Regeneron Pharmaceuticals, Inc.

Welcome to the Regeneron Pharmaceuticals 4th Quarter 2018 Earnings Conference Call. My name is Paulette and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. During the question and answer session, if you have a question, please press star then 1 on your touchtone phone. Please note that this conference is being recorded. I will now turn the call over to Mark Hudson, Senior Manager Investor Relations. You may begin.

Thank you, Paulette. Good morning and welcome to the Regeneron Pharmaceuticals 4th Quarter 2018 Conference Call. An archive of this webcast will be available on our website for 30 days under events. Joining me on the call today are Dr. Leonard Schleifer, Founder President, Chief Executive Officer, Dr. George Inkopoulos, Founding Scientist, President, and Chief Scientific Officer, Mary McCourt, Senior Vice President, and Head of Commercial, and Bob Langie, Executive Vice President and Chief Financial Officer. After our prepared remarks, we'll open up the call for Q&A. I'd also like to remind you that remarks made on this call today include forward-looking statements about Regeneron. Such statements may include but are not limited to those related to Regeneron and its products and business, financial forecasts and guidance, development programs and related anticipated milestones, collaborations, finances, regulatory matters, intellectual property, pending litigation, and competition. Each forward-looking statement is subject to risks and uncertainties that cause actual results and events to differ material from those projected in that statement. A more complete description of these and other material risks can be found in Regeneron's filings with the United States Securities and Exchange Commission, or SEC, including its Form 10-K for the year ended December 31, 2018, which you are planning to file with the SEC tomorrow. Regeneron does not undertake any obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise. In addition, please note that the GAAP and non-GAAP measures will be discussed in today's call. Information regarding our use of non-GAAP financial measures and a reconciliation of those measures to GAAP is available in our Financial Results Press Release, which can be accessed on our website. Once the call concludes, Bob Landry, Jay Markowitz, and the ARA team will be available to answer further questions. With that, let me turn the call over to our President and Chief Executive Officer, Dr. Len Schleifer.

Thank you, Mark, and good morning to everyone who has joined us on today's call and webcast. 2018 marked Regeneron's 30th year anniversary, and it was a remarkable year for the company. We are pleased with our pipeline progress, our commercial execution, and our financial results. And we remain true to our founding mission of inventing important new medicines for patients in need. Aylia, the market-leading anti-veget therapy approved across a range of retinal disease, continues to grow. 2018 U.S. net product sales were $4.08 billion, an increase of 10% year over year. And 2018 global Aylia product sales totaled $6.7 billion, an increase of 14% year over year. We continue to invest in retinal diseases and are pursuing new indications, new formulations, and new molecular entities. We have a PDUFA date in May for diabetic retinopathy without diabetic macular edema, or DME. And our submission was based upon our phase three panorama trial in which we were able to reduce vision-threatening complications of diabetes. In 2018, we made progress fulfilling Dupixent's pipeline in a product promise by showing efficacy in additional diseases and patient populations. The clinical data continue to support our scientific hypothesis that Dupixent targets the molecular drivers of allergic and atopic diseases. In its first approved indication, adult atopic dermatitis, Dupixent is now annualizing above $1 billion in net product sales in the United States alone. George and Marion will provide more detail, but let me emphasize that we are still in the early stages of the Dupixent opportunity, with hopefully many more launches in new diseases, geographies, and age groups. Finally, despite the remarkable accomplishments in the nascent field of immuno-oncology, most cancer patients still don't benefit from this approach. We believe that the comprehensive and differentiated strategy that George outlined for you at the J.P. Morgan conference is already beginning to deliver on its potential to bring the hope and promise of immuno-oncology to many more patients. In September 2018, Lib-Tio became the third FDA approved PD-1 antibody and the first FDA approved therapy for the treatment of advanced cutaneous squamous cell carcinoma. In December, at the 2018 American Society of Hematology Annual Meeting, or ASH, we presented new data for Regeneron 1979, our wholly owned CD20 by CD3 Bi-specific, which we are advancing this year into potentially registrational studies. We simplified and amended our Immuno-Oncology Discovery Agreement with our collaborator, Sanofi. In the new agreement, we will continue to collaborate on Lib-Tio as well as our MUC16 by CD3 and BCMA by CD3 Bi-specific antibody programs. For the rest of our Immuno-Oncology programs, including our co-stimulatory Bi-specifics, Regeneron retains exclusive rights. In summary, in 2018, we continued to build upon the foundation that we established over the last 30 years, which positions us for future continued success as an innovative biotechnology company. And as I said at JPMorgan, after 30 years, all of us at Regeneron feel that we are just getting started. With that, I will now turn the call over to George.

Thank you, Lenin. Good morning to everyone. I'd like to begin with our efforts to continue to expand and optimize the benefits provided to patients by ILEA. As a reminder, in September of 2018, the FDA accepted our supplemental BLA for diabetic retinopathy with an action date of May 13, 2019. This potential label expansion to include patients with diabetic retinopathy without DME, coupled with our existing approval in DME, puts ILEA on the forefront of treating diabetic eye diseases. Let me emphasize data from our Phase 3 panorama study in diabetic retinopathy. In addition to anatomic improvement, we have for the first time shown that ILEA can reduce vision-threatening complications in people who have diabetic retinopathy. Contrary to the perception of some that diabetic retinopathy is a slowly evolving condition, our panorama study demonstrated that patients with moderately severe or severe diabetic retinopathy may progress rapidly, developing vision-threatening complications or new onset DME, with more than 40% of the overall patient population suffering from these events, and more than 50% of the patients in the severe category, certainly showing the high risk that these patients are under. In the overall patient population, ILEA reduced these events by more than 75%. In any case, more complete data on the 52-week Phase 3 panorama study will be presented in the Androgenesis meeting on Saturday and has been submitted to the FDA. It is remarkable that despite many attempts to improve upon the efficacy of VEGF blockade for retinal disease, based on the data we have seen, no other mechanism has proven more beneficial and no other drug and hetat pivotal trials has shown superior visual acuity outcomes compared to ILEA. But we are not standing still. Our goal is to further advance the treatment of retinal diseases. Later this year, we will begin clinical development of a higher dose formulation of Aflibersep to determine whether it can safely provide improved efficacy and longer lasting benefits. In addition, we are actively developing new molecular entities, which we may advance into clinical trials as soon as this year, and we are in earlier stages of development for gene therapies and other novel approaches. I'd now like to turn to Depixin. Our own clinical studies support decades of basic science suggesting that the target of Depixin, that is interleukin-4 and interleukin-13 signaling, is the fundamental driver of type 2 inflammation common to many allergic or atopic diseases. This scientific insight underlies the basis of why many believe Depixin is a pipeline in a product. Following our FDA approval for adult atopic dermatitis in 2017 and our approval in asthma at the end of last year, we are anticipating three important upcoming regulatory milestones for Depixin. First, a decision by the FDA in adolescent atop dermatitis with an action date of March 13, 2019. Second, an EMA decision in the first half of the year on asthma in adults and adolescents. And third, potential FDA acceptance of the supplemental BLA for chronic rhinocynositis with nasal polyposis based on two overwhelmingly positive phase three studies. As Depixin potentially expands into adolescents with atopic dermatitis, it is important to remember how serious and devastating this disease can be. The teenage years are hard enough without debilitating skin condition and they impact self-image, sleep, and the ability to concentrate in school. Most of the patients in our trials had disease covering over half their bodies, and patients have described the accompanying itch as similar to unrelenting poison ivy that never goes away. As measured by EZScore, Depixin reduced the extent and severity of skin lesions by an average of 60 to 70 percent, with significant improvements in other measures, including itch. Beyond this potential improvement in adolescents, we hope to bring the benefit of Depixin to even younger AD patients. And this year, we expect to report results of a phase three trial in patients aged 6 to 11 years. In terms of Depixin and asthma, we are anticipating approval in the EU and Japan later this year. The US asthma launch is underway and is particularly gratifying to see good early uptake among allergists who have had prior experience using Depixin for patients with atopic dermatitis. You will hear more about the asthma launch from Mary. It is widely appreciated for patients with serious allergic diseases. Our trials demonstrate substantial levels of comorbid conditions in individual patients. For example, in our adolescent atopic dermatitis trials, more than 50 percent had asthma as well, and more than 60 to 70 percent had another allergic condition, such as food allergy or inhaled allergies. Many believe that allergic to atopic disease is a systemic condition driven by immune imbalance skewed to the type 2 inflammation, which manifests itself to different degrees in different parts of the body in different patients. Consistent with this viewpoint and with our own emerging clinical data, we're exploring multiple potential new allergic or atopic conditions for Depixin. As I mentioned previously, we have a pending supplementary BLA for chronic rhinocitis with nasophysioposus. In addition, we have recently initiated phase two, three study of depilin in patients and adolescents with the isinophilic esophagitis. Phase two study in collaboration with Amy and therapeutics of depilin may have been peanut allergy and we have completed enrollment in phase two study for glorious allergy. We'll update you in the future about new trials and new indications. With you are into looking 33 program as a potential complement to depiction. We are studying regenerate on 3500 are interleukin 33 antibody, both as monotherapy as well as in combination with the fixings several indications. Including asthma, a topic dermatitis and COPD. We will report results of the phase two study in asthma in 2019 to phase two studies in a topic dermatitis. We recently initiated. An anti interleukin 33 monotherapy dose response study and a combination study with depiction. While it is unlikely that interleukin 33 blockade alone will provide the degree of benefit observed with depiction. Our program is designed to capture any potential incremental benefit that may result from the combination. Moving on now to our amino oncology portfolio. We recently unveiled what we believe is a rational and comprehensive amino oncology strategy with our PD one antibody lip tile at its foundation. In September, 2018, the tile, the third FDA approved anti PD one became the first FDA approved treatment of any kind for advanced cutaneous cell carcinoma or CSC. Outside the United States, the European Medicines Agency is reviewing our regulatory application and we expect a decision later this year. To maximize the substantial opportunity in German oncology. We will be commencing adjuvant studies in CSC in the first half of 2019 with new adjuvant studies to follow. And we are studying with town other skin cancers, where we believe it will have a benefit. Beyond dermatology, we consider non small cell lung cancer to be a major new potential indications of time. Our phase three program and non small cell lung cancer is building on the rapidly evolving treatment paradigm. As we stated previously, we have doubled the size of our trial comparing with time on a therapy to chemotherapy and PD one high patients. Regarding combinations will be focusing our efforts in first line treatment on combination therapy of tile with chemotherapy. The ongoing phase three combination studies being amended to enroll non small cell lung cancer patients here respective of histology and levels of PD one expression and to randomize them to live tile plus chemotherapy or chemotherapy alone. Amazingly enough, despite years of effort and many pivotal trials, there's only one PD one or PD one antibody approved as monotherapy and first line metastatic non small cell lung cancer. If our ongoing trial succeed, we have the potential to be the second. Unfortunately, for patients, even in tumor settings with some response, the majority of patients still do not benefit from PD one blockade. Moreover, little benefit has been demonstrated with PD one and PD one blockade or any other immunotherapy in many of the most common tumor types such as prostate, pancreatic, colorectal and breast. This obviously is an important area of unmet need. As you heard me say recently, we are excited about our by specific franchise and in particular two classes to see three by specifics and the cost inventory by specifics. We believe that these by specifics may have important anti cancer activity on their own and in combinations that can include the tile have the potential to extend the benefits of the new therapy in both the new responsive tumors, as well as thus far, you know, unresponsive tumor types. Three of our city by specifics are already in the clinic with one of them showing impressive initial results as a monotherapy and very advanced late stage patients. In December of 2018 at ash, we presented the exciting data for regenerate on 1979 our CD by specific for B cell non-homogeneous lymphoma or. HL at doses, we are considering for potentially pivotal trials. Treatment of these patients with relapse refractory follicular lymphoma resulted in a one hundred percent objective response rate and an eighty percent complete response rate. Nine out of ten patients maintain their response during treatment and the one patient who progressed did so in the setting of prolonged treatment interruption. At higher doses, we're also being increases in the response rates in the harder treat relapse refractory diffuse large B cell lymphoma or DLBCL and are approaching the level of response reported with Cartes. Based on our emerging data in 2019 we're planning to initiate potentially pivotal studies with our CD by specific for third line follicular lymphoma as well as DLBCL. Our second CD by specific antibody to enter clinical development targets MUX 16 for ovarian cancer. The MUX 16 epitope that we target is the remaining number of the membrane brown protein that when shed is known as CA 125 the well known biomarker for ovarian cancer. And our BCMA by three by specific antibody has just entered clinical development for the treatment of multiple myeloma. We're encouraged by preliminary results of both Cartes as well as bytes targeting BCMA and multiple myeloma and believe that our BCMA by three by specific has a potentially be an important addition in this new area. We recently announced that we are introducing to the clinic and entirely new class of by specific which we term costimitory by specific. Compelling data in our animal models indicate that this new class of by specific can enhance the anti cancer benefit when combined with our PD one antibody as well as with our C three class of by specific. This year we will be introducing two of these costimitory by specific into the clinic. We entered the field of immuno oncology with a long term and comprehensive vision. We have created a large number of rational combination opportunities enabled by the mixing and matching of our technology platforms and capabilities. There are settings like advanced cutaneous squamous cell carcinoma for lip tile and advanced relapse refractory non Hodgkin's lymphoma for regeneron 1979. Where antibodies have demonstrated impressive single agent activity in clinical trials in many other settings, however, monotherapy is unlikely to be enough. This is where our combination strategy comes into play and to supplement our internal efforts. We have collaboration with companies like Bluebird that have therapeutic modalities potentially synergistic with those that we have in house. Let me change gears now to the city man or anybody to nerve growth factor or NGF for chronic pain from osteoarthritis of the hip or knee. I want to highlight two key points regarding our ongoing program. First, as we reported in August, the same map continue to show good efficacy in our latest phase three study at week 16 to study met both co primary endpoints and all key secondary endpoints. We believe that we may have identified the minimally effective dose that may mitigate treatment associated arthropathy's and total joint places that have been observed at higher doses and are the major safety concern of this class. With each day that goes by without safety signals stopping the phase three studies, we're one step closer to bringing this drug to the many people who are now suffering and sometimes seek alternative treatments such as opioids. I've given you just a few updates about some of the seven regeneron discovered drugs that are now approved and 16 additional drug candidates in our clinical pipeline. We don't have time in our prepared remarks to discuss them all. We were happy to take questions during the Q and a before I close. I would like to highlight that the regeneron genetic center has recently sequences 500,000 individual on top of this major accomplishment. Our goal is to sequence another half million people in 2019. These genetic sequences are all linked to detailed electronic medical records along with our collaborators like Geisinger health systems in the UK biobanks. And with funding from our colleagues in the biopharmaceutical industry, we are amassing money be the world's largest big data human sequencing resource, which is making a significant contribution to a drug discovery and development efforts. With that, I'd like to turn the call over to Marion.

Thank you, George. And good morning, everyone. I'd like to start with Alia for the fourth quarter. US Alia net product sales grew 11% year per year to 1.08 billion. And for the full year 2018 US Alia sales grew 10% to 4.08 billion. Alia sales growth resulted from an increase in demand and not from price based on US net product sales. Alia continues to be the market leader with 72% of the overall branded US anti-VEGF market in the fourth quarter. We continue to see overall market growth in both wet AMD and DME driven by the aging population increase in diabetes prevalence and physician preference for Alia. Approximately 90% of patients across all payer segments can access Alia as their first line of therapy. Regeneron will continue to stay engaged with stakeholders in order to preserve physician choice and patient access to Alia and its significant clinical benefits. Building on our leadership position in wet AMD and diabetic eye disease, we see a major growth opportunity for Alia and diabetic retinopathy without DME. The BDUFA date for this new indication is May 13th. As a reminder of the estimated 3.5 million people in the US with diabetic retinopathy without DME, approximately 1 million individuals have moderately severe or severe disease and are at greatest risk for progression and loss of vision. We believe the panorama results that George described support early intervention with Alia and may help evolve the clinical treatment paradigm. Pending approval of Alia in this indication, comprehensive plans are in place to support disease education focused on the benefits of early treatment. We also remain on track to launch Alia pre-filled syringe in 2019 pending regulatory approval. Turning now to Depixent, global net product sales in the fourth quarter were 319 million and in the US alone reached 259 million representing 18% quarter over quarter growth and 89% year over year. Prescriber experience and depth continue to improve with approximately 14,000 healthcare providers having prescribed Depixent and over 46,000 patients have received therapy. There was a notable increase in Depixent prescribing trends with weekly new to brand prescriptions or NBRX increasing to between 750 and 850 patients per week compared to approximately 500 to 600 per week in earlier quarters. We attribute our robust fourth quarter performance to patient and physician experience, our overall promotional campaign, field force impact, national branded television advertisement for atopic dermatitis and the asthma launch. On October 19th, the FDA approved Depixent second major US indication in moderate to severe asthma and patients aged 12 years and older with an asinophilic phenotype or with oral corticosteroid dependent asthma. We expect a regulatory decision in the EU and Japan in the first half of this year. Three months into the US asthma launch were encouraged by the early uptake and prescriber interest. Our goal is for Depixent to be the preferred first line biologic for indicated patients with moderate to severe asthma. At this point in the launch, we estimate that over two thirds of Depixent asthma patients are new to biologics. Allergists and pulmonologists recognize the benefits of Depixent's differentiated clinical profile as the first and only biologic that targets two key cytokines central to type two inflammation. Depixent is also differentiated on its efficacy and exacerbations in lung function, established safety profile and flexibility as the only asthma biologic to offer self or at home administration. In addition, we would like to emphasize the positive impact of allergist familiarity with Depixent for their atopic dermatitis patients. Currently, a majority of our prescriptions are coming from this specialty. We look forward to providing insight on the asthma launch in the coming months. Additionally, we believe that substantial opportunity remains in atopic dermatitis. To date, despite the impressive market experience that I described, less than 15% of adult AD patients and greatest needs have received Depixent therapy. We expect further US growth if the FDA approves Depixent in adolescents ages 12 to 17 on our March 11th PEDUFA date. As a reminder, we estimate that the number of potential adolescent patients is about half of the target adult atopic dermatitis population. Further, we expect data from our pediatric study in atopic dermatitis ages 6 to 11 in 2019. I'd now like to turn to LibTio, which was launched in the US on October 1st as the first FDA approved treatment for patients with metastatic cutaneous squamous cell carcinoma or locally advanced disease who are not candidates for curative surgery or curative radiation. In the EU, we expect a decision later in 2019. In the US, fourth quarter net product sales were 15 million driven by demand. Since launch, we've made inroads in establishing LibTio as a standard of care across all lines of therapy and advanced CSCC. Engagement with the medical community remains very positive, especially with medical oncologists and most surgeons. We've quickly established broad market access and the reimbursement coverage for LibTio with approximately 95% of total commercial Medicare and Medicaid lives covered. We believe that significant opportunities remain to increase the tie usage both for first line and second line treatment under our approved indication. As a reminder, CSCC is a life threatening condition responsible for an estimated 7,000 US deaths each year. Based on demographics and enhancements in patient identification and referrals, we expect the number of newly diagnosed patients to rise annually. Now to ProwlUant, global net product sales in the fourth quarter were 93 million, including 60 million in the US. In 2018, we made strides to remove access and affordability barriers and we continue to engage with key stakeholders to drive demand. As a reminder, this market is highly impacted by discounting and contracting, which may affect net sales. As noted last quarter, we've submitted data from the Odyssey outcomes trial to regulatory authorities in the EU and in the US. Earlier this week, we announced the positive CHMP opinion for the proposed indication in Europe and in the US, the FDA target action date is April 28, 2019. Moving to Kevzara, global net product sales in the fourth quarter were 35 million, including 27 million in the US as demand improved. Within the IL-6 subcutaneous class, Kevzara now has 38% of dispensed NBRX share and 23% of TRX share. Kevzara has reimbursement coverage for 98% of US commercial lives, with 79% of patients able to access Kevzara as either first line biologic or after failing one or two other biologic therapies. I'll now turn the call over to Bob.

Thank you, Marion, and good morning to everyone on the call today. Regeneron delivered record financial results during the fourth quarter of 2018 and completed a year of strong financial performance. For the fourth quarter, non-GAAP diluted net income per share grew 31% to $6.84 on non-GAAP net income of $786 million. And for the full year, non-GAAP diluted net income per share grew 40% to $22.84 on non-GAAP net income of $2.62 billion. Total revenues were $1.93 billion for the fourth quarter and $6.71 billion for the full year 2018, which represented 22% growth versus fourth quarter 2017 and 14% growth versus full year 2017. For the fourth quarter of 2018, revenue growth continued to be driven by global sales of ILEA and a significant increase in Sanofi collaboration revenue due to lower losses from the commercialization of antibodies and the recording of a cumulative catch-up adjustment to revenue principally due to the amendment of the Immuno-Oncology Discovery and Development Agreement. For the fourth quarter of 2018, global net product sales of ILEA were $1.8 billion, an increase of 12% year over year. For the full year, global ILEA net product sales were $6.75 billion, an increase of 14% year over year. In our reported U.S. ILEA results, distributor inventory experienced a slight increase in the fourth quarter of 2018 as compared to the third quarter of 2018, yet remained within our normal one to two week targeted range. XUS ILEA net product sales recorded by our collaborator Bayer were $724 million for the fourth quarter of 2018, representing a 14% reported and an 18% operational or constant currency basis increase year over year. For the full year of 2018, XUS ILEA net product sales were $2.67 billion, and grew 20% on a reported basis and 18% on an operational basis as compared to the full year of 2017. Total Bayer collaboration revenue for the fourth quarter of 2018 was $302 million, of which $271 million was derived from our share of net profits from ILEA sales outside the U.S. The $271 million represents year over year reported growth of 17% compared to the fourth quarter of 2017. For full year 2018, total Bayer collaboration revenue was $1.08 billion. Total Santa Fe collaboration revenue was $428 million for the fourth quarter of 2018, and $1.11 billion for the full year of 2018. The increase in Santa Fe collaboration revenue in the fourth quarter and full year 2018 versus the prior periods in 2017 was primarily due to increased spend and thus reimbursement for elliptical clinical development activities, lower losses associated with the commercialization of antibodies, and the recording of a cumulative catch-up adjustment to revenue of $149 million, primarily in connection with the amendment of the Immuno-Encology Discovery and Development Agreement. Under the terms of the amended Immuno-Encology Discovery and Development Agreement, Santa Fe paid the company $462 million, which included the reimbursement of fourth quarter 2018 Regeneron-incurred research and development costs of $46 million, the prepayment of $120 million for development activities for two bispecific programs, BCMA by CD3 and MUX16 by CD3, in a termination payment. Revenue associated with the cumulative catch-up is recorded in the other line item of the Santa Fe collaboration revenue reported in Table 4 of our press release. In the fourth quarter of 2018, we recognized the loss of $44 million in connection with the commercialization of products under the antibody license and collaboration agreement with Santa Fe, which compares favorably to a loss of $114 million in the fourth quarter of 2017. But as anticipated, this quarter's loss was slightly higher than the $39 million loss from the third quarter of 2018. The lower share loss versus the fourth quarter of 2017 was primarily attributable to higher global net product sales of Depixent and to a lesser extent, Prowluent and Kevzara continued cost containment for Prowluent, partly offset by an increase in Depixent commercialization expenses to support the launch in asthma and ongoing global launches in atopic dermatitis. As we discussed on our November 2018 earnings conference call, we continue to expect the Alliance's financial results to remain variable for the next few quarters as we incur launch expenses for new indications, including a potential label expansion for adolescent patients aged 12 to 17 with atopic dermatitis and launches into new international markets. Turning now to expenses. Non-GAAP R&D expenses were $533 million for the fourth quarter of 2018 and $1.96 billion for full year 2018 as compared to $444 million for the fourth quarter of 2017 and $1.78 billion for the full year 2017. The fourth quarter 2018 increase in non-GAAP R&D expense was the result of an increase in Leptio clinical costs and higher overall R&D headcount and facilities related costs, partly offset by a decrease in Depixent and Prowluent development costs. Our non-GAAP unreimbursed R&D expense, which is calculated as the total non-GAAP R&D expense less R&D reimbursements from our collaborators, was $347 million for the fourth quarter 2018 compared to $265 million for the fourth quarter 2017. The -over-year increase was primarily driven by our share of higher immuno-oncology clinical costs and R&D activities associated with the growing number of wholly owned programs. For year 2018, non-GAAP unreimbursed R&D expense was $1.22 billion. Our press release includes all the information required to calculate unreimbursed non-GAAP R&D expense. For 2019, we are reaffirming our previously provided guidance for non-GAAP unreimbursed R&D to be in the range of $1.59 to $1.71 billion. The increase in our 2019 non-GAAP unreimbursed R&D guidance as compared to full year 2018 is primarily attributable to higher clinical trial and manufacturing costs to support Regeneron's wholly owned programs, including four to six new molecules expected to be advanced into the clinic in 2019 in lower Sanofi reimbursement as a result of the amended Immuno-Oncology Discovery and Development Agreement. Next, non-GAAP SG&A expense was $411 million for the fourth quarter of 2018 and $1.36 billion for the full year 2018. As noted on our November 2018 earnings call, we realized a higher SG&A spend level in the fourth quarter of 2018 as compared to the first three quarters of 2018, primarily due to incremental spend for Depixin, including DTC in the US asthma launch, ILIA, the launch of Leptio, as well as higher contributions to independent -for-profit patient assistant organizations. We reaffirm our previous 2019 guidance for non-GAAP SG&A expense to be in the range of $1.5 to $1.6 billion. The increase in our guidance compared to full year 2018 is primarily driven by increased spend for Depixin, ILIA, and Leptio. The Depixin's increased spend will be focused on the recent US launch of asthma, the expected US launch in atopic dermatitis for adolescent patients, and continued support for the atopic dermatitis indication for adults, including DTC. 2019 ILIA spend increases will be focused on capitalizing on the potential new growth opportunity of ILIA in diabetic retinopathy without DME, as explained earlier by Marion, and increased patient support programs. Sanofi reimbursement of Regeneron commercialization related expenses, a line item found within Sanofi collaboration revenue, was $127 million for the fourth quarter of 2018 and $426 million for the full year of 2018. We reaffirm our full year 2019 guidance of Sanofi reimbursement of Regeneron commercialization related expenses to be in the range of $510 and $560 million. Turning now to taxes. Our effective tax rate was negative 21% and positive 4% for the fourth quarter and full year 2018, respectively, as compared to 69% and 42% for the fourth quarter and full year 2017. The effective tax rate for both the fourth quarter and full year 2018 was positively impacted primarily by the implementation of the Tax Cuts in Jobs Act in the sale of non-inventory related assets between foreign subsidiaries that was finalized at the end of 2018. Remember, the 2017 effective tax rate was negatively impacted by the enactment of the Tax Cuts in Jobs Act as we had to write down certain deferred tax assets due to the lower federal tax rate. In the fourth quarter of 2018, we finalized our assessment of the remeasurement of our net deferred taxed asset due to the Tax Cuts in Jobs Act and elected to recognize deferred taxes for global and tangible low taxed income, commonly referred to as guilty. The net tax impact from both the remeasurement of our net deferred tax asset in sale of non-inventory related assets have been excluded from both fourth quarter and full year 2018 non-GAAP net income as outlined within Table 3 of our press release. We continue to monitor regulatory guidance under the Tax Cuts in Jobs Act and changes in the global tax environment and will respond as appropriate to ensure our tax strategy is efficient and aligned with our business operations. We are reaffirming our 2019 guidance for our effective tax rate to be in the range of 14 to 16 percent, but want to remind you that as in prior years, we will have volatility from quarter to quarter in our tax rate due to the timing of deductions for stock based compensation. Turning next to cash flow in the December 31, 2018 balance sheet. Regeneron ended the fourth quarter of 2018 with cash and marketable securities of $4.6 billion and generated free cash flow in excess of $1.8 billion for full year 2018. We calculate free cash flow as the net cash provided by operating activities less capital expenditures. Our capital expenditures for the full year 2018 were $383 million. We are reaffirming our previous 2019 capital expenditure guidance of between $410 and $490 million. With that, I'd like to turn the call back to Mark. Thank you, Bob. That concludes

our prepared remarks. We'd now like to open up the call for Q&A.

Thank you. We will now begin the question and answer session. If you have a question, please press star then one on your touchtone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. If you are using a speaker phone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star then one on your touchtone phone. And our first question comes from Ying Huang from Bank of America, Merrill Lynch. Please go ahead.

Hi, good morning. Thanks for taking the questions and congrats on the quarter. The first question on ILEA. Obviously you're waiting for FDA approval in diabetic retinopathy. Can you tell us whether you do think that's going to be a significant growth driver for 2019? Or do you think we should expect ILEA to grow at market growth rates? And then maybe you can comment on the net pricing trend in 2019 for ILEA as well. Secondly, can you talk about DUPIX and Outlook? Do you believe the asthma indication will start to be a more important growth driver versus atopic dermatitis for 2019? Thank you.

Okay, so thanks for the question, Ying. On the issue of whether or not diabetic retinopathy is going to be a growth driver in 2019, I think that it will be in the early stages of the launch of that indication. It's going to take a lot of patient education because it's a paradigm shift. So we don't give guidance, but from a general point of view, I think it's going to take some time to develop that market. Pricing trends. I'm not sure what you're getting at, whether you're talking about external forces or not, but our price has been very modestly impacted to the negative side based upon a slight discount that was provided across the board in 2018. In terms of asthma, Marion?

Yeah, I'm happy to comment on asthma. So, you know, I gave you some information today on what is very early in the launch and favorable indicators. As I look to your question, though, an asthma growth opportunity for the future, we do see that is very important. It's not the only DUPIX and growth driver. I also described the atopic dermatitis growth opportunity in adults and with FDA approval, potentially with adolescents this year. But back to your question on asthma, what's most interesting in these early stages of launch is the response that we're hearing from both allergists and pulmonologists to the differentiating profile of DUPIX. Both in terms of its clinical efficacy, the established safety profile, and then also this very, very important factor of patients being able to self-administer or at home administer. That coupled with the fact that for some of these physicians, they're treating patients that have comorbidities, such as when other type two diseases occur with asthma. So, again, it's very early days, but we feel good about the early launch and I'll look forward to giving updates in the future. I'll also remind just in terms of size of patient population for asthma biologics, it's about a million patients. But to date, only about 100,000 patients have been treated, eligible asthma patients with biologics. So it is a market with tremendous opportunity.

Operator, next question. I'd like to just add to Len's point in response to the contribution of diabetic rhinopathy to the market opportunity. I don't want to address the market opportunity specifically, but very importantly about whether this should really be paradigm shifting and whether or not there should really be a new way of treating patients. And I think that, you know, looking at the data, physicians are going to have to, you know, make their decisions. But there's a lot of very important outcomes from our study. Number one, as I already mentioned that the rate of visions, threatening complications and progression in people who have modern, particularly severe, non-proliferative diabetic rhinopathy is, I think, much higher than most people thought. Once people progress treatment at that point, we know is probably not going to be as good as prevention. And I think it's a very important question now asked in terms of the physicians and the entire community. Should we be working harder to prevent onset of disease and loss of vision that you may never get back? And in this particular case is a little bit of prevention really worthwhile for the so many patients who are at such high risk. And I think that that's something that the community, I'm sure, is going to be debating strongly, especially when all this data comes out and is digested and is discussed.

Operator,

next

question,

please.

Our next question comes from Chris Raymond from Piper Jeffery. Please go ahead.

Hey, thanks. Just maybe a couple of pipeline questions. Yes. So first, just on the CD28 co-stimulatory bispecifics, IGG antibodies have had some challenges, I guess, in the solid tumor setting due to the physiologic and physical properties of these tumors. So your bispecifics maintain an IGG-like structure. I guess, can you maybe talk about some of the properties of these antibodies that may allow for better tumor penetration? And are you going to be maybe a little bit more descriptive of that as we get into the clinic with these two? And then also maybe on your C5 antibody 3918, I think in your press release you talk about initiating a phase two trial in PNH. But Len, I think I heard you say last month in San Francisco that enrolling a switching study for meculism, that might be a challenge. So maybe any color there as to the plans? Is this targeted at new patients or is there some other strategy? And maybe is there some other complement mediated disease that may make sense as well? Thanks.

So it's a highly competitive space. So we're not going to get too much into our thinking on C5. But as we get down the road, I think our strategy will emerge. I'm going to let George, of course, deal with the CD28 question.

Yeah, I think there's a whole field of pseudoscience that somehow seems to think that the problem with getting responses and solve tumors has something to do with antibodies not having access. Actually, if one really looks carefully and objectively at all the data, if anything, there's better access to the tumor milieu. Blood vessels become actually more permeable and leaky. And the levels of natural antibodies as well as administrative antibodies is actually much higher in those settings. So that has nothing to do with our strategy or our approach. Our belief, and I think the overwhelming science, argues that the lack of responsiveness has much more to do with very specific immune recognition issues. And that's exactly what our co-students do. They add another level of activation specifically targeted against the tumor, which will add to the immunotherapy benefits of either, for example, checkpoint inhibitors such as PD1. Or the more conventional CD3 like by specifics. So it's all about properly manipulating the immune environment to attack the tumor. And the problems have really nothing to do with antibody access and whether you're using a full length antibody or something that's smaller. And certainly all you have to do to understand that is look at the performance of our CD3 by specific compared to, for example, smaller bites. And that I think even cross study shows that the activities are really not at all limited by the size of the reagent. And that's about it. Thank you.

In the interest of time, I just want to, as a reminder, to ensure that we get to as many people as possible. We could just limit the Q&A to one question at this time. Operator, can you please go to the next caller?

Our next question comes from Jeffrey Porges from SVB Learing. Please go ahead.

Thank you very much. And congratulations both on the results and not being mentioned in the State of the Union last night. I wonder if we could talk a little bit about the cadence through the year, Bob. Your revenue and income statement is notoriously hard to model. And you did have quite a few one time items, non-recurring items in Q4. Could you give us a sense of how we should be thinking about collaboration revenue through the year and whether we should expect there to be a step down in revenue in Q1, which is what we've heard about from many of your peers. Thanks very much. You can also comment about the cadence of expenses through the year just so we can try and get our models a little bit more in line with your outlook.

Jeff, as you know, I mean, we don't get into that much specifics with regards to the quarterly division on expenses and on revenue. I will say, which may not be so evident, with regards to the fourth quarter for Sanofi 2018, right? I mean, we did call out the catch up adjustment that we're talking about as a result of amending the IO discovery agreement. So I think that that's clear. But what I also think didn't get caught during the year is that we did terminate the IO, sorry, the antibody discovery agreement at the end of 2017. So for each of my quarters in 2018, as it pertains to Sanofi, I was going up against the 2017 run rate that included $130 million of the antibody discovery agreement that I will not have to go up against in 2019. So when people saw the fourth quarter, sure, the one time catch up adjustment was significant. But also I didn't go up against the 2017 fourth quarter Sanofi antibody development because it had been exhausted by the third quarter of 2017. So again, a lot of maturations with regards to that. You know, I don't see anything, you know, special with regards to, you know, how we would break out expenses throughout the year. You know, I mean, we don't have that much seasonal impact. I have been reading the comments that you've said amongst our peers. I do not express to have kind of the same inkling that you've heard from them. And that's what that's been put out to the street on it. Operator, next question.

Our next question comes from Terrence Flynn from Goldman Sachs. Please go ahead.

Hi, thanks for taking the question. The first one is I was just wondering now that the comment period is closed. It would be great to hear your latest thoughts on the part B demonstration project. If you think the final version will include a provision for EU reference pricing. And if you can't answer that, would love to hear about insight on the Lib Ty O launch. Maybe just talk a little bit about more about the kind of breadth of prescribing. How many of your target accounts are already prescribing? Where can that go over the course of the year? Thanks.

So

I'll

let Marion come in a minute on Lib Ty O. And we'll give you your two questions since you guys are so convicted on your opinions about us. We'll anticipate something has got to give regarding the international reference pricing situation. Because the public, the administration, myself personally, and a lot of people in the industry, I think, feel and Americans in general feel it's a bit unfair for America to produce all the drugs through its research and development ecosystem and finance it through its financial marketplace and then pay for it for its consumers and then have a very well-heeled European companies get those drugs at a much lower price. The trouble is figuring out a system that can really balance that. And as I've said before, when you have biotechnology companies who have given away the European rights, there's no way to connect those two pricing. You can open it up all you want, but you have different people making pricing decisions. So I think the administration does get that. To the extent that this will force people to give them, as I said before, courage, we'll see. Our sense is there's a little bit of opposition to the way this has been proposed on the Hill, but we have to see how it all washes out. Marion on the Lib-Tio launch? Sure. Happy

to come in on the Lib-Tio launch. First and foremost, incredibly important because Lib-Tio is the first product with the approval that I mentioned earlier this morning for CSC patients with metastatic and advanced disease where previously they didn't have a treatment therapy. So we've had great interest. To your question on targets of our activities, we've certainly seen uptake in an appropriate way, albeit early in the launch from some of the most prestigious academic centers, and we see that on a geographic basis across the country. Similarly, we're also seeing uptake secondarily in more community, large hospital settings that have sophisticated oncology and also in some instances, MOHS surgeons in their practice. I'd also comment that as we look very carefully at the launch, I reported today on 15 million ex-factory sales and mentioned that it is demand-driven. This is not a product with a lot of inventory building, and what we are seeing is that each month we're showing progress in terms of demand for Lib-Tio. So early days we were pleased. The payer and access coverage, as I mentioned, went quickly and was very well managed by our team. So we feel very good about the launch of Lib-Tio. We're working very hard on it.

You know, everybody has their own metrics, Terrence, for how a launch is going. The one that I use is when an oncologist calls us up and tells us that he had a gentleman who had had a cutaneous squamous cell carcinoma, had exhausted all possible treatments, including multiple rounds of surgery, maximum radiation therapy, other types of targeted chemotherapy, and was in the midst of a discussion and headed for hospice because the tumor had invaded from the skin deep into his jaw and then to the base of his skull. He wasn't able to eat, let alone smile. Heading for hospice two days after the drug was approved, this oncologist had heard about our drug in a podcast, convinced the patient to try it, and six weeks later the patient was home for the holidays with a big smile on his face. Those are the sorts of anecdotes that tell us that this launch is making a difference and will go pretty well.

Operator, next question,

please.

Our next question comes from Carter Gould from UBS. Please go ahead.

Good morning. Congrats on the quarter. Questions, I guess, for George or Len. On your CD20 or by CD3, I just wanted to kind of get your latest thoughts on dosing, and specifically if you've nailed down the go-forward doses with those pivotal studies, I recognize you're probably not going to give out those doses on this call, but just if you've nailed those down internally and or you're still waiting on some of the higher dose data. Thank you.

Well, I think as we've indicated and as we've shown in our presentations, in follicular lymphoma the results are so impressive we certainly think we're in the right dose range. And with the DLBCL we are now getting the sort of activities that are starting to approach what one might be seeing with CAR-T type therapies and so forth. So we certainly think we're in the right sort of dose range. And as we said, we anticipate being able to start pivotal studies in both of those settings this year.

Operator, next question.

Our next question comes from Jeff Meacham from Barclays. Please go ahead.

Morning, guys. Thanks a lot for the question. I appreciate it. Bigger picture question. So LiBTIO opens up a new therapeutic area for you guys, but I want to ask you about the broader IO strategy. If rational combos are the main basis, how much of an emphasis does Regeneron place on novel MOAs or targets versus evaluating targets that, say, Pharma or others have explored? I'm just trying to get a sense for differentiation in the oncology strategy. Thanks.

Well, I think that it's a mix, of course, but as you can see from our whole new class of bispecifics, the CD28s, we, I think, are leading a whole new approach that will allow for an entire new group of combination opportunities. And particularly, as we try to explain, the opportunity to now activate immune responses and activate the ability of checkpoint inhibitors like the PD1s to actually help in cancers that historically have not been viewed as immune or responsive, which is, as you know, the vast majority of them. So we believe, and I think a lot of other people now believe, that we have one of the most innovative and leading edge approaches to combination opportunities and that certainly having Liptio as our foundational approach is only going to help these novel approaches try to extend the benefit to many more patients in need.

And I would add to that, Jeff, that the having the multiple approaches, such as an approved PD1, the CD20, CD3, the costims that George mentioned, and all the others, even some that others may have, under one umbrella, one program, I think is a very powerful and efficient way to be able to move forward.

Operator, next question.

Our next question comes from Corey Casmoz from JPMorgan. Please go ahead.

Hey, good morning, guys. Thanks for taking the question. I wanted to ask you about Dupixent and on the asthma side of things. Curious how you're thinking about kind of future biologic penetration in both the moderate and severe asthma patients, kind of subpopulations, with the entrance of Dupie and other biologics. I mean, to date, it's obviously been pretty modest for other biologics, even in the severe setting. So I'm curious how you see that changing over time. Thanks.

So our label, Corey, as you know, includes both moderate and severe patients. It's not unusual that early in a launch, we'll probably tend to get some of the tougher patients. As I mentioned, we skew a little bit more towards biologic naive patients than switches at this point that have heard discussions of both and see evidence in the data of both. But I think we'll have to give it a little bit more time so I can give you a more robust answer on patient types and uptake of the launch. But certainly we think the product profile that I've reviewed in summary, the efficacy, the safety, the ease of use and the interests of the two major prescribing audiences, the allergist and pulmonologist, suggests that we have an important indication and a significant opportunity ahead.

You know, I think it's Marion had mentioned it maybe in her prepared remarks, but if not, just to reemphasize, you know, a large fraction of the allergists have had a great experience with DUPI in atopic dermatitis. And they might make up a large fraction of the prescribers, not necessarily because they're treating patients with comorbid conditions, although they can and that's in the label and they very well might. But the fact that they've had experience in another highly allergic disease has been so positive, I think that that's having a nice halo effect for us, particularly amongst the allergists.

Well, and just like ILEA has an opportunity to be really paradigm shifting in terms of having the opportunity to really change the practice of how you treat high risk diabetic retinopathy patients, I think DUPICSIN, in asthma in particular, but in all of its settings, has a real opportunity to be paradigm shifting because I think there's increasing appreciation that all of these so-called allergic or atopic disease are really systemic conditions. Where the body's immune system has gone awry and gone in the wrong direction. And the data is starting to build up that DUPICSIN is really addressing this systemic perturbation of the immune system. And as we accumulate more and more data, more and more clinical studies, more and more indications, this may become increasingly clear and increase the opportunity. So this is really paradigm shifting where you can really change the course of an immune system and how it's gone wrong by correcting it and correcting it in all of its manifestations, not just in one tissue and one organ, which is how historically medical community treats diseases. So I think in the long term, DUPICSIN really has an opportunity to be very paradigm shifting in this space as well.

Operator, next question, please.

Our next question comes from Anan Bhatt from Guggenheim Security. Please go ahead.

Thanks for the question. Maybe one detail. At this stage, are you able to break out the DUPICSIN asthma and atopic derm sales? And then the NBRX number, Mary Ann, that you gave out, is that only for atopic dermatitis or is that a combined asthma, atrium number?

So the numbers that I gave you on NBRXs, those were combined numbers. And of course, you know, the timing of the asthma launch for obviously covering the last couple of months of the year. I don't have specifics for you at this time of NBRXs broken out by indication, but as we move further into the launch window and have additional experience, we will probably be able to give some additional insights on what the splits are starting to look like.

Operator, we'll take one more question.

And our last question comes from Robin Karnoskis from Citi. Please go ahead.

Hi, guys. Thanks for taking my question. I really appreciate it. So let me just think big picture on DUPICSIN since people are pretty comfortable there. And I get a lot of questions actually on food allergy because it's becoming a bigger deal globally and in the United States. What are these trials generally look like? And, you know, how do you how do you how does this market tend to evolve? Because this could be something that could have maybe a quicker uptake versus say asthma. Can you give us some sense of that market? That could be the next place that you go after EOE.

Well, I don't know about the market opportunity for us. It always starts with the science. And I think that if you look at the science and it's relating to what I was just talking about before and how all these allergic conditions seem to reflect the systemic perturbation of the of the immune system and Interleukin-4 and Interleukin-13 seem to be the central drivers of the immune deviations that's leading to this incredible uptick in allergic disease in general and food allergies in particular. And based on our preclinical studies and actually a lot of other science as well, these these two interleukins could be the central drivers in the whole process. And we believe that there's the possibility that we could be making a fundamental difference in the many patients who are suffering from food allergies. And we, of course, are in the midst of an important study with our collaborators at Amune to explore this. We think that the data from our grass allergy study will also be very relevant because desensitization approaches, whether they're for food allergies or for aero allergens in some ways depend on the same sort of mechanisms. And we believe depictions is right centrally key in those and we'll see what the data shows because we have these ongoing studies and depending on the data and if it if it seems to hold true to the science, it could be an important opportunity for so many patients who are suffering from these problems.

So obviously from from our point of view, from the from the market opportunity, we always like to focus on the most severe patients, which is why George mentioned. But you go after perhaps peanut allergy first or maybe later you go after people who will have children who have poly food allergies have a difficulty thriving. We certainly are all aware of anecdotes of people on on depiction who tell us they were allergic to this and they've been taking it for their atopic dermatitis and now they're not. Obviously, that could be wishful thinking, but it's the sort of thing that we want to study. But I do agree you're correct in the severe poly allergic poly food allergic individual. The uptake there could be quite strong. So that's going to become an increasing focus as as we get through these initial trials that George referred to grass and peanut, but plenty more to come.

Great operator. This includes today's call. Thank you everyone for joining again. Bob Landry, Jay Markowitz and the team is here to answer any further questions. Thank you.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating and you may now disconnect.