Seeking Alpha
, OpenIcon (74 clicks)
Long only, tech, biotech, research analyst
Profile| Send Message|
( followers)  

Summary

  • Regeneron has a high P/E ratio.
  • Eylea revenue has been growing fast and should continue rapid growth through 2015, at least.
  • Is 15% off the 52-week high a buying opportunity?

Regeneron Pharmaceuticals (NASDAQ:REGN) is a profitable and rapidly growing biotechnology company, with trailing earnings per share (NYSEARCA:EPS) of $3.78. Even so, at $300 per share it is 14.9% off its 52-week high of $352.49. That gives it a momentum-stock like P/E ratio of 79.

Is this a buying opportunity? If the prior REGN run-up to $352.49 was a result of momentum-player enthusiasm, it still might be overpriced for long-term investors like myself. But if the value came from a reasonably foreseeable stream of future profits, then in two to three years even the 52-week high will seem like a bargain that should have been grabbed when it was available.

I last analyzed Regeneron in depth in Regeneron Pipeline Worth Tens Of Billions In Market Capitalization just this last September 9, 2013. REGN had closed on September 6 at $267.57, so in the meantime the price has spiked over 20%, and then come back down to $285 on April 8, up just 6.5% from Sept. 9. Market capitalization $285 is $28.5 billion, up $2.1 billion from the $26.4 billion of last September. That is significant. But it is not yet the tens of billions I foresaw over "the next decade." The main message is: REGN is volatile (volatility average 43.61).

The psychology of sellers of biotechnology stocks lately is understandable. Quite a number of biotech companies have seen big run-ups, and in some cases the new, higher stock prices were not backed by trailing profits, or in some cases even by revenues from FDA-approved profits. There is always some risk betting on a therapy pipeline, no matter what the statistics from clinical trials may be. In the case of Dendreon's (NASDAQ:DNDN) Provenge and a few other therapies of recent history, even when the FDA granted approvals, the profit streams were far less that investors had anticipated. Selling when you are up takes a lot of risk off the table. On the other hand, there is the opportunity risk of staying on the sidelines. In many cases the market has underestimated the future value of biotechnology pipelines. Regeneron is a good example. Just three years ago, on April 11, 2011 REGN closed at $43.91. Take the current trailing $3.78 EPS and, in retrospect, you would say REGN was cheap back then, with a price-to-2013 earnings ratio of just 11.6. Those who bet on the future bet right, in that case.

For my own portfolio I make predictions of biotechnology company earnings 3 to 5 years out, then compare those predictions to current stock prices.

In the case of Regeneron, we have a solid future profit stream from Eylea "a pipeline unto itself," currently approved for wet macular degeneration (wet AMD), a leading cause of blindness in seniors. Q4 revenue from Eylea was $402 million, continuing a rapid ramp from $330 million in Q2 and $363 million in Q3. A variation on Eylea, Zaltrap, in cooperation with Sanofi, has been approved for treating colorectal cancer. Eylea for DME (Diabetic Macular Edema) had strong Phase III results with an FDA decision date scheduled for October 23, 2014. For sales of Eylea outside the U.S. Regeneron is partnering with Bayer. Most of Regeneron's value is obviously tied to Eylea.

One of the dangers for any pharmaceutical company is that a new therapy will come along and take most of the market share away from the incumbent. That was the case recently with Vertex Pharmaceuticals (NASDAQ:VRTX), which lost most of its Incivek hepatitis C market share in the course of a couple of quarters. Eylea already competes with Lucentis and Avastin in wet AMD. A highly-touted threat is Ohr Pharmaceutical's (NASDAQ:OHRP) Squalamine. However, even if positive Phase II data becomes available in 2014, a Phase III trial is likely to be required before the drug can obtain commercial approval. If approved Squalamine could gain market share because it can be administered as an eye drop; current therapies including Eylea require injections.

Beyond Eylea's international expansion and label expansion we have the rest of the Regeneron pipeline, plus its monoclonal antibody platform is capable of generating new therapy candidates. It can partner or license therapies with good pre-clinical or early clinical results, or it can develop and market them itself.

The most important component of Regeneron's late-stage pipeline is Aliroumab for lowering "bad" cholesterol levels. If Phase III results are positive it will enter a crowded market. In addition to help specific underserved sub-populations, it has the benefit of needing administration only every two weeks. Next in the pipeline is Dupilumab for eosinophilic asthma and atopic dermatitis; it reported positive Phase IIa data in May, 2013. Dupilumab was named "clinical advance of the year" by Scrip Intelligence. It is being developed in cooperation with Sanofi.

While financial benefits are doubtless years away, it should be noted that Regeneron launched a human genetics initiative in January to help it define disease targets and develop therapies.

As with any biotechnology company, there will be pipeline candidates that drop out because of safety problems or lack of efficacy, or because the commercial opportunity appears insufficient. Because of the width of its pipeline and ability to create new candidates, Regeneron can cut off development of margin candidates early. Too often investors have lost money when a one-candidate company has spent large sums on R&D when it had a questionable profile. I favor companies that have a platform for generating new candidates.

In the short run I think Regeneron is a safer bet than when I looked at it in September, based on Q4 2013 results and guidance for 2014. In 2014 Regeneron is still almost entirely about Eylea sales, which are estimated at $1.7 billion to $1.8 billion. There should be some royalties from sales outside the U.S., so I am going to round up expected revenue to the high end of guidance, $1.8 billion. Unreimbursed R&D expense (non-GAAP) is expected between $425 and $475 million. Non-GAAP SG&A is estimated at $330 to $380 million. My own estimate for COGS (cost of goods sold) is $160 million. That should leave non-GAAP net income around $835 million, and full-year non-GAAP EPS around $8.35 per share.

If the share price stays at $285 and I am right about $8.35 per share non-GAAP EPS, then at the end of 2014 P/E will be 34 non-GAAP, which will be a lot more reasonable than the current PE. If investors continue to project rapid growth into 2015 and beyond, the PE could stay high and the stock price would to proportionately (to increased EPS) higher.

But a high PE also leaves room for REGN to go lower, short-term. Failure to achieve 2014 guidance, or guidance to a slower rate of growth in 2015, could cause PE retraction.

On the whole, given risks and opportunities, I see Regeneron as a good investment at $285 per share for anyone wanting to hold the stock for 2 years or more. I suspect buying at that price today will seem brilliant a decade from now.

There are other good, cheaply priced (given long term prospects) biotechnology companies out there today, and some that I would still consider overpriced despite the recent correction. In particular I see companies like Gilead (NASDAQ:GILD), Biogen (NASDAQ:BIIB), and Celgene (NASDAQ:CELG) and well as Regeneron as able to grow their way out of any short-term setbacks. They have proven they can turn candidate therapies into commercial profits. Momentum plays may force most biotechs up or down for short periods of time, but in the long run every stock is put to the acid test: can it produce profit streams? I see Regeneron as one of the likely long-term winners, despite the usual caveats.

Even among this select biotech group, however, Regeneron has a high P/E. Current trailing 1-year P/E ratios (GAAP) for the group are (at prices at 7AM on 4/8/2014):

Regeneron 78.6
Celgene 42.3
Gilead 38.8
Biogen 37.0

While all four are fast-growing companies with deep pipelines, the other three companies have been making profits much longer, but may not grow as fast as Regeneron in the short run. As detailed above, Regeneron, with its less broad portfolio of approved drugs, at this P/E ratio is mapping a lot of future profit growth into the price. The risks are substantial. The main criteria for buying at today's price (it has gone up to $300 while I researched and wrote the article) should be how long do you plan to hold the stock. It the short run it could get knocked down substantially again if it fails to continue to deliver profit growth, or even if there is just a further rotation away from high PE biotech stocks.

I considered buying Regeneron on this dip, but for now I have held off. If the price had gone lower today instead of higher, it might have tipped me to the point of taking a small initial long position. I'll be looking closely at REGN first quarter results when reported. Also an FDA approval for Aliroumab would do much to improve my view of Regeneron's future value.

Source: Regeneron Down 15% From 52-Week High: Buy?

Additional disclosure: I have no position in REGN, and no plans to initiate a position within the next 72 hours.