Regeneron Pharmaceuticals (NASDAQ: REGN), a mid-sized biotechnology company, is a classic case of how FDA approval of a single drug can transform the fortunes of a biotech company. The company's stock has returned more than 100% to investors in the last year and YTD, the stock has appreciated almost 63%. In this article I try to understand whether there is still some steam left in the stock.
Regeneron Pharmaceuticals Inc.
Regeneron is an integrated biopharmaceutical company that focuses on development of new candidates for serious ailments primarily in areas like ophthalmology, inflammation, cancer and hypercholesterolemia.
The company's first approved drug was Eylea (aflibercept), a VEGF inhibitor, when the FDA approved it for treatment of patients with neovascular (wet), age-related macular degeneration (AMD) on November 18, 2011. AMD usually affects older people and results in loss of vision in the macula, the center of the visual field due to age related damage to the retina. Ten months later, on September 21, 2012, the company announced the approval of Eylea injection for treatment of macular edema following central retinal vein occlusion.
In August 2012, the FDA approved Zaltrap (ziv-aflibercept), developed in partnership with Sanofi (NYSE: SNY) in combination with 5-fluorouracil, leucovorin and irinotecan for treatment of metastatic colorectal cancer in adults. The European Medicines Agency (EMA) approved Eylea for treatment of macular degeneration in November 2012.
The company is currently involved in Phase III trials of Eylea for evaluation of its efficacy and safety in treatment of diabetic macular edema.
Jump in revenue and profit
The first approval came in Q4 2011 and the other three in Q3 and Q4 2012. From annual revenue of $446 million in year ended December 2011, Regeneron's revenue jumped to $1.38 billion. If my math is correct, this is a 300% growth in one year. Net income turned around too - from a loss of $222 million to a profit of $750 million.
In the most recent quarter ended March 30, 2013, Regeneron reported total revenue of $440 million, out of which Eylea's net sales in the U.S. amounted to $314 million. Non GAAP net income for the quarter was $201 million, translating into $1.78 per share.
Outside of the U.S. the company has an agreement of sharing profit and loss with Bayer Healthcare for commercialization of Eylea. For Japan, however, Regeneron receives a royalty on sales. Following regulatory approvals from EMA, Japan, Australia and other countries, Bayer Healthcare commenced sales of Eylea in Q4 2012. Outside of the U.S., sales of Eylea were $65 million, up from $19 million reported by Bayer in Q4 2012.
Challenge from competitor
Ampio Pharmaceuticals (NASDAQ: AMPE), a mid-size development-stage biotech company, is developing an existing oral drug, Optina, as treatment for diabetic retinopathy and diabetic macular edema. On January 22, 2013, the company announced acceptance by FDA of the company's investigational new drug (IND) for Optina. Earlier, in July 2012, the FDA granted 505(b) (2) status to the drug (drugs so designated can be approved in a single trial). Phase 2 clinical trials are currently underway.
Regeneron's game changer
Development of alirocumab/REGN727 in partnership with Sanofi has the making of a breakthrough product for Regeneron. Alirocumab is a human monoclonal antibody that binds a protein called PCSK9. Regeneron is evaluating its efficacy for managing LDL cholesterol in patients who fail to get the desired LDL cholesterol levels using statin drugs.
Heart disease is a leading cause of death in the U.S. and high cholesterol levels is one of the major risk factors. According to the American Heart Association (AHA), "estimated 31.9 million adults ≥20 years of age have total serum cholesterol levels ≥240 mg/dL, with a prevalence of 13.8%." Individuals with levels of 240mg/dL or above are at twice the risk of coronary heart disease compared to those with below 200mg/dL.
PCSK9 inhibitors are a novel way of lowering LDL cholesterol, commonly known as "bad cholesterol." Although LDL lowering statin drugs work well and have been in use for decades and generally considered safe, these do not work in all patients nor do all tolerate them very well. In addition, statins are not potent enough for patients who have levels above 400mg/dL due to genetic abnormalities. PCSK9 inhibitors offer a new hope for such patients.
PCSK9 protein binds to receptors of LDL reducing their availability of liver cells to remove excess LDL cholesterol from the blood. Statin drugs, on the other hand, stimulate the production of PCSK9 protein which restricts their ability to lower LDL cholesterol.
Many companies including Pfizer (NYSE: PFE) and Amgen (NYSE: AMGN) are in the race for being the first to bring a PCSK9 inhibitor drug in the market. Data of studies with PCSK9 presented at the American Heart Association 2012 Scientific Sessions showed large reductions in LDL. With most data presented by Regeneron/Sanofi, the company's candidate REGN727 has a clear edge over others. "All eyes will now be on safety and long-term outcomes."
Regeneron is riding on the success of Eylea and its dosing advantage over Lucentis (developed and marketed by Genentech in the U.S. and by Novartis elsewhere) and expectations from results of its game-changer drug for managing cholesterol levels. While results for REGN727 and subsequent approval by FDA, if at all, will take time, the threat from Optina is closer because of its 505(b) (2) status. One never knows how fast patients would take to switch to it when it is out.
Regenoron's current valuation of $26.65 billion and jump in quarterly revenue is supported primarily by Eylea. The company is now testing it for diabetic macular edema. If clinical trials show favorable results, given the dosing improvement that Eylea enjoys of rival Lucentis it could probably prove to be a $2 billion a year drug.
However, the company's current valuation is anything but ridiculous, trading as it is at P/E multiple of 41.43. Buying the stock at CMP does not make sense. Even the forward P/E ratio of 45.43 for December 31, 2014, is nothing to talk about. The only aspect worth looking into is the growth thesis. However, here also, the 5 year expected PEG (price-to-earnings growth) ratio of 2.12 is also on the higher side.
There is also talk of a possible takeover by Bayer or Sanofi. It is open to doubt that either of them would want to spend more than $25 billion for a single product, especially the one that they are already distributing.
The sky high growth has already been discounted by the market and a major downturn may just be round the corner. I would stay away from Regeneron, at least until the time valuations come to realistic levels.