December 31, 2012, we released substantially all of our valuation allowance against our deferred tax assets and recorded a corresponding income tax benefit as described in "Results of Operations" below. We continue to maintain a valuation allowance against certain deferred tax assets. Uncertain tax positions are accounted for in accordance with FASB authoritative guidance, which prescribes a comprehensive model for the manner in which a company should recognize, measure, present, and disclose in its financial statements all material uncertain tax positions that the company has taken or expects to take on a tax return. Those positions, for which management's assessment is that there is more than a 50% probability of sustaining the position upon challenge by a taxing authority based upon its technical merits, are subjected to certain measurement criteria. Inventories Inventories are stated at the lower of cost or estimated realizable value. We determine the cost of inventory using the first-in, first-out, or FIFO, method. We capitalize inventory costs associated with our products prior to regulatory approval when, based on management's judgment, future commercialization is considered probable and the future economic benefit is expected to be realized; otherwise, such costs are expensed as research and development. We periodically analyze our inventory levels to identify inventory that may expire prior to expected sale or has a cost basis in excess of its estimated realizable value, and write-down such inventories as appropriate. In addition, our products are subject to strict quality control and monitoring which we perform throughout the manufacturing process. If certain batches or units of product no longer meet quality specifications or become obsolete due to expiration, we record a charge to cost of goods sold to write down such unmarketable inventory to its estimated realizable value. In 2013, 2012, and 2011, cost of goods sold included inventory write-downs and reserves totaling $9.1 million, $17.0 million, and $0.5 million, respectively. 56



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Results of Operations Years Ended December 31, 2013 and 2012 Net Income Net income in 2013 and 2012 consists of the following: (In millions) 2013 2012 Revenues $ 2,104.7$ 1,378.5 Operating expenses (1,344.7 ) (920.8 ) Other expenses (46.6 ) (43.3 )



Income before income taxes 713.4 414.4 Income tax (expense) benefit (289.0 ) 335.8 Net income

$ 424.4$ 750.2 The increase in pre-tax income is related primarily to higher net product sales of EYLEA in the United States and higher Bayer HealthCare collaboration revenue in connection with sales of EYLEA outside the United States, partly offset by higher operating expenses. However, the increase in pre-tax income was more than offset by substantially higher income tax expense in 2013 than in 2012. In 2012, we recorded a tax benefit of $335.8 million primarily related to the release of substantially all of the valuation allowance associated with our deferred tax assets. Consequently, in 2013, we began recording income tax expense based on an estimated effective tax rate. Revenues Revenues in 2013 and 2012 consist of the following: (In millions) 2013 2012 Net product sales $ 1,425.8$ 858.1 Collaboration revenue: Sanofi 430.1 423.8 Bayer HealthCare 220.3 70.1 Total collaboration revenue 650.4 493.9



Technology licensing and other revenue 28.5 26.5 Total revenue

$ 2,104.7$ 1,378.5 Net Product Sales Net product sales consist of U.S. sales of EYLEA and ARCALYST. In November 2011, we received marketing approval from the FDA for EYLEA for the treatment of wet AMD, at which time product sales commenced. In addition, in September 2012, we received marketing approval from the FDA for EYLEA for the treatment of macular edema following CRVO. In 2013, EYLEA net product sales increased to $1,408.7 million from $837.9 million in 2012 due to higher sales volume. In 2013, ARCALYST net product sales were $17.1 million compared to $20.2 million in 2012. 57



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Sanofi Collaboration Revenue The collaboration revenue we earned from Sanofi, as detailed below, consisted primarily of reimbursement for research and development expenses that we incurred, our share of losses in connection with Sanofi's commercialization of ZALTRAP, recognition of a substantive milestone payment in 2012, and recognition of previously deferred revenue related to non-refundable up-front payments. In addition, Sanofi collaboration revenue in 2013 was reduced by two $10.0 million up-front payments that we made to Sanofi in connection with our acquisition from Sanofi of full exclusive rights to two families of novel antibodies, as described below. Year ended Sanofi Collaboration Revenue December 31, (In millions) 2013 2012 ZALTRAP: Regeneron's share of losses in connection with commercialization of ZALTRAP $ (30.8 )$ (25.6 ) Substantive milestone payment -



50.0

Reimbursement of Regeneron research and development expenses 5.6 10.6 Other 9.7 13.3 Total ZALTRAP (15.5 ) 48.3 Antibody: Reimbursement of Regeneron research and development expenses 453.5



365.3

Up-front payments to Sanofi for acquisition of rights related to two antibodies (20.0 ) - Other 12.1 10.2 Total Antibody 445.6 375.5 Total Sanofi collaboration revenue $ 430.1 $



423.8

Sanofi commenced sales of ZALTRAP for treatment, in combination with FOLFIRI, of patients with mCRC that is resistant to or has progressed following an oxaliplatin-containing regimen, in the United States in the third quarter of 2012 and in certain European and other countries in the first quarter of 2013. Regeneron's share of the loss in connection with commercialization of ZALTRAP, as shown in the table below, represents our 50% share of ZALTRAP net product sales less cost of goods sold and shared commercialization and other expenses. Regeneron's share of losses in connection with commercialization of ZALTRAP Year ended December 31, (In millions) 2013



2012

Net product sales recorded by Sanofi $ 70.2 $



31.7

Regeneron's share of collaboration losses (30.8 )



(25.6 )

Our share of the loss in 2013 and 2012 represents our share of the costs of launching and commercializing ZALTRAP, partly offset by net product sales. Our share of the loss for 2013 is based on nine months of actual results and an estimate for the fourth quarter. Each quarter, Sanofi provides us with an estimate of our share of the profit or loss from commercialization of ZALTRAP for the most recent fiscal quarter; these estimates are reconciled to actual results in the subsequent fiscal quarter, and our portion of the profit or loss is adjusted accordingly, as necessary. In 2012, we earned a $50.0 million substantive milestone payment from Sanofi upon FDA approval of ZALTRAP. Sanofi's reimbursement of our ZALTRAP research and development expenses decreased in 2013 compared to 2012, primarily due to a decrease in research and development activities and lower costs related to manufacturing ZALTRAP prior to regulatory approval. Other ZALTRAP revenue primarily consisted of recognition of deferred revenue related to the ZALTRAP up-front payments from Sanofi and reimbursement of other ZALTRAP-related expenses. The decrease in other revenue resulted primarily from lower recognition of deferred revenue in 2013, due to lengthening the estimated performance period over which this deferred revenue is being recognized, effective in the first quarter of of 2013. In connection with recognition of deferred revenue related to ZALTRAP, as of December 31, 2013, $6.0 million of the original $105.0 million of up-front payments was deferred and will be recognized as revenue in future periods. 58



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In 2013, Sanofi's reimbursement of our antibody expenses consisted of $160.0 million under our discovery agreement and $293.5 million of development costs under our license agreement, compared to $181.9 million and $183.4 million, respectively, in 2012. Under the amended discovery agreement, Sanofi agreed to fund up to $160 million per year of our antibody discovery activities. In 2010, as we scaled up our capacity to conduct antibody discovery activities, Sanofi funded only $137.7 million of our preclinical research under the expanded collaboration and the balance between that amount and $160.0 million was added to the funding otherwise available to us in 2011-2012. As a result, Sanofi funded more of our discovery activities in 2012 than in 2013. The higher reimbursement of development costs in 2013 compared to 2012 was primarily due to increased development activities for alirocumab and dupilumab. As described above, in May 2013, we made two $10.0 million up-front payments to Sanofi in connection with acquiring from Sanofi full exclusive rights to antibodies targeting the PDGF family of receptors and ligands in ophthalmology and all other indications and to antibodies targeting the Ang2 receptor and ligand in ophthalmology. Other antibody revenue relates primarily to recognition of deferred revenue from an $85.0 million up-front payment and other payments. As of December 31, 2013, $60.5 million of the up-front and other payments was deferred and will be recognized as revenue in future periods. Bayer HealthCare Collaboration Revenue The collaboration revenue we earned from Bayer HealthCare, as detailed below, consisted of our share of profits in connection with commercialization of EYLEA outside the United States, recognition of sales and substantive development milestone payments, cost-sharing of Regeneron EYLEA development expenses, reimbursement of other Regeneron EYLEA expenses, and revenue related to a non-refundable $75.0 million up-front payment received in 2006 and a $20.0 million milestone payment received in 2007 (which, for the purpose of revenue recognition, was not considered substantive). Year ended Bayer HealthCare Collaboration Revenue December



31,

(In millions) 2013



2012

Regeneron's net profit in connection with commercialization of EYLEA outside the United States $ 101.5 $



-

Sales and substantive development milestone payments 70.0



25.0

Cost-sharing of Regeneron EYLEA development expenses 20.9



34.9

Other 27.9



10.2

Total Bayer HealthCare collaboration revenue $ 220.3 $

70.1

Bayer HealthCare commenced sales of EYLEA outside the United States for the treatment of wet AMD in the fourth quarter of 2012 and for the treatment of macular edema secondary to CRVO in the fourth quarter of 2013. Regeneron's net profit in connection with commercialization of EYLEA outside the United States is summarized below. Regeneron's Net Profit from EYLEA Sales Outside Year ended the United States December



31,

(In millions) 2013



2012

Net product sales outside the United States$ 472.1 $

19.0

Regeneron's share of collaboration profit from sales outside the United States 159.1



4.2

Reimbursement of EYLEA development expenses incurred by Bayer HealthCare in accordance with Regeneron's payment obligation (57.6 ) (4.2 ) Regeneron's net profit in connection with commercialization of EYLEA outside the United States $ 101.5 $



-

Bayer HealthCare records revenue from sales of EYLEA outside the United States. Our share of the profit for 2013 is based on nine months of actual results and an estimate for the fourth quarter. Each quarter, Bayer HealthCare provides us with an estimate 59



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of our share of the profit or loss, including the percentage of sales in Japan that we earned, from commercialization of EYLEA outside the United States for the most recent fiscal quarter; these estimates are reconciled to actual results in the subsequent fiscal quarter, and our portion of the profit or loss is adjusted accordingly, as necessary. In 2013 and 2012, our share of the profit we earned from commercialization of EYLEA outside the United States was offset by our contractual obligation to reimburse Bayer HealthCare for a portion of the agreed-upon development expenses previously incurred by Bayer HealthCare. In 2013, we earned $15.0 million and $10.0 million substantive development milestone payments from Bayer HealthCare upon receipt of marketing and pricing approval, respectively, outside the United States for EYLEA for the treatment of macular edema secondary to CRVO. In addition, we earned, and recorded as revenue in 2013, three $15.0 million sales milestone payments from Bayer HealthCare upon total aggregate net sales of EYLEA outside the United States exceeding $200 million, $300 million, and $400 million, respectively, over a twelve-month period. In 2012, we earned $15.0 million and $10.0 million substantive milestone payments from Bayer HealthCare upon receipt of marketing and pricing approval, respectively, in Japan for EYLEA for the treatment of wet AMD. Cost-sharing of our global EYLEA development expenses with Bayer HealthCare decreased in 2013 compared to 2012, as we incurred lower costs in connection with winding down various Phase 3 EYLEA clinical studies. Other revenue principally consists of (i) reimbursement of other Regeneron EYLEA expenses, primarily related to Bayer HealthCare's share of royalties payable to Genentech in connection with sales of EYLEA outside the United States, which commenced in May 2013, and (ii) recognition of deferred revenue related to the up-front and 2007 milestone payments from Bayer HealthCare. As described further below under "License and Settlement Agreements with Genentech", in May 2013, we entered into an Amended and Restated Non-Exclusive License and Settlement Agreement with Genentech to include all sales of EYLEA worldwide in our royalty obligation. As of December 31, 2013, $21.7 million of the up-front and 2007 milestone payments was deferred and will be recognized ratably as revenue in future periods. Technology Licensing and Other Revenue In connection with the amendment and extension of our VelocImmune license agreement with Astellas, in August 2010, we received a $165.0 million up-front payment, which was deferred upon receipt and is being recognized as revenue ratably over a seven-year period beginning in June 2011. In both 2013 and 2012, we recognized $23.6 million of technology licensing and other revenue related to this agreement. As of December 31, 2013, $104.6 million of the August 2010 technology licensing payment received from Astellas was deferred and will be recognized as revenue in future periods. Under a June 2009 agreement with Novartis, we receive royalties on worldwide sales of Novartis' canakinumab. In 2013 and 2012, technology licensing and other revenue included $4.8 million and $2.8 million, respectively, of royalties from Novartis. Expenses Total operating expenses increased to $1,344.7 million in 2013 from $920.8 million in 2012. Our average headcount in 2013 increased to 2,153 from 1,827 in 2012, principally in connection with expanding our research and development, and commercialization activities. Operating expenses in 2013 and 2012 included a total of $198.4 million and $94.2 million, respectively, of non-cash compensation expense related to employee stock option and restricted stock awards (Non-cash Compensation Expense). The increase in total Non-cash Compensation Expense in 2013 was primarily attributable to the higher fair market value of our Common Stock on the date of our annual employee option grants made in December 2012 compared to recent prior years. As of December 31, 2013, unrecognized Non-cash Compensation Expense related to outstanding (i) non-performance based stock options was $492.5 million, (ii) performance based stock options was $4.2 million, and (iii) unvested restricted stock awards was $43.7 million. We expect to recognize this Non-cash Compensation Expense over weighted-average periods of 1.8 years, 1.0 years, and 3.8 years, respectively. 60



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Research and Development Expenses Research and development expenses increased to $859.9 million in 2013 from $625.6 million in 2012. The following table summarizes the major categories of our research and development expenses in 2013 and 2012: Research and Development Expenses Year ended December 31, Increase (In millions) 2013 2012 (Decrease) Payroll and benefits (1) $ 294.2 $ 212.1 $ 82.1 Clinical trial expenses 139.5 92.3 47.2 Clinical manufacturing costs (2) 225.3 165.0 60.3 Research and other development costs 73.1 58.0 15.1 Occupancy and other operating costs 94.9 76.3 18.6 Cost-sharing of Bayer HealthCare and Sanofi development expenses (3) 32.9 21.9 11.0 Total research and development expenses $ 859.9 $ 625.6



$ 234.3

(1) Includes Non-cash Compensation Expense of $101.9 million in 2013 and $48.4 million in 2012. (2) Represents the full cost of manufacturing drug for use in research, preclinical development, and clinical trials, including related payroll and benefits, Non-cash Compensation Expense, manufacturing materials and supplies, drug filling, packaging, and labeling costs, depreciation, and occupancy costs of our Rensselaer manufacturing facility. Includes Non-cash Compensation Expense of $14.6 million and $5.4 million in 2013 and 2012, respectively. (3) Under our collaborations with Bayer HealthCare and Sanofi, in periods when Bayer HealthCare or Sanofi incur certain development expenses, we also recognize, as additional research and development expense, the portion of our collaboration partners' development expenses that we are obligated to reimburse. Our collaboration partners provide us with estimated development expenses for the most recent fiscal quarter. Bayer HealthCare and Sanofi's estimates are reconciled to their actual expenses for such quarter in the subsequent fiscal quarter and our portion of our collaboration partners' development expenses that we are obligated to reimburse is adjusted accordingly. Payroll and benefits increased principally due to the increase in employee headcount and Non-cash Compensation Expense, as described above. Clinical trial expenses increased due primarily to higher costs for clinical studies of alirocumab, dupilumab, and early stage antibody product candidates, partly offset by lower costs related to our Phase 3 trials of EYLEA in wet AMD and macular edema following CRVO, and ARCALYST, which have concluded. Clinical manufacturing costs increased primarily due to higher costs related to manufacturing alirocumab, sarilumab, and dupilumab, partly offset by lower costs related to manufacturing clinical supplies of ARCALYST. Research and other development costs increased primarily due to higher costs associated with our early stage research and development programs and regulatory submissions for marketing approvals for EYLEA. Occupancy and other operating costs increased principally in connection with our higher headcount, expanded research and development activities, and higher information technology and facility-related costs at our Tarrytown and Rensselaer, New York sites. Cost-sharing of Bayer HealthCare and Sanofi development expenses increased primarily due to our obligation to fund 20% of Sanofi's Phase 3 alirocumab and sarilumab development costs, which commenced during the fourth quarter of 2013. 61



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We prepare estimates of research and development costs for projects in clinical development, which include direct costs and allocations of certain costs such as indirect labor, Non-cash Compensation Expense, and manufacturing and other costs related to activities that benefit multiple projects, and, under our collaborations with Bayer HealthCare and Sanofi, the portion of Bayer HealthCare and Sanofi's development expenses which they incur, that we are obligated to reimburse. Our estimates of research and development costs for clinical development programs are shown below: Project Costs Year ended December 31, Increase (In millions) 2013 2012 (Decrease) EYLEA $ 133.3 $ 132.7 $ 0.6 Alirocumab 152.2 70.1 82.1 Sarilumab 51.9 27.7 24.2 Dupilumab 89.0 34.9 54.1 ARCALYST 6.4 38.2 (31.8 ) Other antibody candidates in clinical development 113.9 101.2 12.7 Other research programs and unallocated costs 313.2 220.8 92.4 Total research and development expenses $ 859.9 $ 625.6



$ 234.3

Drug development and approval in the United States is a multi-step process regulated by the FDA. The process begins with discovery and preclinical evaluation, leading up to the submission of an IND to the FDA which, if successful, allows the opportunity for study in humans, or clinical study, of the potential new drug. Clinical development typically involves three phases of study: Phases 1, 2, and 3. The most significant costs in clinical development are in Phase 3 clinical trials, as they tend to be the longest and largest studies in the drug development process. Following successful completion of Phase 3 clinical trials for a biological product, a BLA must be submitted to, and accepted by, the FDA, and the FDA must approve the BLA prior to commercialization of the drug. It is not uncommon for the FDA to request additional data following its review of a BLA, which can significantly increase the drug development timeline and expenses. We may elect either on our own, or at the request of the FDA, to conduct further studies that are referred to as Phase 3b and 4 studies. Phase 3b studies are initiated and either completed or substantially completed while the BLA is under FDA review. These studies are conducted under an IND. Phase 4 studies, also referred to as post-marketing studies, are studies that are initiated and conducted after the FDA has approved a product for marketing. In addition, as discovery research, preclinical development, and clinical programs progress, opportunities to expand development of drug candidates into new disease indications can emerge. We may elect to add such new disease indications to our development efforts (with the approval of our collaborator for joint development programs), thereby extending the period in which we will be developing a product. There are numerous uncertainties associated with drug development, including uncertainties related to safety and efficacy data from each phase of drug development, uncertainties related to the enrollment and performance of clinical trials, changes in regulatory requirements, changes in the competitive landscape affecting a product candidate, and other risks and uncertainties described in Part I, Item 1A, "Risk Factors". The lengthy process of seeking FDA approvals, and subsequent compliance with applicable statutes and regulations, require the expenditure of substantial resources. Any failure by us to obtain, or delay in obtaining, regulatory approvals could materially adversely affect our business. For these reasons and due to the variability in the costs necessary to develop a pharmaceutical product and the uncertainties related to future indications to be studied, the estimated cost and scope of the projects, and our ultimate ability to obtain governmental approval for commercialization, accurate and meaningful estimates of the total cost to bring our product candidates to market are not available. Similarly, we are currently unable to reasonably estimate if our product candidates in clinical development will generate material product revenues and net cash inflows. Selling, General, and Administrative Expenses Selling, general, and administrative expenses increased to $329.4 million in 2013 from $210.8 million in 2012 primarily due to higher expenses in connection with commercialization of EYLEA, including the Branded Prescription Drug Fee (as described in the Liquidity and Capital Resources section below) and contributions to a not-for-profit organization that assists patients with chronic disease conditions, and higher Non-cash Compensation Expense principally for the reason described under "Expenses" above. Selling, general, and administrative expenses included $80.0 million and $39.2 million of Non-cash Compensation Expense in 2013 and 2012, respectively. 62



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Cost of Goods Sold Cost of goods sold increased to $118.0 million in 2013 from $83.9 million in 2012 due primarily to increased sales of EYLEA. Cost of goods sold primarily consisted of royalties, as well as costs in connection with producing EYLEA and ARCALYST commercial supplies. In addition, in 2013 and 2012, cost of goods sold included inventory write-downs and reserves totaling $9.1 million and $17.0 million, respectively. We record a charge to cost of goods sold to write down our inventory to its estimated realizable value if certain batches or units of product do not meet quality specifications or are expected to expire prior to sale. Cost of Collaboration Manufacturing We manufacture commercial supplies of product for our collaborators. Cost of collaboration manufacturing increased to $37.3 million in 2013 from $0.5 million in 2012 primarily due to the launch of EYLEA outside the United States in the fourth quarter of 2012. Cost of collaboration manufacturing primarily consists of third-party royalties, as well as costs in connection with producing commercial supplies for our collaborators. When the product is sold by our collaborators to third-party customers, our risk of inventory loss no longer exists, and we therefore recognize our related manufacturing costs for the sold product as cost of collaboration manufacturing. Other Income and Expense Total other expenses increased to $46.7 million in 2013 from $43.3 million in 2012. Other expenses consist of investment (expense) income and interest expense. In 2013, we had net investment expense of $0.2 million, compared to net investment income of $2.0 million in 2012. In the fourth quarter of 2013, we recorded a $2.9 million other-than-temporary impairment of an equity security based upon the length of time that the security was in an unrealized loss position and our expectation that we will not hold the security until a potential recovery in value occurs. This impairment charge fully offset investment income earned in 2013 on our marketable securities. Interest expense in 2013 and 2012 primarily includes interest associated with our $400.0 million aggregate principal amount of 1.875% convertible senior notes, including amortization of the note discount and debt issuance costs, and interest associated with our facility lease obligations. Income Taxes In 2013, we recorded income tax expense of $289.0 million, based on an effective tax rate of 40.5%. The difference between the U.S. federal statutory rate of 35% and our effective tax rate for 2013 is primarily due to increases related to state and local taxes, the non-deductible Branded Prescription Drug Fee, and losses incurred in foreign jurisdictions with rates lower than the federal statutory rate. These increases were partially offset by federal and state income tax credits. In January 2013, the American Taxpayer Relief Act was enacted, which included a provision to extend the income tax credit for increased research activities retroactively to the tax year ended December 31, 2012, as well as for 2013. As a result of the extension, during 2013, we recognized the benefit of both the 2012 and 2013 federal research tax credit. In the fourth quarter of 2012, we recorded a $335.8 million income tax benefit, primarily attributable to the release of substantially all of the valuation allowance against our deferred tax assets. The decision to release this valuation allowance was made after we determined that it was more likely than not that these deferred tax assets would be realized, and was based on the evaluation and weighting of positive and negative evidence, including our achievement of a cumulative three-year income position in the fourth quarter of 2012. In addition, we considered forecasts of future operating results and utilization of net operating losses and tax credits prior to their expiration. Therefore, starting in 2013, we recorded income tax expense on income using an estimated effective tax rate. We expect our effective tax rate to increase in 2014, primarily due to a shift in our geographic mix of profits and losses as we continue our international expansion. In addition, the federal income tax credit for increased research activities expired on December 31, 2013; as a result, unless tax legislation is enacted to extend or make permanent this federal income tax credit, we expect it will cause our effective tax rate to increase. 63



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Years Ended December 31, 2012 and 2011 Net Income (Loss) We reported net income of $750.3 million, or $7.92 per basic share and $6.75 per diluted share, for the year ended December 31, 2012, compared to a net loss of $221.8 million, or $2.45 per share (basic and diluted), for 2011. Our net income in 2012 resulted primarily from net product sales of EYLEA, which we launched in November 2011, and an income tax benefit of $335.8 million, primarily attributable to the release of substantially all of the valuation allowance against our deferred tax assets. In 2012, we also earned a $50.0 million substantive milestone payment from Sanofi upon FDA approval of ZALTRAP and $25.0 million of substantive milestone payments from Bayer HealthCare upon receipt of marketing and pricing approvals in Japan for EYLEA for the treatment of wet AMD. Revenues Revenues in 2012 and 2011 consist of the following: (In millions) 2012 2011 Net product sales $ 858.1$ 44.7 Collaboration revenue: Sanofi 423.8 326.6 Bayer HealthCare 70.1 43.1 Total collaboration revenue 493.9 369.7



Technology licensing and other revenue 26.5 31.4 Total revenue

$ 1,378.5$ 445.8 Net Product Sales Net product sales consist of U.S. sales of EYLEA and ARCALYST. We record product sales net of allowances and accruals for prompt pay discounts, rebates and chargebacks under governmental programs (including Medicaid), product returns, and distribution-related fees. In November 2011, we received marketing approval from the FDA for EYLEA for the treatment of wet AMD, at which time product sales commenced. In addition, in September 2012, we received marketing approval from the FDA for EYLEA for the treatment of macular edema following CRVO. In 2012 and 2011, we recognized $837.9 million and $24.8 million, respectively, of EYLEA net product sales. In 2012 and 2011, we also recognized ARCALYST net product sales of $20.2 million and $19.9 million, respectively. 64



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Sanofi Collaboration Revenue The collaboration revenue we earned from Sanofi, as detailed below, consisted primarily of reimbursement for research and development expenses that we incurred, recognition of our share of losses in connection with Sanofi's commercialization of ZALTRAP, recognition of a substantive milestone payment, and recognition of revenue related to non-refundable up-front payments of $105.0 million related to the ZALTRAP collaboration and $85.0 million related to the antibody collaboration. Year ended Sanofi Collaboration Revenue December 31, (In millions) 2012 2011 ZALTRAP: Regeneron's share of losses in connection with commercialization of ZALTRAP $ (25.6 ) $ (9.3 ) Substantive milestone payment 50.0



-

Reimbursement of Regeneron research and development expenses 10.6 16.9 Other 13.3 9.9 Total ZALTRAP 48.3 17.5 Antibody: Reimbursement of Regeneron research and development expenses 365.3 299.3 Other 10.2 9.8 Total Antibody 375.5 309.1 Total Sanofi collaboration revenue $ 423.8 $



326.6

In August 2012, the FDA approved ZALTRAP for treatment, in combination with FOLFIRI, of patients with mCRC that is resistant to or has progressed following an oxaliplatin-containing regimen. Regeneron's share of the loss in connection with commercialization of ZALTRAP, as shown in the table below, represents our 50% share of ZALTRAP net product sales less cost of goods sold and shared commercialization and other expenses. Our share of the loss increased in 2012, compared to 2011, due to an increase in commercialization activities in preparation for potential regulatory approvals. Sanofi provides us with an estimate of our share of the profit or loss from commercialization of ZALTRAP for the most recent fiscal quarter. Sanofi's estimates of net products sales and related expenses for such quarter are reconciled to their actual net product sales and related expenses in the subsequent fiscal quarter, and our portion of the profit or loss is adjusted accordingly, as necessary. Regeneron's share of losses in connection with commercialization of ZALTRAP Year ended December 31, (In millions) 2012



2011

Net product sales recorded by Sanofi $ 31.7 - Regeneron's share of collaboration losses (25.6 )



$ (9.3 )

In 2012, we earned a $50.0 million substantive milestone payment from Sanofi upon FDA approval of ZALTRAP. Sanofi's reimbursement of our ZALTRAP research and development expenses decreased in 2012 compared to 2011, primarily due to a decrease in research and development activities and lower costs related to manufacturing ZALTRAP prior to regulatory approval. Other ZALTRAP revenue includes recognition of deferred revenue related to the up-front payments from Sanofi, which increased in 2012 from 2011 due to shortening the estimated performance period over which this deferred revenue is being recognized, effective in the second quarter of 2012. In 2012, Sanofi's reimbursement of our antibody expenses consisted of $181.9 million under our discovery agreement and $183.4 million of development costs under our license agreement, compared to $161.9 million and $137.4 million, respectively, in 2011. The higher reimbursement amount under the discovery agreement in 2012 compared to 2011 was primarily due to an increase in our antibody discovery activities. The higher reimbursement of development costs in 2012 compared to 2011 was primarily due to increased development activities for alirocumab. Other antibody revenue relates primarily to recognition of deferred revenue from an $85.0 million up-front payment and other payments. As it relates to recognition of deferred revenue, in connection with the November 2009 amendment of the discovery agreement, Sanofi has funded $30 million of agreed-upon costs incurred by us to expand our manufacturing capacity at our Rensselaer, New York facilities. Revenue related to such funding from Sanofi was deferred and is being recognized as collaboration 65



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revenue prospectively over the related performance period in conjunction with the recognition of the original $85.0 million up-front payment. Bayer HealthCare Collaboration Revenue The collaboration revenue we earned from Bayer HealthCare, as detailed below, consisted primarily of cost-sharing of Regeneron EYLEA development expenses, recognition of substantive milestone payments, and recognition of revenue related to a non-refundable $75.0 million up-front payment received in 2006, and a $20.0 million milestone payment received in 2007 (which, for the purpose of revenue recognition, was not considered substantive). Year



ended

Bayer HealthCare Collaboration Revenue December



31,

(In millions) 2012



2011

Cost-sharing of Regeneron EYLEA development expenses $ 34.9 $



33.7

Substantive milestone payments 25.0



-

Regeneron's net profit in connection with commercialization of EYLEA outside the United States -



-

Other 10.2



9.4

Total Bayer HealthCare collaboration revenue $ 70.1 $

43.1

Cost-sharing of our global EYLEA development expenses with Bayer HealthCare increased slightly in 2012 compared to 2011. In 2012, we incurred higher costs in connection with regulatory and other development activities, partly offset by lower costs in connection with our Phase 3 VIEW 1 study in wet AMD, which has concluded. In 2012, we earned $15.0 million and $10.0 million substantive milestone payments from Bayer HealthCare upon receipt of marketing and pricing approval, respectively, in Japan for EYLEA for the treatment of wet AMD. In the fourth quarter of 2012, Bayer HealthCare launched EYLEA for the treatment of wet AMD outside of the United States. Regeneron's net profit in connection with commercialization of EYLEA outside the United States is summarized below. Our share of the profit we earned from commercialization of EYLEA outside the United States was fully offset by our contractual obligation to reimburse Bayer HealthCare for a portion of the agreed-upon development expenses previously incurred by Bayer HealthCare. Regeneron's Net Profit from EYLEA Sales Outside the United States Year



ended

(In millions) December



31, 2012 Net product sales outside the United States recorded by Bayer HealthCare

$



19.0

Regeneron's share of collaboration profit from sales outside the United States

4.2

Reimbursement of EYLEA development expenses incurred by Bayer HealthCare in accordance with Regeneron's payment obligation

(4.2 ) Regeneron's net profit in connection with commercialization of EYLEA outside the United States $



-

Other revenue principally consisted of recognition of deferred revenue related to the up-front and 2007 milestone payments from Bayer HealthCare.

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Technology Licensing and Other Revenue In connection the amendment and extension of our VelocImmune license agreement with Astellas, in August 2010, we received a $165.0 million up-front payment, which was deferred upon receipt and is being recognized as revenue ratably over a seven-year period beginning in June 2011. In connection with our VelocImmune license agreement with AstraZeneca, which terminated effective as of February 2011, the $20.0 million non-refundable payment received in the first quarter of 2010 was deferred upon receipt and recognized as revenue ratably through February 2011. In 2012 and 2011, we recognized $23.6 million and $24.8 million, respectively, of technology licensing and other revenue related to these agreements. Technology licensing and other revenue in 2011 also included $3.6 million recognized in connection with our five-year grant from the NIH, which we were awarded in September 2006 as part of the NIH's Knockout Mouse Project. As of the end of 2011, no further revenue has been recognized by us in connection with this NIH Grant. In addition, under a June 2009 agreement with Novartis, we receive royalties on worldwide sales of Novartis' canakinumab. In 2012 and 2011, technology licensing and other revenue included $2.8 million and $2.3 million, respectively, of royalties from Novartis. Expenses Total operating expenses increased to $920.8 million in 2012 from $651.0 million in 2011. Our average headcount in 2012 increased to 1,827 from 1,568 in 2011, principally in connection with expanding our antibody research and development activities and commercialization activities, primarily for EYLEA in the United States. Operating expenses in 2012 and 2011 included a total of $94.2 million and $56.1 million, respectively, of Non-cash Compensation Expense. The increase in total Non-cash Compensation Expense in 2012 was primarily attributable to the higher fair market value of our Common Stock on the date of our annual employee option grants made in December 2011 and 2012 compared to recent prior years. Research and Development Expenses Research and development expenses increased to $625.6 million in 2012 from $529.5 million in 2011. The following table summarizes the major categories of our research and development expenses in 2012 and 2011: Research and Development Expenses Year ended December 31, Increase (In millions) 2012 2011 (Decrease) Payroll and benefits (1) $ 212.1 $ 168.9 $ 43.2 Clinical trial expenses 92.3 67.6 24.7 Clinical manufacturing costs (2) 165.0 123.0 42.0 Research and other development costs 58.0 60.4 (2.4 ) Occupancy and other operating costs 76.3 61.8 14.5 Cost-sharing of Bayer HealthCare EYLEA development expenses (3) 21.9 47.8 (25.9 ) Total research and development expenses $ 625.6 $ 529.5 $ 96.1 (1) Includes Non-cash Compensation Expense of $48.4 million in 2012 and $29.3 million in 2011. (2) Represents the full cost of manufacturing drug for use in research, preclinical development, and clinical trials, including related payroll and benefits, Non-cash Compensation Expense, manufacturing materials and supplies, drug filling, packaging, and labeling costs, depreciation, and occupancy costs of our Rensselaer manufacturing facility. Includes Non-cash Compensation Expense of $5.4 million and $3.5 million in 2012 and 2011, respectively. (3) Under our collaboration with Bayer HealthCare, in periods when Bayer HealthCare incurs EYLEA development expenses, we also recognize, as additional research and development expense, the portion of Bayer HealthCare's EYLEA development expenses that we are obligated to reimburse. Payroll and benefits increased principally due to the increase in employee headcount and Non-cash Compensation Expense, as described above. Clinical trial expenses increased due primarily to higher costs for clinical studies of our antibody candidates, especially alirocumab and dupilumab, and higher costs related to our Phase 3 studies of EYLEA in DME and macular edema following BRVO, partly offset by lower costs related to our Phase 3 VIEW 1 trial of EYLEA in wet AMD, which has concluded. Clinical manufacturing costs increased primarily due to higher costs related to manufacturing alirocumab, certain other antibody 67



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candidates, and clinical supplies of EYLEA, partly offset by lower costs related to manufacturing clinical supplies of ARCALYST. Occupancy and other operating costs increased principally in connection with our higher headcount, expanded research and development activities, and higher information technology and facility-related costs. Cost-sharing of Bayer HealthCare's EYLEA development expenses decreased primarily due to lower costs in connection with Bayer HealthCare's wet AMD development activities, including the VIEW 2 trial, which has concluded. We prepare estimates of research and development costs for projects in clinical development, which include direct costs and allocations of certain costs such as indirect labor, Non-cash Compensation Expense, and manufacturing and other costs related to activities that benefit multiple projects, and, under our collaboration with Bayer HealthCare, the portion of Bayer HealthCare's EYLEA development expenses that we are obligated to reimburse. Our estimates of research and development costs for clinical development programs are shown below: Project Costs Year ended December 31, Increase (In millions) 2012 2011 (Decrease) EYLEA $ 132.7 $ 147.6 $ (14.9 ) ARCALYST 38.2 43.2 (5.0 ) ZALTRAP 13.7 17.1 (3.4 ) Alirocumab 70.1 33.9 36.2 Sarilumab 27.7 27.3 0.4 Dupilumab 34.9 26.6 8.3 Other antibody candidates in clinical development 87.5 48.1 39.4 Other research programs and unallocated costs 220.8 185.7 35.1 Total research and development expenses $ 625.6 $ 529.5 $ 96.1 Selling, General, and Administrative Expenses Selling, general, and administrative expenses increased to $210.8 million in 2012 from $117.3 million in 2011 due to higher selling expenses in connection with commercialization of EYLEA, higher headcount, and higher Non-cash Compensation Expense principally for the reason described above. Selling, general, and administrative expenses included $39.3 million and $23.3 million of Non-cash Compensation Expense in 2012 and 2011, respectively. Cost of Goods Sold Cost of goods sold increased to $83.9 million in 2012 from $4.2 million in 2011 due primarily to our launch of EYLEA in November 2011. Cost of goods sold primarily consisted of royalties, as well as costs in connection with producing EYLEA and ARCALYST commercial supplies. In addition, in 2012 and 2011, cost of goods sold included inventory write-downs and reserves totaling $17.0 million and $0.5 million, respectively. We record a charge to cost of goods sold to write down our inventory to its estimated realizable value if certain batches or units of product do not meet quality specifications or are expected to expire prior to sale. Other Income and Expense Total other expenses increased to $43.3 million in 2012 from $17.7 million in 2012. Other expenses consist of investment income and interest expense. Investment income decreased to $2.0 million in 2012 from $3.5 million in 2011 due primarily to lower yields on cash and marketable securities. Interest expense increased to $45.3 million in 2012 from $21.3 million in 2011. In October 2011, we issued $400.0 million aggregate principal amount of 1.875% convertible senior notes. Total interest expense in 2012 and 2011 associated with these notes, including amortization of the note discount and debt issuance costs, was $29.1 million and $5.4 million, respectively. 68



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Income Taxes In the fourth quarter of 2012, we recorded a $335.8 million income tax benefit, primarily attributable to the release of substantially all of the valuation allowance against our deferred tax assets. The decision to release this valuation allowance was made after we determined that it was more likely than not that these deferred tax assets would be realized, and was based on the evaluation and weighting of positive and negative evidence, including our achievement of a cumulative three-year income position in the fourth quarter of 2012. In addition, we considered forecasts of future operating results and utilization of net operating losses and tax credits prior to their expiration. In 2011, we recorded a $1.1 million income tax benefit, which consisted primarily of $0.7 million related to tax legislation that allowed us to claim a refund for a portion of our unused pre-2006 research tax credits. Liquidity and Capital Resources Sources and Uses of Cash for the Years Ended December 31, 2013, 2012, and 2011 At December 31, 2013, we had $1,083.9 million in cash, cash equivalents, and marketable securities compared with $587.5 million (including $8.2 million of restricted cash and marketable securities) at December 31, 2012 and $810.6 million (including $7.7 million of restricted cash and marketable securities) at December 31, 2011. In connection with our U.S. product launch of EYLEA in the fourth quarter of 2011, we have offered extended payment terms to our EYLEA customers. As a result, due to the growth of our EYLEA product sales, our net trade accounts receivable (none of which are past due) increased to $787.1 million at December 31, 2013 from $593.2 million at December 31, 2012 and $28.3 million at December 31, 2011. During 2013, we collected $1,302.0 million of EYLEA trade receivables. Effective January 2014, we have shortened the payments terms to certain of our EYLEA customers, which will reduce our cash collection cycle. As described above, in 2013 we earned and received a total of $70.0 million in milestone payments from Bayer HealthCare. In 2012, we earned and received a $50.0 million milestone payment from Sanofi, and $25.0 million of milestone payments from Bayer HealthCare. We also made a $60.0 million lump-sum payment in the third quarter of 2012, under our Non-Exclusive License and Partial Settlement Agreement with Genentech, when cumulative U.S. sales of EYLEA reached $400.0 million. In October 2011, we completed a private placement of $400.0 million aggregate principal amount of 1.875% convertible senior notes and received net proceeds of $391.1 million after deducting the initial purchaser's discount and issuance costs. In connection with the offering of the convertible senior notes, we entered into convertible note hedge and warrant transactions, which had a net cost to us of $23.7 million. Cash Provided by (Used in) Operating Activities Net cash provided by operating activities was $583.6 million in 2013. Our net income of $424.4 million in 2013 included the following non-cash expenses: (i) Non-cash Compensation Expense of $198.4 million, (ii) depreciation and amortization of $41.2 million, (iii) non-cash interest expense of $23.1 million, primarily resulting from the amortization of the discount and debt issuance costs in connection with our convertible senior notes, which were issued in October 2011, and (iv) other non-cash charges of $23.7 million, which includes $9.1 million of inventory write-downs and reserves. In addition, deferred tax assets at December 31, 2013 decreased by $63.6 million, compared to end-of-year 2012, primarily due to utilization of net operating loss and tax credit carry-forwards to offset income taxes payable during 2013. At December 31, 2013, Sanofi and trade accounts receivable increased by $198.7 million, compared to end-of-year 2012, primarily due to higher trade accounts receivable in connection with U.S. EYLEA product sales, as described above. Inventories increased by $48.0 million, compared to end-of-year 2012, primarily in connection with increased production of EYLEA commercial supplies. Prepaid expenses and other assets increased by $52.8 million, compared to end-of-year 2012, primarily due to an increase in our receivable balance due from Bayer HealthCare in connection with the launch of EYLEA outside the United States. Our deferred revenue at December 31, 2013 decreased by $28.0 million, compared to end-of-year 2012, primarily due to amortization of a previously received and deferred $165.0 million payment under our license agreement with Astellas and amortization of previously deferred payments under our Sanofi and Bayer HealthCare collaborations, partly offset by costs of product manufactured for Sanofi and Bayer HealthCare for which recognition of revenue has been deferred. Accounts payable, accrued expenses, and other liabilities increased by $136.7 million at December 31, 2013, compared to end-of-year 2012, primarily due to (i) higher sales-related charges, deductions, and royalties related to EYLEA, (ii) higher payroll-related liabilities, due in part to funding payment of our year-end 2012 employee cash bonuses in 2012, whereas year-end 2013 employee cash bonuses were accrued in 2013 and paid in 2014, and (iii) higher expenditures in connection with our expanding commercial and research and development activities. 69



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Net cash used in operating activities was $74.6 million in 2012. Our net income of $750.3 million in 2012 included (i) a non-cash tax benefit of $340.2 million resulting from the release of substantially all of the valuation allowance against our deferred tax assets, as previously described above, (ii) Non-cash Compensation Expense of $94.2 million, (iii) depreciation and amortization of $36.9 million, (iv) non-cash interest expense of $22.9 million, including $21.6 million resulting from the amortization of the discount and debt issuance costs in connection with our convertible senior notes, which were issued in October 2011, and (v) other non-cash charges of $34.0 million, including inventory write-downs and reserves of $17.0 million. At December 31, 2012, Sanofi and trade accounts receivable increased by $590.1 million, compared to end-of-year 2011, primarily due to higher trade accounts receivable in connection with EYLEA product sales, as described above. Inventories increased by $28.9 million, compared to end-of-year 2011, primarily in connection with production of EYLEA commercial supplies. Prepaid expenses and other current assets increased by $23.7 million, compared to end-of-year 2011, primarily due to an increase in prepaid royalties resulting from the $60.0 million payment we made in the third quarter of 2012, as described above. Our deferred revenue at December 31, 2012 decreased by $41.1 million, compared to end-of-year 2011, primarily due to amortization of a previously received and deferred $165.0 million payment under our license agreement with Astellas and amortization of previously deferred payments under our Sanofi and Bayer HealthCare collaborations. Accounts payable, accrued expenses, and other liabilities increased by $11.0 million at December 31, 2012, compared to end-of-year 2011, primarily due to higher sales-related deductions in connection with EYLEA and higher expenditures in connection with our expanding commercial and research and development activities, partly offset by lower payroll-related liabilities due to payment of our year-end 2012 employee cash bonuses in 2012, whereas year-end 2011 employee cash bonuses were accrued in 2011 and paid in January 2012. Net cash used in operating activities was $141.7 million in 2011. Our net loss of $221.8 million in 2011 included Non-cash Compensation Expense of $56.1 million and depreciation and amortization of $31.1 million. At December 31, 2011, Sanofi and trade accounts receivable increased by $21.1 million, compared to end-of-year 2010, primarily due to EYLEA product sales, which commenced in the fourth quarter of 2011. Due to the payment terms granted to our customers, our EYLEA product sales in 2011, generally, had not yet been collected as of December 31, 2011. Our deferred revenue at December 31, 2011 decreased by $40.3 million, compared to end-of-year 2010, primarily due to amortization of a previously received and deferred $165.0 million payment under our license agreement with Astellas and amortization of previously deferred payments under our Sanofi and Bayer HealthCare collaborations. Accounts payable, accrued expenses, and other liabilities increased by $50.0 million at December 31, 2011, compared to end-of-year 2010, primarily in connection with (i) higher payroll-related liabilities, due in part to funding payment of our year-end 2010 employee cash bonuses in 2010 whereas year-end 2011 employee cash bonuses were accrued in 2011 and funded in 2012 and (ii) our expanded levels of activities and expenditures, partly in connection with EYLEA commercialization activities. Cash (Used in) Provided by Investing Activities Net cash used in investing activities was $355.5 million and $81.1 million in 2013 and 2012, respectively, and net cash provided by investing activities was $128.5 million in 2011. In 2013 and 2012, purchases of marketable securities exceeded sales or maturities by $199.1 million and $31.2 million, respectively. In 2011, sales or maturities of marketable securities exceeded purchases by $186.0 million. Capital expenditures of $156.3 million, $49.3 million, and $57.2 million in 2013, 2012, and 2011, respectively, included costs in connection with expanding our Rensselaer, New York manufacturing facilities and tenant improvement and associated costs related to our leased facilities in Tarrytown, New York. Cash Provided by (Used in) Financing Activities Net cash provided by financing activities was $77.1 million and $384.2 million in 2013 and 2011, respectively, and net cash used in financing activities was $97.6 million in 2012. Proceeds from issuances of Common Stock, in connection with exercises of employee stock options, were $57.4 million in 2013 compared to $63.5 million in 2012 and $43.6 million in 2011. In addition, payments for employee tax obligations in connection with stock option exercises and vesting of restricted Common Stock were $195.1 million in 2013 compared to $163.3 million in 2012 and $25.1 million in 2011. Cash flows from financial activities also increased by $216.9 million in 2013 due to utilization of excess tax benefits in connection with stock option exercises, which offset cash tax obligations. As described above, in October 2011, we completed a private placement of convertible senior notes and entered into convertible note hedge and warrant transactions. 70



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Fair Value of Marketable Securities At December 31, 2013 and 2012, we held $548.3 million and $354.9 million, respectively, of marketable securities which consisted of debt securities issued by investment grade institutions as well as equity securities. The composition of our portfolio of marketable securities on these dates was as follows: December 31, 2013 December 31, 2012 Investment type Fair Value Percent Fair Value Percent Unrestricted U.S. government and government agency obligations $ 107.5 20 % $ 328.1 92 % Corporate bonds 369.2 68 % - - Commercial paper 24.0 4 % - - Municipal bonds 36.9 7 % 17.5 5 % International government agency obligations 2.0 - - - Certificates of deposit 7.5 1 % - - Equity securities 1.2 - 3.4 1 % Total unrestricted marketable securities 548.3 100 % 349.0 98 %



Restricted

U.S. government obligations - - 5.9 2 % Total marketable securities $ 548.3 100 % $ 354.9 100 % In addition, at December 31, 2013, we had $535.6 million of cash and cash equivalents, primarily held in bank deposits and money market funds. At December 31, 2012, we had $232.6 million of cash, cash equivalents, and restricted cash, primarily held in money market funds that invest in U.S. government securities. During 2013, due to cancellation of lender collateralization requirements, all formerly restricted marketable securities were reclassified as unrestricted on our balance sheet. Our methods for valuing our marketable securities are described in Note 7 to our Consolidated Financial Statements. Collaborations with Sanofi ZALTRAP (aflibercept) In September 2003, we entered into a collaboration agreement with Aventis Pharmaceuticals Inc. (predecessor to Sanofi U.S.) to collaborate on the development and commercialization of ZALTRAP in all countries other than Japan, where we retained the exclusive right to develop and commercialize ZALTRAP. Sanofi made a non-refundable up-front payment of $80.0 million and purchased 2,799,552 newly issued unregistered shares of our Common Stock for $45.0 million. In January 2005, we and Sanofi amended the collaboration agreement to exclude, from the scope of the collaboration, the development and commercialization of ZALTRAP for intraocular delivery to the eye. In connection with this amendment, Sanofi made a $25.0 million non-refundable payment to us. In December 2005, we and Sanofi amended our collaboration agreement to expand the territory in which the companies are collaborating on the development of ZALTRAP to include Japan. In connection with this amendment, Sanofi agreed to make a $25.0 million non-refundable up-front payment to us, which was received in January 2006. In August 2012, the FDA approved ZALTRAP Injection for Intravenous Infusion, in combination with FOLFIRI, for patients with mCRC that is resistant to or has progressed following an oxaliplatin-containing regimen, and Sanofi commenced ZALTRAP sales in the United States. We received, and recorded as revenue in 2012, a $50.0 million substantive milestone payment from Sanofi upon FDA approval of ZALTRAP. We currently manufacture clinical and commercial supplies of ZALTRAP. In the future, Sanofi is expected to be responsible for manufacturing commercial supplies of ZALTRAP. Under the collaboration agreement, as amended, we and Sanofi share co-promotion rights and profits and losses on sales of ZALTRAP outside of Japan for disease indications included in our collaboration. In Japan, we are entitled to receive a percentage of approximately 35% on annual sales of ZALTRAP, subject to certain potential adjustments. Under the collaboration agreement, as amended, agreed-upon worldwide ZALTRAP development expenses incurred by both companies during the term of the agreement, including costs associated with the manufacture of clinical drug supplies, are funded 71



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by Sanofi. If the collaboration becomes profitable, we will be obligated to reimburse Sanofi for 50% of these development expenses in accordance with a formula based on the amount of development expenses and our share of the collaboration profits, or at a faster rate at our option. In addition, if the collaboration becomes profitable, we will be obligated to reimburse Sanofi for 50% of the $25.0 million payment received in connection with the January 2005 amendment to our collaboration agreement. As a result, we expect that, initially, our share of any ZALTRAP profits (including our percentage of sales of ZALTRAP in Japan) will be used to reimburse Sanofi for this repayment obligation. In particular, our contingent reimbursement obligation to Sanofi for ZALTRAP was approximately $446 million as of December 31, 2013. Sanofi funded $9.8 million, $12.8 million, and $16.9 million, respectively, of our ZALTRAP development and other costs in 2013, 2012, and 2011. Our share of the loss from commercialization of ZALTRAP, representing our 50% share of ZALTRAP net product sales less cost of goods sold and shared commercialization and other expenses, was $30.8 million in 2013, $25.6 million in 2012, and $9.3 million in 2011. At December 31, 2013 and 2012, there was a net payable of $1.4 million and $2.7 million, respectively, to Sanofi in connection with the companies' ZALTRAP collaboration. In addition, the up-front payments from Sanofi of $80.0 million in September 2003 and $25.0 million in January 2006 were recorded to deferred revenue and are being recognized as contract research and development revenue over the period during which we expect to perform services. In 2013, 2012, and 2011, we recognized $5.5 million, $11.2 million, and $9.9 million per year of revenue, respectively, related to these up-front payments. Sanofi has the right to terminate the agreement without cause with at least twelve months advance notice. Upon termination of the agreement for any reason, any remaining obligation to reimburse Sanofi for 50% of ZALTRAP development expenses will terminate and we will retain all rights to ZALTRAP. Antibodies In November 2007, we and Sanofi entered into a global, strategic collaboration to discover, develop, and commercialize fully human monoclonal antibodies. The collaboration is governed by a Discovery and Preclinical Development Agreement and a License and Collaboration Agreement (each as amended). In connection with the execution of the discovery agreement in 2007, we received a non-refundable up-front payment of $85.0 million from Sanofi. Pursuant to the collaboration, Sanofi is funding our research to identify and validate potential drug discovery targets and develop fully human monoclonal antibodies against these targets. In November 2009, we and Sanofi amended these collaboration agreements to expand and extend our antibody collaboration. Under the amended discovery agreement, Sanofi agreed to fund up to $160 million per year of our antibody discovery activities in 2010 through 2017. In 2010, as we scaled up our capacity to conduct antibody discovery activities, Sanofi funded $137.7 million of our preclinical research under the amended discovery agreement. The balance between that amount and $160 million was added to the funding otherwise available to us in 2011-2012 under the amended discovery agreement. Sanofi has an option to extend certain antibody development and preclinical activities relating to selected program targets for up to an additional three years after 2017. For each drug candidate identified through discovery research under the discovery agreement, Sanofi has the option to license rights to the candidate under the license agreement. If it elects to do so, Sanofi will co-develop the drug candidate with us through product approval. Under certain defined circumstances, upon exercising its option to license rights to particular candidates, Sanofi must make a $10 million substantive milestone payment to us. Under the license agreement, agreed upon worldwide development expenses incurred by both companies during the term of the agreement are funded by Sanofi, except that following receipt of the first positive Phase 3 trial results for a co-developed drug candidate, subsequent Phase 3 trial-related costs for that drug candidate (called Shared Phase 3 Trial Costs) are shared 80% by Sanofi and 20% by us. If the collaboration becomes profitable, we will be obligated to reimburse Sanofi for 50% of worldwide development expenses that were fully funded by Sanofi and 30% of Shared Phase 3 Trial Costs, in accordance with a defined formula based on the amounts of these expenses and our share of the collaboration profits from commercialization of collaboration products. However, we are not required to apply more than 10% of our share of the profits from collaboration products in any calendar quarter towards reimbursing Sanofi for these development costs. In particular, our contingent reimbursement obligation to Sanofi in connection with the companies' antibody collaboration was approximately $879 million as of December 31, 2013. If Sanofi does not exercise its option to license rights to a particular drug candidate under the license agreement, we retain the exclusive right to develop and commercialize such drug candidate, and Sanofi will receive a royalty on sales, if any. Sanofi will lead commercialization activities for products developed under the license agreement, subject to our right to co-promote such products. The parties will equally share profits and losses from sales within the United States. The parties will share profits outside the United States on a sliding scale based on sales starting at 65% (Sanofi)/35% (us) and ending at 55% (Sanofi)/45% (us), and losses outside the United States at 55% (Sanofi)/45% (us). In addition to profit sharing, we are entitled to receive up to $250 million in sales milestone payments, with milestone payments commencing only if and after aggregate annual sales outside the United States exceed $1.0 billion on a rolling 12-month basis. 72



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We are obligated to use commercially reasonable efforts to supply clinical requirements of each drug candidate under the collaboration until commercial supplies of that drug candidate are being manufactured. In connection with the November 2009 amendment of the collaboration's discovery agreement, Sanofi funded $30 million of agreed-upon costs incurred by us to expand our manufacturing capacity at our Rensselaer, New York facilities. In 2013, 2012, and 2011, Sanofi funded $160.0 million, $181.9 million, and $161.9 million, respectively, of our expenses under the collaboration's discovery agreement and $295.4 million, $183.4 million, and $137.4 million, respectively, of our development and other costs under the license agreement. In addition, in 2013, we funded $17.6 million of Sanofi's Phase 3 development costs for alirocumab and sarilumab under the license agreement. The $85.0 million up-front payment received from Sanofi in December 2007 was recorded to deferred revenue and is being recognized as collaboration revenue over the period during which we expect to perform services. In addition, reimbursements by Sanofi of our costs to expand our manufacturing capacity were recorded to deferred revenue and are being recognized prospectively as collaboration revenue over the same period applicable to recognition of the $85.0 million up-front payment. In 2013, 2012, and 2011, we recognized $8.6 million, $8.6 million, and $8.2 million, of revenue, respectively, related to these deferred payments. In connection with the antibody collaboration, in August 2008, we entered into a separate agreement with Sanofi, which extended through December 2012, to use our proprietary VelociGene technology platform to supply Sanofi with genetically modified mammalian models of gene function and disease. The agreement provided for minimum annual order quantities for the term of the agreement, for which we receive payments which will total $21.5 million. With respect to our antibody collaboration with Sanofi, $106.1 million and $102.6 million was included in accounts receivable as of December 31, 2013 and 2012, respectively. With respect to each antibody product which enters development under the license agreement, Sanofi or we may, by giving twelve months notice, opt-out of further development and/or commercialization of the product, in which event the other party retains exclusive rights to continue the development and/or commercialization of the product. We may also opt-out of the further development of an antibody product if we give notice to Sanofi within thirty days of the date that Sanofi elects to jointly develop such antibody product under the license agreement. Each of the discovery agreement and the license agreement contains other termination provisions, including for material breach by the other party. Prior to December 31, 2017, Sanofi has the right to terminate the amended discovery agreement without cause with at least three months advance written notice; however, except under defined circumstances, Sanofi would be obligated to immediately pay to us the full amount of unpaid research funding during the remaining term of the research agreement through December 31, 2017. Upon termination of the collaboration in its entirety, our obligation to reimburse Sanofi for development costs out of any future profits from collaboration products will terminate. In December 2007, we sold Sanofi 12 million newly issued, unregistered shares of Common Stock at an aggregate cash price of $312.0 million, or $26.00 per share of Common Stock. As a condition to the closing of this transaction, Sanofi entered into an investor agreement with us. This agreement, which was amended in January 2014, contains certain demand rights, "stand-still provisions", and other restrictions, which are more fully described in Note 14 to our Consolidated Financial Statements. In addition, in October 2010, Sanofi purchased 1,017,401 shares of Common Stock in our underwritten public offering. Collaborations with Bayer HealthCare EYLEA outside the United States In October 2006, we entered into a license and collaboration agreement with Bayer HealthCare to globally develop, and commercialize outside the United States, EYLEA. Under the terms of the agreement, Bayer HealthCare made a non-refundable up-front payment to us of $75.0 million. We also received from Bayer HealthCare a $20.0 million development milestone payment in 2007 (which, for the purpose of revenue recognition, was not considered substantive) and a $10.0 million substantive milestone development payment in each of 2010 and 2011. 73



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Bayer HealthCare commenced sales of EYLEA for the treatment of wet AMD in the fourth quarter of 2012 following receipt of regulatory approvals in the EU and other regions, and for the treatment of macular edema secondary to CRVO in the fourth quarter of 2013 following receipt of regulatory approvals in the EU and Japan. Bayer HealthCare has additional regulatory applications for EYLEA for the treatment of wet AMD and macular edema secondary to CRVO pending in other countries. Bayer HealthCare markets EYLEA outside the United States, where, for countries other than Japan, the companies will share equally in profits and losses from sales of EYLEA. We are entitled to receive a percentage of between 33.5% and 40.0% of EYLEA annual net sales in Japan. We are obligated to reimburse Bayer HealthCare out of our share of the collaboration profits (including our percentage of sales of EYLEA in Japan) for 50% of the agreed-upon development expenses that Bayer HealthCare has incurred in accordance with a formula based on the amount of development expenses that Bayer HealthCare has incurred and our share of the collaboration profits, or at a faster rate at our option. As a result, we expect that, initially, our share of any EYLEA profits outside the United States will be partly used to reimburse Bayer HealthCare for this repayment obligation. In particular, our contingent reimbursement obligation to Bayer HealthCare for EYLEA was approximately $276 million at December 31, 2013. We are obligated to use commercially reasonable efforts to supply clinical and commercial bulk product of EYLEA to Bayer HealthCare. Within the United States, we are responsible for commercialization of EYLEA and retain exclusive rights to all future profits from such commercialization in the United States. In 2012, we received, and recognized as revenue, $15.0 million and $10.0 million substantive milestone payments from Bayer HealthCare upon receipt of marketing and pricing approval, respectively, in Japan for EYLEA for the treatment of wet AMD. In 2013, we received, and recognized as revenue, $15.0 million and $10.0 million substantive milestone payments from Bayer HealthCare upon receipt of marketing and pricing approval, respectively, for EYLEA for the treatment of macular edema secondary to CRVO outside the United States. In addition, in 2013, we received, and recognized as revenue, three $15.0 million sales milestone payments from Bayer HealthCare upon total aggregate sales of EYLEA outside the United States exceeding $200 million, $300 million, and $400 million, respectively, over a twelve-month period. We may earn up to $90 million in additional sales milestone payments if twelve-month sales of EYLEA outside the United States achieve certain specified levels up to $1 billion. In addition, in connection with a November 2013 agreement under which Bayer HealthCare obtained rights to use certain of our EYLEA clinical data for a regulatory filing, we became eligible to receive up to $30 million in additional sales milestone payments if twelve-month sales of specific commercial supplies of EYLEA outside the United States achieve certain specified levels up to $200 million. Under the terms of the agreement, since 2009, all agreed upon EYLEA development expenses incurred by both companies under a global development plan, and certain commercialization and other expenses, are shared equally, and profits or losses on sales of EYLEA outside the United States are also shared. In connection with our collaboration with Bayer HealthCare, we recognized $220.3 million, $70.1 million, and $43.1 million of collaboration revenue in 2013, 2012, and 2011, respectively. We also funded $15.3 million, $21.9 million, and $47.8 million of Bayer HealthCare's EYLEA development expenses in 2013, 2012, and 2011, respectively. At December 31, 2013 and 2012, $63.2 million and $2.8 million, respectively, were receivable from Bayer HealthCare in connection with the companies' EYLEA collaboration outside the United States. In addition, the $75.0 million up-front payment and the $20.0 million milestone payment received in 2007 from Bayer HealthCare were recorded to deferred revenue. In 2013, 2012, and 2011, we recognized $7.9 million, $7.9 million, and $9.4 million, respectively, of revenue related to these payments. Based on the positive results of Phase 3 studies, we submitted a supplemental BLA for U.S. regulatory approval of EYLEA in DME in the fourth quarter of 2013; the target date for an FDA decision on the supplemental BLA is August 18, 2014. An application for marketing approval for the treatment of DME in the EU was also submitted during the fourth quarter of 2013. In January 2014, Bayer HealthCare exercised its right to opt-in to the global development and commercialization of EYLEA outside the United States for the treatment of macular edema following BRVO. In connection with its opt-in, Bayer HealthCare will reimburse us for a defined share of the EYLEA global development costs that we have or will incur for the BRVO indication. In addition, profits or losses on sales of EYLEA outside of the United States for the treatment of macular edema following BRVO will also be shared. Bayer HealthCare has the right to terminate the agreement without cause with at least six months or twelve months advance notice depending on defined circumstances at the time of termination. In the event of termination of the agreement for any reason, we retain all rights to EYLEA. 74



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PDGFR-beta antibody outside the United States In January 2014, we entered into a license and collaboration agreement with Bayer HealthCare governing the joint development and commercialization outside the United States of an antibody product candidate to PDGFR-beta, including in combination with EYLEA, for the treatment of ocular diseases or disorders. REGN2176-3, a combination product candidate comprised of an antibody to PDGFR-beta co-formulated with EYLEA, is being developed under the agreement. Under the agreement, we will conduct the initial development of the PDGFR-beta antibody through completion of the first proof-of-concept study, upon which Bayer HealthCare will have a right to opt-in to the collaboration for further development and commercialization outside the United States. In connection with the agreement, Bayer HealthCare made a $25.5 million non-refundable upfront payment to us in January 2014, and is obligated to pay 25% of global development costs and 50% of development costs exclusively for the territory outside the United States under the initial development plan. In addition, Bayer HealthCare is obligated to reimburse us for 50% of the development milestone payments to Sanofi related to our acquisition of rights to antibodies targeting the PDGF family of receptors in May 2013, as described above. In that regard, Bayer HealthCare made a $2.5 million payment to us in January 2014. Further, in connection with our initial development of the PDGFR-beta antibody through completion of the first proof-of-concept study, we are eligible to receive up to $17.5 million in future development milestone payments from Bayer HealthCare, although certain of these development milestone payments could be reduced by half if Bayer HealthCare does not opt-in to the collaboration. If Bayer HealthCare exercises their right to opt-in to the collaboration, they will obtain exclusive commercialization rights to the product outside the United States, pay for 25% of global development costs and 50% of development costs exclusively for the territory outside the United States, pay a $20 million opt-in payment to us, pay a $20 million development milestone to us upon receipt of the first marketing approval in the European Union or Japan, share profits from sales outside the United States equally with us, and be responsible for the payment of royalties on sales outside the United States to Sanofi. Within the United States, we have exclusive commercialization rights and will retain all of the profits from sales. If Bayer HealthCare does not opt-in to the collaboration, we will have exclusive rights to develop and commercialize PDGFR-beta antibodies (except as a combination product with EYLEA) for use outside the United States. We also have the right to opt-out of the collaboration upon completion of the first proof-of-concept study for the PDGFR-beta antibody. If we opt-out of the collaboration and Bayer HealthCare exercises its right to opt-in to the collaboration, Bayer HealthCare will obtain exclusive rights to the PDGFR-beta antibody (except as a combination product with EYLEA) outside of the United States, be responsible for all development costs outside of the United States, be responsible for all royalty and milestone payments to a third party, and will retain all of the profits from sales of the PDGFR-beta antibody outside of the United States. Unless terminated earlier in accordance with its provisions, the agreement will continue to be in effect until such time as neither party or its respective affiliates or sublicensees is developing or commercializing a PDGFR-beta antibody in the specified field outside of the United States and such discontinuation is acknowledged as permanent by both us and Bayer HealthCare in writing. License Agreement with Astellas In July 2010, the non-exclusive license agreement with Astellas was amended and extended through June 2023. Under the terms of the amended agreement, Astellas made a $165.0 million up-front payment to us in August 2010. In addition, Astellas will make a $130.0 million second payment to us in June 2018 unless the license agreement has been terminated prior to that date. Astellas has the right to terminate the agreement at any time by providing 90 days' advance written notice. Under certain limited circumstances, such as our material breach of the agreement, Astellas may terminate the agreement and receive a refund of a portion of its up-front payment or, if such termination occurs after June 2018, a portion of its second payment, to us under the July 2010 amendment to the agreement. We are entitled to receive a mid-single digit royalty on any future sales of antibody products discovered by Astellas using our VelocImmune technology. 75



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License Agreement with Cellectis In July 2008, we and Cellectis S.A. entered into an Amended and Restated Non-Exclusive License Agreement. The amended license agreement resolved a dispute between the parties related to the interpretation of a license agreement entered into by the parties in December 2003 pursuant to which we licensed certain patents and patent applications relating to a process for the specific replacement of a copy of a gene in the receiver genome by homologous recombination. Pursuant to the amended license agreement, in July 2008, we made a non-refundable $12.5 million payment to Cellectis and agreed to pay Cellectis a low single-digit royalty based on revenue received by us from any future licenses or sales of our VelociGene or VelocImmune products and services. No royalties are payable to Cellectis with respect to our former VelocImmune license agreement with AstraZeneca, our current VelocImmune license agreement with Astellas, or our antibody collaboration with Sanofi. In addition, no royalties are payable to Cellectis on any revenue from commercial sales of antibodies from our VelocImmune technology. We are amortizing our $12.5 million payment to Cellectis in proportion to past and anticipated future revenues under our license agreements with AstraZeneca and Astellas and our antibody discovery agreement with Sanofi (as amended in November 2009). Royalty Agreement with Novartis Pharma AG Under a June 2009 agreement with Novartis (that replaced a previous collaboration and license agreement), we receive royalties on worldwide sales of Novartis' canakinumab, a fully human anti-interleukin-IL1ß antibody. The royalty rates in the agreement start at 4% and reach 15% when annual sales exceed $1.5 billion. Canakinumab is marketed for the treatment of CAPS and gouty arthritis, and is in earlier stage development for other inflammatory diseases. We are unable to predict whether these royalties will ever contribute materially to our results of operations or financial condition. License and Settlement Agreements with Genentech On December 31, 2011, we entered into a Non-Exclusive License and Partial Settlement Agreement with Genentech (the Original Genentech Agreement) that covered making, using, and selling EYLEA in the United States for the prevention and treatment of human eye diseases and disorders in the United States, and ended the litigation relating to those matters. The Original Genentech Agreement provided for us to make payments to Genentech based on U.S. sales of EYLEA through May 7, 2016, the date the Davis-Smyth patents expire. Under the Original Genentech Agreement, we made a $60.0 million milestone payment when cumulative U.S. sales reached $400 million and are obligated to pay royalties of 4.75% on cumulative relevant sales of EYLEA between $400 million and $3 billion and 5.5% on any cumulative relevant sales of EYLEA over $3 billion. Effective May 17, 2013, we entered into an Amended and Restated Non-Exclusive License and Settlement Agreement with Genentech (the Amended Genentech Agreement), which amended the Original Genentech Agreement to now include all sales of EYLEA worldwide and ended the litigation relating to those matters. Under the Amended Genentech Agreement, we received a worldwide non-exclusive license to the Davis-Smyth patents, and certain other patents, owned or co-owned by Genentech for the prevention or treatment of human eye diseases and eye disorders through administration of EYLEA to the eye. Under the Amended Genentech Agreement, we are obligated to make payments to Genentech based on sales of EYLEA in the United States and EYLEA manufactured in the United States and sold outside the United States through May 7, 2016 using the same milestone and royalty rates as in the Original Genentech Agreement. EYLEA is sold outside the United States by affiliates of Bayer HealthCare under our license and collaboration agreement. All payments to Genentech under the Original Genentech Agreement and the Amended Genentech Agreement have been or will be made by Regeneron. Bayer HealthCare will share in all such payments based on the proportion of ex-U.S. EYLEA sales to worldwide EYLEA sales and determined consistent with the license and collaboration agreement. Also on May 17, 2013, we entered into a Non-Exclusive License and Settlement Agreement (the ZALTRAP Agreement), with Genentech, Sanofi U.S. Services, Inc. and Sanofi-Aventis U.S. LLC (the latter two entities, collectively, Sanofi) under which we and Sanofi received a worldwide non-exclusive license to the Davis-Smyth patents, and certain other patents, in all indications for human use other than the prevention or treatment of eye diseases and eye disorders through administration to the eye. Under the terms of the ZALTRAP Agreement, payments are required to be made to Genentech based on sales of ZALTRAP in the United States and of ZALTRAP that is manufactured in the United States and sold outside the United States through May 7, 2016. A payment of $19 million is required to be made upon cumulative relevant sales of ZALTRAP reaching $200 million. In addition, royalty payments are required to be made to Genentech based upon 4.5% of cumulative relevant sales of ZALTRAP between $400 million and $1 billion and 6.5% of any cumulative relevant sales of ZALTRAP over $1 billion. All payments to Genentech under the ZALTRAP Agreement will be made by Sanofi, and we will share in all such payments. 76



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Tarrytown, New York Leases We lease approximately 664,000 square feet of laboratory and office space at facilities in Tarrytown, New York, under a December 2006 lease agreement, as amended. These facilities include approximately 230,000 square feet of space in two newly constructed buildings (Buildings A and B) that were completed during the third quarter of 2009 and approximately 131,000 square feet of additional space in a third newly constructed building (Building C), that was completed in early 2011. In April 2013, we executed an agreement related to approximately 360,000 square feet of space that we currently lease at our Tarrytown location, which extended the term of the lease from June 2024 to June 2029; the remaining space will expire in June 2024. The lease contains three renewal options to extend the term of the lease by five years each and early termination options on approximately 271,000 square feet of space. The lease provides for monthly payments over its term and additional charges for utilities, taxes, and operating expenses. In April 2013, we entered into a new lease agreement for approximately 297,000 square feet of additional new laboratory and office space to be constructed in two new buildings (Buildings D and E), which are expected to be completed in the second half of 2015, at our current Tarrytown, New York location. The term of the lease, which is expected to commence in mid-2014, is approximately 15 years and contains three renewal options to extend the term of the lease by five years each. The lease provides for (i) monthly payments over its term, which are expected to commence in 2015 and will be based on the landlord's costs of construction and tenant allowances, and (ii) additional charges for utilities, taxes, and operating expenses. Certain premises under the lease are accounted for as operating leases. However, for Buildings A, B, C, D, and E (collectively, the Buildings) that we are or will be leasing, we are deemed, in substance, to be the owner of the landlord's Buildings in accordance with the application of FASB authoritative guidance. Consequently, in addition to capitalizing the tenant improvements, we capitalize the landlord's costs of constructing these new facilities, offset by a corresponding facility lease obligation. As it relates to Buildings A, B, and C, we also recognized, as additional facility lease obligation, reimbursements from our landlord for tenant improvement costs that we incurred since, under FASB authoritative guidance, such payments that we receive from our landlord are deemed to be a financing obligation. With respect to Buildings A and B, monthly lease payments commenced in August 2009, and the buildings were placed in service by us in September 2009. With respect to Building C, monthly lease payments commenced in January 2011, and the building was placed in service by us in February 2011. At December 31, 2013 and 2012, the Buildings' facility lease obligation balance was $185.2 million and $160.8 million, respectively. Capital Expenditures Our cash expenditures for property, plant, and equipment totaled $156.3 million in 2013, $49.3 million in 2012, and $57.2 million in 2011. In July 2013, we reached preliminary agreement to acquire a 400,000 square foot facility in Limerick, Ireland, subject to entering into definitive agreements as well as securing permits from the local government in Limerick. We intend to renovate this facility to accommodate and support our growth, primarily in connection with expanding our manufacturing capacity to support our global supply chain. We expect to incur capital expenditures of approximately $350 to $425 million in 2014 primarily in connection with expanding our manufacturing facilities at our Rensselaer facility, tenant improvements primarily related to Buildings D and E at our leased Tarrytown facilities, purchasing and commencing renovations on the new Limerick facility described above (predicated on finalizing its purchase), and purchases of equipment. Offering of Convertible Senior Notes In October 2011, we issued $400.0 million aggregate principal amount of 1.875% convertible senior notes in a private placement. The notes were offered by the initial purchaser only to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933. The notes pay interest semi-annually on April 1 and October 1, and will mature on October 1, 2016, unless earlier converted or repurchased. The notes are convertible, subject to certain conditions, into cash, shares of our Common Stock, or a combination of cash and shares of Common Stock, at our option. The initial conversion rate for the notes is 11.9021 shares of Common Stock (subject to adjustment in certain circumstances) per $1,000 principal amount of the notes, or a total of approximately 4,760,840 shares upon conversion, which is equal to an initial conversion price of approximately $84.02 per share. A holder of the notes may surrender their notes at their option any time prior to the close of business on the business day immediately preceding July 1, 2016, only under the following circumstances: (i) during any calendar quarter commencing after the calendar quarter ending on December 31, 2011 (and only during such calendar quarter), if the last reported sale price of our Common Stock for at least 20 trading days 77



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(whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (ii) during the five business day period after any ten consecutive trading day period (the "measurement period") in which the trading price, as defined, of the notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our Common Stock and the conversion rate on each such trading day; (iii) if we elect to issue to all or substantially all holders of our Common Stock any rights, options, or warrants (other than pursuant to a rights plan) entitling them for a period of not more than 60 calendar days after the record date for such issuance, to subscribe for or purchase shares of our Common Stock, at a price per share less than the average of the last reported sales prices of our Common Stock for the ten consecutive day period ending on, and including, the trading day immediately preceding the declaration date for such issuance; (iv) upon specified distributions to our shareholders; or (v) upon the occurrence of specified corporate transactions, such as a fundamental change (i.e., a change in control), or our Common Stock ceasing to be listed on at least one U.S. national securities exchange. On or after July 1, 2016, holders may convert their notes at the conversion rate at any time prior to the close of business on the second scheduled trading day immediately preceding the maturity date irrespective of the foregoing conditions. In the event that a fundamental change, as defined in the indenture under which the notes have been issued, occurs prior to maturity of the notes, the initial conversion rate may be increased to include additional shares upon conversion, or holders can require us to purchase from them all or a portion of their notes for 100% of the principal value plus any accrued and unpaid interest. Based on the reported sales prices of our Common Stock, the notes were able to be converted by holders as of December 31, 2013. In connection with the offering of the convertible senior notes, we entered into convertible note hedge (call option) and warrant transactions with multiple counterparties, including an affiliate of the initial purchaser. The convertible note hedge transactions cover, subject to customary anti-dilution adjustments, the number of shares of our Common Stock that initially underlie the notes, and are intended to reduce the potential dilutive impact of the conversion feature of the notes. The convertible note hedge will terminate upon the earlier of the maturity date of the notes or the first day the notes are no longer outstanding. The warrant transactions have an initial strike price of approximately $103.41 per share, and may be settled in cash or shares of our Common Stock, at our option. The warrants expire at various dates during 2017. The net proceeds from the convertible senior notes offering were $391.1 million after deducting the initial purchaser's discount and issuance costs. In addition, the net cost of the convertible note hedge transactions, after taking into account the proceeds received by us from the warrant transactions, was $23.7 million. Funding Requirements We expect continued growth in our expenditures, particularly in connection with our research and development activities (including preclinical and clinical testing), capital expenditures, and commercialization of EYLEA. We believe that our existing capital resources, funds generated by anticipated EYLEA net product sales, and funding for reimbursement of development costs that we are entitled to receive under our collaboration agreements will enable us to meet our projected operating needs for the foreseeable future. As described above, research and development expenses that we incur in connection with our ZALTRAP and antibodies collaborations are generally funded by Sanofi, except that following receipt of the first positive Phase 3 trial results for a co-developed antibody drug candidate, subsequent Phase 3 trial-related costs for that drug candidate are shared 80% by Sanofi and 20% by us. In addition, as described above, we and Bayer HealthCare share (i) agreed-upon development expenses that both companies incur in connection with our EYLEA collaboration, and (ii) development costs under the initial development plan in connection with our PDGFR-beta antibody collaboration. 78



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In connection with our funding requirements, the following table summarizes our contractual obligations as of December 31, 2013. These obligations and commitments assume non-termination of agreements and represent expected payments based on current operating forecasts, which are subject to change: Payments Due by Period Less than one Greater than 5 (In millions) Total year 1 to 3 years 3 to 5 years years Convertible senior notes (1) $ 422.5$ 7.5$ 415.0 - - Operating leases (2) 117.6 10.9 19.8 $ 19.0 $ 67.9 Purchase obligations (3) 458.8 353.9 84.2 20.7 - Other long-term liabilities (4) 304.3 17.7 36.6 38.2 211.8



Total contractual obligations $ 1,303.2$ 390.0$ 555.6 $ 77.9 $ 279.7

(1) Consists of $400.0 million aggregate principal amount of 1.875%

convertible senior notes that mature on October 1, 2016, unless earlier

converted or repurchased. The amounts in the table above assume the

payment of interest on our convertible senior notes through their maturity

date and the payment of the principal amount of the notes at their maturity date. Interest on the notes is payable semi-annually. The convertible senior notes will be convertible, subject to certain conditions, into cash, shares of our Common Stock, or a combination of cash and shares of Common Stock, at our option. As of December 31, 2013, the convertible senior notes were convertible under the terms of the indenture governing the notes. (2) Excludes future contingent costs for utilities, real estate taxes, and operating expenses. In 2013, these costs were $11.5 million. See Note 13(a) to our Consolidated Financial Statements.



(3) Purchase obligations primarily relate to (i) research and development

commitments, including those related to clinical trials, (ii) capital

expenditures for equipment acquisitions, and (iii) license payments. Our

obligation to pay certain of these amounts may increase or be reduced

based on certain future events. Open purchase orders for the acquisition

of goods and services in the ordinary course of business are excluded from

the table above. (4) Represents payments with respect to facility lease obligations in



connection with our lease of Buildings A, B, and C in Tarrytown, New York,

as described under "Tarrytown, New York Leases" above. In addition to the

estimated obligations in the table above, pursuant to a new lease

agreement entered into in April 2013, there are two new buildings

currently under construction (Buildings D and E). Rent payments on these

buildings are expected to commence in 2015, and will be based on the

landlord's costs of construction and tenant allowances. See Note 13(a) to

our Consolidated Financial Statements.

As described above, in May 2013, we acquired from Sanofi full exclusive rights to antibodies targeting the PDGF family of receptors and ligands in ophthalmology and all other indications and to antibodies targeting the Ang2 receptor and ligand in ophthalmology. With respect to PDGF antibodies, we made a $10.0 million up-front payment to Sanofi in May 2013 and a $5.0 million development milestone payment in January 2014, and are obligated to pay up to $35 million in potential additional development milestones and royalties on any future sales. With respect to Ang2 antibodies in ophthalmology, we also made a $10.0 million up-front payment to Sanofi in May 2013, and are obligated to pay a potential $5 million development milestone payment and royalties on any future sales. Under our collaboration agreements with Sanofi and Bayer HealthCare, we and our collaborator will share profits and losses in connection with commercialization of drug products. Profits or losses under each collaboration are measured by calculating net sales less cost of goods sold and shared commercialization and other expenses. If the applicable collaboration becomes profitable, we have contingent contractual obligations to reimburse Sanofi and, in connection with EYLEA outside the United States, Bayer HealthCare for a defined percentage (generally 50%) of agreed-upon development expenses incurred by Sanofi and Bayer HealthCare, respectively. These reimbursements would be deducted each quarter, in accordance with a formula, from our share of the collaboration profits (and, for our ZALTRAP collaboration with Sanofi and our EYLEA collaboration with Bayer HealthCare, our percentage on product sales in Japan) otherwise payable to us, unless, in some cases, we elect to reimburse these expenses at a faster rate. In particular, as of December 31, 2013, our contingent reimbursement obligation to Sanofi for ZALTRAP was approximately $446 million, while our contingent reimbursement obligation to Bayer HealthCare for EYLEA was approximately $276 million. Therefore, we expect that, initially, our share of profits from sales of ZALTRAP, and a portion of our share of profits from sales of EYLEA outside the United States, will be used to reimburse our collaborators for these obligations. The amount we need to fund operations will depend on various factors, including revenues from net product sales, the potential regulatory approval and commercialization of our product candidates and new indications for our marketed products, and the timing thereof, the status of competitive products, the success of our research and development programs, the potential future need 79



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to expand our professional and support staff and facilities, the status of patents and other intellectual property rights (and future litigation related thereto), the delay or failure of a clinical trial of any of our potential drug candidates, and the continuation, extent, and success of our collaborations with Sanofi and Bayer HealthCare. Clinical trial costs are dependent, among other things, on the size and duration of trials, fees charged for services provided by clinical trial investigators and other third parties, the costs for manufacturing the product candidate for use in the trials, and for supplies, laboratory tests, and other expenses. The amount of funding that will be required for our clinical programs depends upon the results of our research and preclinical programs and early-stage clinical trials, regulatory requirements, the duration and results of clinical trials underway and of additional clinical trials that we decide to initiate, and the various factors that affect the cost of each trial as described above. Our commercialization costs over the next few years will depend on, among other things, whether or not new indications for our marketed products or our antibody product candidates in later stage clinical development receive regulatory approval, the market potential for such new indications or product candidates, and the commercialization terms of our collaboration agreements, if applicable (whereby some or all commercialization costs may be shared with our collaborators). Currently, we are required to pay royalties on sales of commercial products. In the future, if we are able to successfully develop, market, and sell EYLEA for other indications, or certain of our product candidates, we may be required to pay additional royalties or share the profits from such sales pursuant to our license or collaboration agreements. In addition, under the provisions of the PPACA and the Health Care and Education Reconciliation Act of 2010, a non-tax deductible annual fee (the Branded Prescription Drug Fee) is imposed on pharmaceutical manufacturers that sell branded prescription drugs to specified government programs. This fee is allocated to companies, including Regeneron, based on their prior year market share of total branded prescription drug sales into these government programs. As described above, in 2013, 2012, and 2011, we made cash payments of $195.1 million, $163.3 million, and $25.1 million, respectively, for employee tax obligations in connection with stock option exercises and vesting of restricted stock. Future cash requirements for such payments will depend on various factors, including the level of stock option grants and exercises and the sales prices of our Common Stock, and may continue to be substantial. We expect that expenses related to the filing, prosecution, defense, and enforcement of patents and other intellectual property will continue to be substantial. We may from time to time seek to retire or repurchase our outstanding debt (including our 1.875% convertible senior notes) through cash purchases or exchanges for equity or debt securities, in open market purchases, privately negotiated transactions, or otherwise. Such purchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions, and other factors. The amounts involved may be material. Due to the amounts of our net operating loss and tax credit carry-forwards available for tax purposes, which totaled $450.4 million and $120.1 million, respectively, at December 31, 2013, we do not anticipate making significant cash payments for income taxes for at least the next twelve months. In connection with our collaboration with Bayer HealthCare, we are entitled to receive up to $90 million in additional sales milestones based on total twelve-month sales of EYLEA outside the United States achieving certain specified levels up to $1 billion. In addition, in connection with a November 2013 agreement under which Bayer HealthCare obtained rights to use certain of our EYLEA clinical data for a regulatory filing, we became eligible to receive up to $30 million in additional sales milestone payments if twelve-month sales of specific commercial supplies of EYLEA outside the United States achieve certain specified levels up to $200 million. Other than letters of credits totaling $1.6 million as of December 31, 2013, we have no off-balance sheet arrangements. A $3.4 million letter of credit was canceled in April 2013 in connection with the amendment of our Tarrytown lease, as described above. As of December 31, 2013, we had no other banking arrangements that provided short-term financing or lines of credit. In November 2013, we filed a shelf registration statement on Form S-3, to replace the shelf registration that expired in October 2013, registering the sale, in one or more offerings, of an indeterminate amount of equity or debt securities, together or separately. There is no assurance, however, that we will be able to complete any offerings of securities under this shelf or other registration statements. Factors influencing the availability of additional financing include our progress in product development and commercialization, investor perception of our prospects, and the general condition of the financial markets. 80



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