After a five-year 930% gain, it is possible that shares of Regeneron Pharmaceuticals (REGN) have run their course. For the second time in three months, the stock has fallen below $240 after exceeding $270 a share. Therefore, should this fickle stock price be an indication to seek value elsewhere, or is Regeneron catching a breather before popping back to new highs?
What Does Regeneron Do?
Regeneron Pharmaceuticals is a $24 billion company that's driven by the performance of its drug Eylea, which treats wet age-related macular edema, the leading cause of blindness in the elderly. In two recent Phase 3 trials, Eylea proved more successful than laser surgery at improving the vision of patients with diabetic macular edema (DME), the leading cause of blindness in younger and middle-aged adults. Therefore, Eylea, an orphan drug, could potentially treat six million globally with these indications.
During Regeneron's most recent quarter, sales of Eylea reached $330 million, most of the company's $457.64 million in sales, a 50.3% gain year-over-year. Regeneron is currently guiding for full-year Eylea sales of $1.325 billion, and peak sales - combining wet age-related macular edema and DME - is estimated at $3.5-$4 billion globally. Due to the incredible expectations, and the drug's strong performance, Eylea remains a central piece of the Regeneron investment puzzle.
In addition, Regeneron markets two other drugs: Zaltrap and Arcalyst. While the drug Arcalyst, essentially an antibiotic, has peak sales of about $100 million, Zaltrap, colorectal cancer, is promising with peak sales in excess of $500 million. Combined, Regeneron has a product offering of drugs that could generate sales between $4 and $4.5 billion annually.
A Pipeline of Possibilities
A company with the potential to reach sales of $4.5 billion is no joke, but it's still hard to justify the company's $23 billion market cap. Essentially, if all three of Regeneron's products reach max potential, then Regeneron is trading at five times peak sales, which is far greater than the healthcare sector at three times sales.
Unlike companies such as Onyx Pharmaceuticals (ONXX), Regeneron's biggest upside isn't in its launched products, but rather its industry-leading pipeline. Regeneron has 12 products in its pipeline, and three late-phase potential blockbusters.
First, let's start with the biggest and baddest of them all, the Phase 3 cholesterol drug Alircumab. In a Phase 1 study, the drug lowered bad cholesterol by over 70% compared to Lipitor. The company is expecting to announce data from its Phase 3 study next year, but because of Regeneron's clinical success, and the early data, most believe that Alircumab will impress. If so, analysts project that U.S. sales could reach $3.5 billion, and then over $8 billion globally!
Next, the company has a Phase 3 rheumatoid arthritis drug called Sarilumab. This product is being tested on patients who don't respond to anti-rheumatic drugs. The company is partnered with Sanofi on this drug's development, and the two companies are testing it on other indications where different types of drugs (i.e. Humira, Simponi, or Enbrel) are unsuccessful. If proven to be effective, sales could exceed $1 billion annually, and upwards of $1.5 billion globally.
Lastly is Dupilumab, a Phase 2 asthma drug that is somewhat under-the-radar. This drug was previously tested on 104 patients, where only 6% of those treated with Dupilumab experienced an asthma attack over 12 weeks. Meanwhile 44% of patients experienced an asthma attack on placebo. Hence, Dupilumab is attempting to treat asthma, rather than alleviate its symptoms. Much like Alircumab, the potential for this drug is off the charts, with peak sales expectations in excess of $4 billion annually.
Clearly, when you combine Regeneron's three marketed drugs and its three lead candidates you can see that its $23 billion market cap might be justified. However, you should also keep in mind that I only discussed three products, and that there are still nine more in the pipeline.
If we combine the peak sales estimates for Regeneron's three marketed and the noted candidates, then Regeneron could see revenue over $17 billion annually. However, just to be safe, let's assume that only 60% of that potential is ever met. Then, sales would top $10 billion annually.
When you consider that many of Regeneron's products are orphan designated, and that it could have three blockbuster products in the market, then its price/peak sales of 2.25 (conservatively) appears quite cheap. Because after all, in this market, growth is rewarded, and in biotechnology, a six times peak sales ratio is not uncommon. Therefore, depending on whether or not each of these products earn FDA approvals and reach full potential, I think Regeneron still has 100%-200% upside.
Why's It Trading Lower?
In my opinion, Regeneron is very cheap. The company trades at a hefty 13.5 times trailing 12 month sales, but most of the company's upside isn't found in the last year, but rather over the next five years.
Despite the company's promise, it has in fact lost 15% of its value over the last three months. First, the company slightly missed sales expectations for Eylea in its recent quarter. However, with full-year sales guidance, Eylea is expected to outperform expectations. Unfortunately, the market failed to realize this fact, and focused solely on one quarter.
Then, there is also some concern surrounding Ampio Pharmaceuticals (AMPE), which has a late-stage drug called Optina that treats the same condition as Eylea. While Eylea is injected into the eye, Optina is taken in pill form, meaning that if successful in clinical studies, physicians and patients would likely prefer it over Eylea. However, Ampio has a market cap of just $225 million, and if Regeneron saw them as a real threat, I have no doubt that Regeneron would purchase Ampio quickly.
The final possibility for why Regeneron has traded lower might be because of a natural pullback. With every stock it is normal and healthy to see slight profit taking, as any stock that rises too fast becomes a risk to fall just as hard. However, with data upcoming on three crucial programs, and Eylea's indication expanding, I see no reason to sell or not to invest in Regeneron. From what I can tell, Regeneron looks to be one of the best and safest long-term options within the healthcare space.