Manisha A. Narasimhan - Regeneron Pharmaceuticals, Inc. Leonard S. Schleifer - Regeneron Pharmaceuticals, Inc. George Damis Yancopoulos - Regeneron Pharmaceuticals, Inc. Marion McCourt - Regeneron Pharmaceuticals, Inc. Robert E. Landry - Regeneron Pharmaceuticals, Inc..

Carter Gould - UBS Securities LLC Cory W. Kasimov - JPMorgan Securities LLC Christopher J. Raymond - Piper Jaffray & Co. Geoffrey C. Porges - Leerink Partners LLC Matthew Luchini - BMO Capital Markets (United States) Terence Flynn - Goldman Sachs & Co. LLC Ying Huang - Bank of America Merrill Lynch.

Welcome to the Regeneron Pharmaceuticals Q3 2018 Earnings Conference Call. My name is John and I'll be your operator for today's call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. Please note, the conference is being recorded.

And now, I will turn the call over to Manisha Narasimhan, Head of Investor Relations..

Thank you, John. Good morning, and welcome to Regeneron Pharmaceuticals' third quarter 2018 conference call. An archive of this webcast will be available on our website under Events for 30 days. Joining me on the call today are Dr. Leonard Schleifer, Founder, President and Chief Executive Officer; Dr.

George Yancopoulos, Founding Scientist, President and Chief Scientific Officer; Marion McCourt, Senior Vice President and Head of Commercial; and Bob Landry, Senior Vice President and Chief Commercial (sic) [Financial] (00:56) Officer. After our prepared remarks, we will open the call for Q&A.

I would 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 forecast 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 could cause actual results and events to differ materially 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-Q for the quarter ended September 30, 2018, which was filed with the SEC earlier today.

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 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 our call concludes, Bob Landry and the IR team will be available to answer further questions.

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

Thank you. Manisha does such a fabulous job at Investor Relations, we should at least get her name right. It's Manisha Narasimhan. Good morning to everyone who has joined the call. In the third quarter, Regeneron delivered record financial results, an important pipeline progress. EYLEA sales continue to grow. For the first time, U.S.

EYLEA net quarterly sales surpassed $1 billion. Also, for the first time, third quarter worldwide Dupixent sales exceeded $0.25 billion. And Dupixent was recently approved for asthma, its second major indication. Additionally, we launched Libtayo, our first approved immuno-oncology therapy.

For EYLEA, we significantly strengthened the franchise through a recently expanded label for less frequent dosing and the potential for a new indication in diabetic retinopathy. And we expect to advance a high-dose formulation of aflibercept into the clinic in the first half of next year.

Libtayo, our first commercial entry into the exciting and fast-evolving area of immuno-oncology, is the foundation upon which we intend to build with multiple additional agents and approaches in many different cancer settings. We have described Dupixent as a pipeline and a product, and it is living up to that potential.

Compared to other approved biologics for asthma, Dupixent has a differentiated profile and label.

The recent asthma approval, together with the ongoing robust launch in atopic dermatitis, positive Phase 3 results in chronic rhinosinusitis with nasal polyps, and positive Phase 2 results in eosinophilic esophagitis, validate the scientific hypothesis that the IL-4/IL-13 pathway is responsible for a spectrum of allergic or Type 2 diseases.

You'll hear more from Marion about the launch of Dupixent in asthma and atopic dermatitis, and George will update you on our clinical programs. We have continued to make steady progress with our other commercialized products. From Praluent, our LDL cholesterol-lowering PCSK9 antibody, we anticipate that the U.S.

treatment guidelines for lipid lowering will be updated shortly. We hope the updated guidelines will facilitate greater access and support increased use of the PCSK9 class.

Although it gets drowned out in the debate about drug prices, the fact remains that cardiovascular disease is the number one cause of death in the United States, and high LDL cholesterol is a major cause of cardiovascular disease. Our early pipeline continues to progress.

At the beginning of the year, we set a goal of advancing four to six new molecules into clinical development. I'm happy to report that to-date, we have already advanced four new molecules into clinical development. These include a bispecific antibody for ovarian cancer, a new antibody for pain, a leptin receptor agonist, and an antibody to CTLA4.

We also expect to advance into the clinic by year-end, a BCMA CD3 bispecific antibody for multiple myeloma. We now have seven approved drugs and our clinical pipeline has 20 product candidates spanning a range of therapeutic areas. All of these molecules were discovered by our scientists. With that, I will now turn the call over to George..

atopic dermatitis, asthma, and now, chronic rhinosinusitis with nasal polyposis. As we have observed in our studies, patient with one such condition often suffer from allergic diseases as well – other allergic diseases.

We are committed to extending Dupixent's approval into younger age groups and geographies, and broadening it to additional Type 2 allergic indications. In atopic dermatitis, we recently reported positive data for our Phase 3 study of Dupixent in adolescents with moderate-to-severe atopic dermatitis.

These results were the basis of a regulatory submission in the U.S. for patients between the ages of 12 and 17 years.

This morning, we announced that the FDA has accepted for prior review, the sBLA for Dupixent in adolescent patients 12 to 17 years of age with moderate-to-severe atopic dermatitis, whose disease was inadequately controlled with topical therapies or for whom topical treatment was medically inadvisable.

Currently, there are no FDA-approved systemic biologic medicines to treat adolescents with moderate-to-severe atopic dermatitis. The target date for the FDA decision is March 11, 2019. We're also currently conducting studies in younger patients between the ages of six months and five years, as well as in patients between the ages of 6 and 11 years.

In terms of other diseases, we initiated our Phase 2/3 study for dupilumab in adults and adolescents with eosinophilic esophagitis. We also recently started our Phase 2 study of dupilumab in peanut allergy. This program is being conducted in collaboration with Aimmune Therapeutics.

A Phase 2 study of dupilumab for grass allergy is currently underway and a Phase 2/3 study in COPD is being planned. We view our interleukin-33 program as a complement to Dupixent. The Regeneron Genetics Center, in collaboration with Geisinger Health System and the U. K.

Biobank, has confirmed and extended observations linking the interleukin-33 pathway to both COPD and asthma. We are studying our interleukin-33 antibody both as monotherapy, as well as in combination with Dupixent and asthma, where we have three trials in progress, and in COPD where we have one.

We plan by year-end to initiate two Phase 2 studies in atopic dermatitis. One will be anti-IL-33 monotherapy, and the other will combine anti-IL-33 with Dupixent. I would now like to switch to the very exciting field of immuno-oncology, which continues to be an area of focus for us and where we have recently made important strides.

At the end of September, Libtayo, the brand name of cemiplimab-rwlc, became not only the first PD-1 antibody approved by the FDA for the treatment of advanced cutaneous squamous cell carcinoma, or CSCC, but the first treatment of any kind ever approved for this cancer.

The response rate for this very high unmet need cancer setting were among the highest ever reported for a PD-1 treatment in a solid tumor. Outside the United States, a regulatory application for Libtayo is being reviewed by the European Medicines Agency with the decision expected in the first half of 2019.

There are currently no EMA-approved treatments for advanced cutaneous cell carcinoma. As we have stated before, we consider non-small cell lung cancer being an important potential indication for Libtayo. Our Phase 3 program in non-small cell lung cancer is enrolling as planned.

Based on our review of emerging data in this evolving field, and as we had indicated on our last quarterly call, we have doubled the size of our trial comparing Libtayo monotherapy to chemotherapy in PD-L1 high patients from 300 patients to approximately 700 patients.

We are also conducting Phase 3 studies of Libtayo in second-line non-small cell lung cancer and in combination with chemotherapy with an anti-CTLA-4 antibody in first line. While these things are being conducted with the commercially available CTLA-4 antibody, I am pleased to report that our own CTLA-4 antibody is now in clinical development.

Turning now to our bispecific antibody platform, the leading program here is our fully owned CD20xCD3 antibody. Next month at the Annual Meeting of the American Society of Hematology or ASH, we will be presenting additional data in B-cell malignancies. Our second bispecific antibody to enter the clinic targets MUC16 and CD3 for ovarian cancer.

By year-end, we expect our BCMAxCD3 bispecific antibody to enter clinical development for the treatment of multiple myeloma. We have also announced that we will be progressing an entirely new class of bispecifics into the clinic starting in the first half of 2019.

Continuing on the theme of immuno-oncology, in the third quarter, we entered into a collaboration with bluebird bio to discover, develop, and commercialize new CAR-T and other cell therapies for cancer.

This collaboration represents a great example of two companies with synergistic technologies working together to try to make a significant advancement in the field. Moving on, our late-stage pipeline has made progress and I would like to focus on a few programs.

In the third quarter, we announced positive topline efficacy data for fasinumab, our Nerve Growth Factor or NGF antibody in patients with chronic pain from osteoarthritis of the knee or hip.

The study met both co-primary endpoints and all key secondary endpoints at week 16, showing that we can achieve efficacy with low doses that mitigate treatment associated arthropathies at least during the study period. We have three Phase 3 studies with fasinumab ongoing in osteoarthritis, including our long-term safety study.

As most of you know, pain represents an area of high unmet need. To that end, we have recently advanced another molecule for pain into clinical development, a full human antibody to the GFR alpha3 neurotrophic factor receptor. Our clinical programs in cardiovascular metabolism are moving ahead.

We are enrolling Phase 3 studies of Praluent in adults with homozygous familial hypercholesterolemia, in addition to pediatric studies in heterozygous and homozygous familial hypercholesterolemia. We recently received regulatory approval for Praluent for the treatment of patients with heterozygous familial hypercholesterolemia undergoing apheresis.

And finally, the FDA has accepted for review, an sBLA for Praluent as a potential treatment to reduce major adverse cardiovascular events with the target action date of April 28, 2019.

Evinacumab, our ANGPTL3 antibody, is in a Phase 3 clinical development study in homozygous familial hypercholesterolemia, where it's received Orphan and Breakthrough designations.

We are also enrolling patients in a Phase 2 study of evinacumab in heterozygous familial hypercholesterolemia and refractory hypercholesterolemia, and another Phase 2 study in severe hypertriglyceridemia.

In terms of our other clinical programs in December, at the Annual ASH Meeting, we will also be presenting additional data from our wholly-owned C5 antibody program. We expect to initiate a Phase 2 study of the subcutaneous-administered molecule in patients with paroxysmal nocturnal hemoglobinuria or PNH in the first half of 2019.

Another exciting molecule in our pipeline is our Activin-A antibody, where we currently have a potentially pivotal Phase 2 study ongoing in a rare disease called fibrodysplasia ossificans progressiva.

Finally, I would just like to highlight, within the next three months, our Regeneron Genetics Center expects to hit the 500,000 mark of human sequence, a milestone few, if any, centers have ever achieved. With that, I would now like to turn the call over to Marion..

Thank you, George, and good morning, everyone. I would like to start with EYLEA, where global net sales in the third quarter were $1.68 billion, an increase of 11% year-over-year. U.S. net sales of EYLEA were $1.02 billion, a 7% year-over-year increase.

This increase was driven by overall market growth in both wet AMD and DME, physician preference and the aging population, as well as the increase in the prevalence of diabetes. Based on net sales, EYLEA currently holds about 70% of the overall branded U.S. and anti-VEGF markets.

In an effort to educate consumers and raise brand awareness and interest, we recently launched the pilot EYLEA DDC campaign for approved indications in select markets. Beyond the approved indications of wet AMD, DME, retinal vein occlusion, and diabetic retinopathy with DME, we see potential opportunity for EYLEA in diabetic retinopathy.

As you just heard from George, we recently reported positive data in this indication and expect a regulatory decision in the U.S. in May of next year. Following this potential approval, we plan to initiate a focused campaign to drive adoption in this large untapped indication.

Additionally, in August, we announced that the FDA-approved an sBLA for EYLEA for a modified every 12-week dosing schedule for wet AMD after one year of effective treatment. This makes EYLEA the only approved anti-VEGF drug for wet AMD with 4-, 8- and 12-week dosing specifically referenced in its label.

I'd like to spend a moment discussing our prefilled syringe for EYLEA. As previously announced, we received a Complete Response Letter from the FDA. We remain confident that we will be able to satisfy the agency's request, which included the completion of a usability study evaluating a single injection in approximately 30 patients.

We plan to make a regulatory submission in the first half of 2019. Our launch timelines for the prefilled syringe have not changed, and we continue to be on track for an expected 2019 launch. Turning now to Dupixent, global net sales in the third quarter of 2018, as reported by our collaborator Sanofi, were $263 million, including $220 million in U.S.

Let me start with Dupixent in atopic dermatitis. Underlying U.S. demand for Dupixent remains strong with total prescriptions or TRx up approximately 17% quarter-over-quarter sequentially. Prescriber depth and breadth continues to improve with now over 12,300 healthcare providers having prescribed Dupixent to over 60,000 patients.

Despite the strength of this launch, the vast majority of patients with moderate-to-severe atopic dermatitis have not been treated with Dupixent. Educating patients about Dupixent as a potential new treatment is an important area of focus. To this end, we recently launched a national branded television campaign and are encouraged by the early results.

Outside the U.S., the ongoing launch in Dupixent in atopic dermatitis is progressing well. As George announced, the sBLA for Dupixent in adolescents with atopic dermatitis has been filed and granted Priority Review by the FDA with an action date in March 2019.

If approved, this will allow the benefits of Dupixent to be extended to patients as young as 12 years of age. We estimate that the number of adolescent patients is about half that of the adult atopic dermatitis population. In addition, we have also submitted an application for a 200-milligram autoinjector for Dupixent.

Turning now to asthma, which is the most recently approved indication for Dupixent. As you heard from George, we believe Dupixent is a highly differentiated biologic for the treatment of asthma. The launch is underway and feedback from physicians has been positive.

We've only been in the market for a couple of weeks now, so it is too early to provide any detailed launch metrics. We estimate there are approximately 775,000 to 900,000 adult and adolescent patients in the U.S.

with moderate-to-severe asthma that have uncontrolled persistent symptoms that despite standard-of-care therapy may be suitable for treatment with a biologic therapy. Currently, only about 11% of these patients are treated with a biologic.

One of the key considerations for physicians treating asthma patients is to limit or avoid the use of oral steroids to control the disease. We estimate that the oral corticosteroid-dependent population represents approximately 25% to 30% of the approximate 775,000 to 900,000 patients with uncontrolled persistent asthma eligible for a biologic.

Dupixent is a non-steroid treatment option for these patients. With that in mind, we are optimistic about the asthma launch with the goal of making Dupixent the preferred first-line biologic for indicated patients with moderate-to-severe asthma.

Early efforts to engage both allergists and pulmonologists are well underway, and the reception has been positive. Many allergists are already familiar with Dupixent in atopic dermatitis, and these doctors are also treating patients with asthma.

We're actively working at educating and creating awareness of Dupixent's differentiated profile with pulmonologists. We look forward to providing further updates on the launch in the months ahead. I'd now like to turn to Libtayo, our PD-1 antibody.

On September 28, the FDA approved Libtayo for the treatment of patients with metastatic cutaneous squamous cell carcinoma, or locally advanced CSCC, who are not candidates for curative surgery or curative radiation. We continue to expect a decision by the European Medicines Agency in the first half of 2019.

The launch of Libtayo is a major milestone and the first step in our goal of establishing Regeneron as a major player in the immuno-oncology space.

Upon FDA-approval, the oncology sales force quickly mobilized to make Libtayo the standard of care for CSCC by engaging medical oncologists and MO surgeons (26:50), targeting centers specializing in skin cancers. So far, feedback from medical community has been positive.

On October 24, Libtayo was included in the updated National Comprehensive Cancer Network, NCCN, Guidelines for CSCC. Libtayo received a 2A evidence rating, the only systemic therapy with an NCCN rating in CSCC.

From a payor standpoint, we've been successful in establishing broad access and reimbursement coverage so patients in need can get access to the treatment quickly. Recall that CSCC is the most common form of skin cancer and is responsible for an estimated 4,000 to 8,000 deaths each year in the U.S.

It currently accounts for approximately 20% of all skin cancers in the U.S., with the number of newly diagnosed cases expected to rise annually. We look forward to providing further update on the launch at a later time.

Switching to Praluent, global net sales in the third quarter recorded by Sanofi were $80 million, representing a 62% increase compared with the third quarter of 2017. We have submitted data from the cardiovascular OUTCOMES study to regulatory agencies in the U.S. and the EU, and anticipate decisions in the second half of 2019.

We are also expecting that the lipid-lowering treatment guidelines in the U.S. will be updated shortly. These updated guidelines may facilitate greater access and support increased use of the PCSK9 inhibitor class.

We're continuing payor engagement and remain the exclusive PCSK9 inhibitor on the Express Scripts National Commercial (sic) [Preferred] (28:32) Formulary. Based on net sales, our market share in the U.S.

has grown significantly since the addition to the [ph] ESI formulary (28:39), up to 40% in the third quarter with the number of prescriptions continuing to increase steadily. Moving to Kevzara, global net sales as recorded by Sanofi were $25 million in the third quarter as demand improved.

Within the IL-6 subcutaneous class, Kevzara now has 42% of dispensed NBRx share and 20% share of TRx. I'll now turn the call over to Bob..

Thanks, Marion, and good morning, everyone. I'm pleased to report both solid top line results and strong operational performance for the third quarter of 2018.

We are encouraged by EYLEA and Dupixent sales growth, progress across our portfolio, and improvements on our operating leverage as reflected in the reduction of our full year 2018 expense and tax guidance line items. For the third quarter of 2018, we earned $5.87 per diluted share on non-GAAP net income of $675 million.

These results represent a 47% and 44% year-over-year increase in our non-GAAP diluted EPS and net income, respectively. Total revenue grew 11% year-over-year to $1.66 billion driven by performance of U.S. EYLEA, revenue increases for both the Sanofi and Bayer collaborations, and growth within other revenue.

EYLEA net product sales in the United States grew 7% to $1.02 billion compared to $953 million in the third quarter of 2017. U.S. EYLEA distributor inventory decreased in the quarter as compared to the second quarter of 2018, yet remained within our normal one- to two-week targeted range.

As disclosed in our last earnings call, commencing in the second week of June, we increased the existing EYLEA discount that we offered to physician practices regardless of volume.

As a result, there was a slight degradation in EYLEA's gross-to-net percentage in the third quarter of 2018 compared to both the third quarter of 2017 and first half of 2018. Effective October 1, 2018, we started shipping and recording U.S. net sales of Libtayo.

As a reminder, for Libtayo in the U.S., we are the commercial lead and will record product sales. Sanofi has exercised its option to co-promote Libtayo in the U.S.

Ex U.S., EYLEA net product sales recorded by our collaborator Bayer were $655 million for the three months ended September 30, 2018, representing a 20% operational and 16% reported increase on a year-over-year basis.

Total Bayer collaboration revenue for the three months ended September 30, 2018, grew 12% year-over-year to $264 million, of which $243 million was derived from the share of net profits from EYLEA sales outside the U.S.

The $243 million, which represents year-over-year growth of 18%, compares favorably to the $205 million realized for the three months ended September 30, 2017. Total Sanofi collaboration revenue was $256 million for the third quarter of 2018 compared to $245 million for the third quarter of 2017.

The year-over-year revenue increase was driven by three factors.

First, we realized a $59 million decrease in our share of losses in connection with the commercialization of Dupixent, Praluent and Kevzara; second, higher Sanofi R&D reimbursement revenue associated with our increased investment in immuno-oncology; and third, higher Sanofi commercialization reimbursement revenue associated with increased investment in commercialized products.

Offsetting these three factors is the 2017 expiration of the Sanofi Antibody Discovery and Preclinical Development Agreement, under which we recorded $38 million of revenue in the third quarter of 2017 compared to no revenue this quarter.

In the third quarter of 2018, we recognized a loss of $39 million in connection with the commercialization of products from the Antibody License and Collaboration Agreement with Sanofi, which compares favorably to a loss of $98 million in the third quarter of 2017, and a loss of $69 million in the second quarter of 2018.

The lower share of loss versus the third quarter of 2017 was primarily attributed to higher global net sales of Dupixent and Praluent, and continued cost containment for Praluent, partly offset by an increase in Dupixent commercialization expenses.

Despite incurring necessary launch expenses for new indications in new markets, from a financial standpoint, the Alliance had its best performing quarter.

While we experienced improved operating leverage in the third quarter of 2018, we expect the Alliance's financial results to remain variable for the next few quarters as we continue to incur launch expenses for new indications in new markets.

Compared to the third quarter of 2018, we are expecting a higher Alliance loss in the fourth quarter of 2018, in connection with the commercialization of these antibodies. Before turning to expenses, I want to briefly comment on our third quarter 2018 other revenue.

In the third quarter of 2018, other revenue was $117 million versus $62 million in the third quarter of 2017.

This increase was primarily driven by the recognition of a higher amount of deferred revenue from Teva and Mitsubishi Tanabe, including amounts related to the recognition of a portion of the $60 million and $20 million development milestones achieved from Teva and Mitsubishi Tanabe, respectively, in the third quarter of 2018.

Other revenues also increased from the recognition of revenue related to our agreement with Biomedical Advanced Research and Development Authority, or BARDA, to develop, test, and manufacture an antibody therapy for the treatment of Ebola virus infection.

As a reminder, you can find a summary of the components of other revenue in the MD&A section of the 10-Q. Non-GAAP R&D expenses were $497 million for the third quarter of 2018 as compared to $460 million for the third quarter of 2017.

The increase in non-GAAP R&D expense was the result of an increase in Libtayo clinical cost and higher R&D, head count and facility-related costs, partly offset by a decrease in Dupixent development cost.

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 $311 million for the three months ended September 30, 2018, compared to $227 million for the three months ended September 30, 2017.

As highlighted earlier, $38 million of this increase is attributable to the expiration of the Sanofi Antibody Discovery and Preclinical Agreement at the end of 2017. The remaining increases were driven by our share of higher immuno-oncology clinical costs and R&D activities associated with the growing number of wholly owned programs.

Our press release includes the information required to calculate unreimbursed non-GAAP R&D expense. We are lowering and tightening our full year 2018 guidance for non-GAAP unreimbursed R&D expense to be in the range of $1.19 billion to $1.225 billion from our previous guidance of $1.21 billion to $1.26 billion.

Non-GAAP SG&A expense was $326 million for the third quarter of 2018 as compared to $259 million for the three months ended September 30, 2017.

The higher SG&A expenses in the third quarter of 2018 were primarily due to an increase in contributions to independent not-for-profit patient assistance organizations and higher launch expenses for Libtayo and Dupixent in adult and adolescent asthma.

We are lowering and tightening our full year 2018 non-GAAP SG&A expense to be $1.33 billion to $1.37 billion from $1.34 billion to $1.39 billion. Based on this revised guidance, we expect a higher SG&A spend level in the fourth quarter of 2018.

This higher spend is driven by EYLEA expenses, including DTC; and Dupixent expenses, including DTC and patient support programs. Sanofi reimbursement of Regeneron commercialization-related expenses, a line item found within Sanofi collaboration revenue, was $107 million for the third quarter of 2018.

We are lowering and tightening our full year 2018 guidance for reimbursement of Regeneron commercialization-related expenses to $430 million to $455 million from $455 million to $485 million.

For the three months ended September 30, 2018, as compared to the same period in 2017, non-GAAP cost of goods sold declined principally due to better cost absorption at our Limerick, Ireland commercial manufacturing facility. Cost of collaboration and contract manufacturing increased due to higher sales volumes of both EYLEA outside the U.S.

and Sanofi collaboration antibodies, as well as the recognition of manufacturing costs associated with our agreement with BARDA. These increases were partially offset by lower validation costs at our Limerick facility. Turning now to taxes.

Our effective tax rate in the third quarter of 2018 was 6.5% compared to 31.3% for the third quarter of 2017, driven primarily by the enactment of the Tax Cuts and Jobs Act, as well as one-time tax benefits associated with tax planning in connection with this Act.

Our tax rate continues to benefit from the Federal tax credit for research activities, stock-based compensation, and income earned in foreign jurisdictions with tax rates lower than the U.S.

The third quarter of 2018 also included a GAAP income tax benefit of $11.9 million that was an adjustment to the provisional amount recorded as of December 31, 2017, for the U. S. Tax Reform Act, which was related to the remeasurement of the company's U.S. net deferred tax assets.

As we await additional regulatory guidance and continue to assess the full impact of the new tax law, including some one-time items, we now expect our full year 2018 effective tax rate to be in the range of 11% to 13% from our previous guidance of 13% to 16%.

While our effective tax rate guidance has been lower for 2018, we expect that over the next few years, our effective tax rate will be in the mid- to high-teens. Turning next to cash flow and the balance sheet.

Regeneron ended the third quarter of 2018 with cash and marketable securities of $4.1 billion, and generated an excess of $1.1 billion of free cash flow from the nine months ended September 30, 2018. We calculate free cash flow as net cash provided by operating activities less capital expenditures.

Our capital expenditures for the three months ended September 30, 2018, were $106 million, in total, $298 million for the nine months ended September 30, 2018. We are lowering and tightening our full year 2018 capital expenditure guidance to $360 million to $390 million from our prior range of $410 million to $450 million.

On the BD front, as George mentioned, we entered into a collaboration with bluebird bio. In connection with the execution of the collaboration agreement, we also agreed to purchase 420,000 shares of bluebird common stock for $100 million.

As part of the agreement, $37 million, the amount paid in excess of the fair market value of the shares purchased, will be credited against our funding obligation for collaboration research.

Before I hand the call back to Manisha to commence Q&A, I also wanted to highlight an exciting announcement Regeneron made in September regarding a new agreement with the State of New York to support economic development in the capital region.

Over the next seven years, Regeneron has committed to invest $800 million to expand facilities and create 1,500 new full-time jobs in New York State. This expansion will be supported by $140 million in economic development incentives from New York State. With that, I would like to turn the call back to Manisha..

Thank you, Bob. John, that concludes our prepared remarks. We'd now like to open the call for Q&A..

Thank you. We'll now begin the question-and-answer session. And our first question is from Geoff Meacham from Barclays..

Hi. This is Greg Harrison (41:15) on for Geoff. Thanks for taking the question.

Can you talk us through the trends you're seeing recently with payor access for Dupixent? Have asthma patients been able to get access? And how is this compared with the launch in atopic dermatitis?.

So, certainly, it's early days, Greg (41:36), in the launch for asthma. But I can certainly report that with Dupixent for the new asthma indication, we are making steady progress and very pleased with initial dialogue with payors. But I'll just remind everyone that this is only our third week in market with the asthma launch.

Then, as a comment, you alluded to atopic dermatitis and payor coverage. Certainly, we see the majority of the market with adequate coverage. And, of course, that reflects in the uptake we're seeing with Dupixent performance..

Operator, next question please?.

Our next question is from Carter Gould from UBS..

Hey, guys. Good morning. Thanks for taking the question. I guess, Len, given all the commentary coming out of the White House around Part B proposals and HHS, just wanted to get to your latest thoughts on sort of that messaging, anything that you guys can do to either mitigate that front on either on the – yeah, I'll it there..

Yeah. Hi. Thanks for your question, Carter. Obviously, it's tough to know what's going to actually become policy given a lot of these announcements were pre-election. I do think the administration is serious about trying to do something with drug pricing.

But whether or not they will be able to get in a demonstration pricing which covers a large fraction of the country starting in the year 2020 with international reference pricing, I think that's a wide, big, open – big question mark at this time..

Next question, please..

Our next question is from Cory Kasimov from JPMorgan..

Hey. Good morning, guys. Thank you for taking my question. I'm curious how you're looking at the market opportunity for Dupixent in the moderate eosinophilic asthma population when considering the low biologic penetration you referred to for severe asthmatics to-date.

So, I guess, given those historic dynamics, do you think you'll be able to penetrate much of the moderate patients in the first year or so of the product's launch or should we really be focused on severe? Thanks..

I'm going to let Marion answer that question after I just make one brief comment. The market has yet to see a self-administered product. And it is – penetration is expected to be exceedingly low for the moderate population when you have to get to the doctor's office in an infusion or hang around there for half a day, et cetera, et cetera.

Marion?.

Yes. So, I'd add to that, that it's not unusual that physicians, and in this case, it's pulmonologists and allergists, will often use a product, Dupixent, in this case, for asthma on some of their tougher patients first. I'll share that anecdotally, the reports we're getting have been very, very positive.

So, over time, most definitely, I think we'll have success not only with severe, but also the moderate patients. And I think that continuum will evolve over market experience.

But they're really compelling reasons why, and that relates to the clinical profile of Dupixent in asthma, its overall efficacy, not only in exacerbations, lung function, OCS reduction and quality of life, but then also the broad category of patients that we achieved in our label; moderate-to-severe patients, of course, EOs greater than 150, OCS-dependent regardless of phenotype or EOs.

As Len mentioned, another element that we're hearing that is just so important is that we are the only asthma biologic to offer both at-home self-administration and when physicians want to, they can always start a patient in the office to help educate and train them. But this is a really important factor in the ability to have broader use.

And then the other item I'd add is that, of course, with Dupixent, we're not launching a new product, we're launching a new indication. So, allergists who already had experience with Dupixent, and we already have shown an established safety profile. So, we're really excited about the launch. It is very, very early days.

I look forward to giving you reports in the future..

And this is George. I just want to emphasize about the clinical profile that Marion brought up, which is that, particularly for moderate patients, they still can have pretty substantial reductions in their lung functions.

When you're talking about a biological that may be the first biological really can have clinically meaningful impact on lung function, that can really make a difference in patients' lives. And that is something that has a really potential to essentially have a real impact on patients' lives.

And together with its safety profile, I think there's a lot of rationale for penetrating into the moderate population..

John, next question, please..

Our next question is from Chris Raymond from Piper Jaffray..

Hey, thanks. Just a question on the Dupixent peanut allergy study or work that you're doing with Aimmune. Can you maybe talk a little bit in detail about the objectives of this work, maybe the strategy even? I think you've talked about being able to potentially improve on Aimmune's experience in desensitizing kids during the up-dosing period.

But maybe just frame for us, what is – there's obviously a lot of opportunity in food allergy, not just peanut allergy. What does success look like from this initial trial? And where do you think that could take you in terms of sort of penetrating that other market, that bigger market? Thanks..

Just to get into the science for a second, I think that everybody has to understand that the reason you have allergies is you have a certain kind of immunoglobulin known as immunoglobulin E that is bound to the surface of mast cells and basophils.

And once it interacts with allergen, it clusters on the surface of these cells, resulting in degranulation, release of histamine, and other allergic mediators. That's the fundamental basis of allergy. For those of you who don't know, interleukin-4 and interleukin-13 are the IgE switch factors.

When you try desensitization therapy, the whole goal of that therapy fundamentally is to reprogram the immune system and make the immune system make good antibody or immunoglobulin G, as in George, instead of immunoglobulin E as in Ellen.

So – and when you are trying desensitization, you don't really have a natural way of actually impacting whether the cells that are involved in the response go to IgG or IgE. IL-4 blockade and IL-13 blockade are the fundamental drivers.

So, in any setting of desensitization, giving Dupixent should do or drive exactly the kind of reprogram that you want that historically has been very difficult to achieve. And in animal studies, the results are pretty much black and white.

So, we believe that in almost any setting of desensitization, whether it be peanut, grass, whether it be with any approach, the whole goal is to stop making IgE and to start making IgG. That is exactly what Dupixent can do.

So, what we hope success in that study is faster ability to tolerate higher doses of the peanut during the whole desensitization, decrease the number of patients who have allergy-mediated side effects, mostly GI side effects that limit their ability to take or stay on the treatment.

All of these will be indicators that Dupixent is doing exactly what we think it should be doing, which is driving more IgG and preventing the body from making the IgE, and thus, reprogram the body away from allergy. And this is just the beginning.

If it works in peanut, it has a signal here, it should be applicable to essentially every form of desensitization available by whatever modality..

Operator, next question, please?.

Our next question is from Geoffrey Porges from Leerink..

Thank you very much for taking the question. Just to follow-up on Dupixent a little bit. Could you just address the question of the adolescent indication and what your expectations are there? And you mentioned the population, but would you expect adoption to be faster or slower there? And then just back to the asthma launch.

Could you comment on whether you think this is going to be actively managed by payors, whether there'll be step edits and rebates involved, or do you think that you're largely going to sort of be able to price more or less at the same price as you have in AD and have unrestricted access? Thanks..

Geoff, before Marion answers, we invite you to come by. We might have a antiviral antibody we can give you there..

I'd appreciate that. (51:04).

So, Geoff, addressing your comments first on Dupixent uptake in adolescence, well, as mentioned, we very much look forward to the indication and helping this group of patients with moderate-to-severe disease, and the agony that goes with that for both them and their families.

We would anticipate that the uptake should be similar to potentially a bit faster than what we saw in adult atopic dermatitis, and I think it's for two reasons.

I want to be a little conservative in saying similar, but the reason why I think realistically, it might be a little bit faster for these patients is that physicians now have experience with Dupixent. And the product is becoming well known, depth of prescribing is increasing.

And for that reason, coupled with the fact that this is an alarming disease for adolescents, we believe it's very important that we get the word out quickly, and there's great excitement and enthusiasm in the market for this indication, for this group of patients who are truly suffering.

Your second question related to asthma and payor uptake, it's very early days. This is our third week of launch, so things are going well. There's been great receptivity to the clinical profile of the product. But I think I'd rather come back and give more detail on payor specificity as we have more time in market..

Great. Thanks very much..

I just wanted to add to the pediatric side of this, is that next setting (52:37) steroids, whether they're absorbed from lathering lots of it on or with systemic bursts (52:45) of treatment in adolescents during their growth spurts is a big deal. So, I think that's another reason why doctors might want to move to early adoption..

Next question please?.

Our next question is from Matthew Luchini from BMO Capital..

Hi, great. Thanks for taking the question. Just on Dupixent, we've had the DTC campaign ongoing now for a little while. I was wondering if you could give us an update or your latest view on the patient mix that's currently receiving the drug for atopic dermatitis, as well as perhaps your view on current persistence or refill rates.

That's something that I don't think was mentioned in the earlier remarks. Thank you..

Sure. So, let me take persistence and refill rates first. So the persistency that we've commented on in the past at the 12-month point being approximately 80% continues. So, we see strong persistency with Dupixent. Similarly, on the – first script refill is an important factor and we still see that at over 90%.

So, these are indicators that when patients go on Dupixent therapy for atopic dermatitis, they want to stay on therapy because their lives are better. The second piece you mentioned is a little bit on the DTC, I believe, was part of the question, and also, the types of patients.

So, similar to the comment I made before, it's not unusual for physicians to start with their most severe patients. But clearly now, we're getting penetration not only with severe, but also moderate patients.

And we really thought it was part of our responsibility to – for this disease and for patients who potentially previously had given up because therapies were not really helping them at all, we thought that this product was absolutely ideal for an on-air branded campaign. We're still only in months of that branded Dupixent TV campaign.

It was perceived, as some would recall, by a disease awareness campaign, and we thought that was the right order to do things. We've been in national broadcast mode with the Dupixent TV campaign now since about the August timeframe. So, we're several months in. The signs we see so far are encouraging..

Next question, please?.

Our next question is from Terence Flynn from Goldman Sachs..

Hi. Thanks for taking the question. Know you are unlikely to give EYLEA guidance for 2019, but maybe you could just talk about the puts and takes heading into next year. It looks like we're on track for another double-digit year of branded growth here. So, just wondering if we think that, that should continue heading into 2019.

And then you mentioned this higher dose formulation of EYLEA. Maybe what have you learned here that drove this decision? And what would actually be required to bring that to market? Thanks..

So maybe George can take the higher dose, and then we can comment about the market..

Well, in terms of a higher dose, I guess the point is that we remain impressed with the fact that EYLEA has stood up with so much competition, and that no one has really been able to come up, seemingly, with a fundamentally different profile in terms of the benefit, effects on vision or duration of treatment.

And so, we thought that it was time, especially because we've been working on this in the labs for a while, to see whether just giving a higher dose of EYLEA can actually take EYLEA past what is now, we think, the gold standard in the field, and see if we could either improve the benefit and/or extend the duration of the interval.

And so we're poised, we've been working on this for a while, and we're going to be putting it in the clinic this year..

Next year, 2019..

Sorry. 2019. Yeah..

Right. So – and then....

I'm already operating in 2019..

In terms of the market growth, we see nothing that will change the underlying demographics for the increase in diabetes and the increase in AMD continuing to grow the market somewhere in the mid to high or low-double-digit growth over time. Those demographics do not seem to be letting up at all.

Obviously, where we fit in there, based on competition, what have you, we'll have to see how all that plays out. But I echo what George says, we haven't seen anything that's disruptive.

We certainly haven't seen a drug – even the most touted drug by the sponsor, RTH (57:47), it seems to me they have forgotten that the retina specialists are actually some of the smartest guys out there as physicians. And they can do math and they can multiply 75% times about 50% and come up with a lot lower number than 75%.

So, it seems to me that EYLEA has a really good profile. In addition, what we saw in the diabetic retinopathy studies was, we think, quite remarkable.

I think it was startling to many, how frequent it was that people untreated with asymptomatic diabetic retinopathy given placebo, just watch for year, and when a large fraction of them, about a-third, actually develop vision-threatening complications.

And this can be dramatically prevented and reduced, not only improve the diabetic retinopathy, but prevent the progression of the diabetic retinopathy. And we think that, that's a big deal. It's going to take some reeducation out there of both patients and physicians, but we think that's a fundamental advance.

Remember that diabetes and diabetic eye disease is one of the leading still leading causes of blindness in adults..

Operator, we have time for one last question, please..

And our last question is from Ying Huang from Bank of America..

Hi. Thanks for taking the questions. I have one for NGF. In the recently released Phase 3 top line, you saw the placebo adjusted rate of – adjudicated arthropathy at about 2%. And then we saw the Pfizer fasinumab at ACR showed less than 1.5% incidence of RPOA.

Just wondering whether you think that this kind of safety is acceptable for the FDA and for the treating physicians, and what's the gating factor for the long-term safety in your Phase 3 trial? And then next, if you could give us a little bit more color on the collaboration with bluebird, exactly what kind of target and what kind of style of (59:51) therapy you're focusing on.

Thank you..

Thanks, Ying. Let me just comment on the fasinumab and then maybe George can comment on the bluebird or add to fasinumab. But I have to say that I think we know that in any drug dosing – any drug development program, getting the dose right is really, really important.

And that becomes super important when you have a very steep dose response curve for side effects. And we think that our approach has been to really try and get that dose right.

And we're hopeful that the very long dose that we got that is still able to produce what's basically so far at least best-in-class efficacy results – and notwithstanding, of course, study comparisons and all that – but really good efficacy results thus far, but perhaps, as George said in his prepared remarks, mitigating the safety.

In terms of safety, I don't think it's just going to be the adjudicated arthropathies, which – that probably would be an acceptable level. But I also think there's a question of whether or not this treatment will be to more or less joint replacements.

There's some evidence, I believe you've seen in the other development program, certainly in ours, of high doses that you would see more joint replacements. And that probably would not be acceptable.

Our program is very carefully monitored by an independent VSMB (01:01:28), which has met recently, and advised us to continue development at these low doses, where we've demonstrated the efficacy. So, we hope that we've got the dose right.

Being first here may not be nearly as important as being right because there's not as much room for error in this program as there might be in others. George can talk about bluebird..

Yeah, just to add to that. As you know, we're continuing our long-term safety study with NGF.

And as Len said, I mean, the most important data is to see what the benefit will be compared to adverse events with, we believe at this point, since we seem to have mitigated against at least the arthropathies, the total joint replacements numbers are going to be very important certainly with the competitors' program that is a concern, and we'll have to see whether our dose gets around that.

In terms of bluebird, I think for us, this is a very exacting collaboration. Clearly, they've demonstrated and they've developed their technologies and abilities to develop these CAR-T therapies.

What we bring to the table is we bring new targets and new reagents, whether they be antibodies or T-cell receptor-related reagents that can target new targets that can be put into and made into chimeric antigen receptors by bluebird to be put into their cells and used via their therapeutic approach.

So, we're very excited about putting together our ability to bring new targets and new ways to make these chimeric antigen receptors together with their ability to take those forward and deliver them to patients.

And we think this is a real synergistic collaboration between two companies with very complementary capabilities, and we're hoping to be able to change the future there..

Thank you..

Thank you, George. Operator, that concludes our prepared – our call today. I know we weren't able to get to all your questions, but please send me an e-mail and we will schedule a follow-up call with you..

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