- Sales of Regeneron's highest selling medication, Eylea, are expected to rise rapidly over the next few years as it gains market share.
- Eylea is expected to be approved by the FDA to treat diabetic macular edema.
- Long-term partner Sanofi increased its stake in Regeneron to 22.5%.
- High research spending and a diverse pipeline of potential products should help Regeneron get more drugs to market.
Regeneron Pharmaceuticals, Inc. (NASDAQ:REGN) is a U.S.-based biotechnology company. In November 2011, the U.S. FDA approved Regeneron's Eylea, a treatment for a common cause of blindness in the elderly, neovascular age-related macular degeneration (wet-AMD), and also for macular edema following central retinal vein occlusion (CRVO). In the following two years, Regeneron's share price rose over 500%, based largely on the predicted success of Eylea and its high sales totaling over $2 billion in the United States in 2012 and 2013 combined.
On July 1st, 2014, French drugmaker Sanofi (NYSE:SNY) increased its stake in Regeneron to 22.5% of outstanding shares, up from 20.5% in April and 16% in 2013. Sanofi has expressed interest and received approval to increase its stake in Regeneron to 30%. Regeneron's long-standing relationship with Sanofi, the fifth-largest pharmaceutical company by revenue, has been very beneficial, and the two companies have partnerships to develop many new drugs. Although Sanofi stated that it has no plans to acquire Regeneron now, as Sanofi increases its stake, a future acquisitions seems more likely.
Regeneron received approval in March, 2014 to spend $300 million to convert a former Dell plant in Limerick, Ireland into its first manufacturing site outside the United States. This move was part of a trend in the pharmaceutical industry to take advantage of lower Irish tax rates. The pharmaceutical companies Actavis (NYSE:ACT) and Perrigo (NYSE:PRGO) have expanded to Ireland recently, and U.S. medical devices manufacturer Medtronic (NYSE:MDT) recently bought its Irish competitor, Covidien, and is moving its headquarters to Ireland to take advantage of the corporate taxes.
Currently, Regeneron only sells three medications; Eylea, Zaltrap, and Arcalyst. Sales of Eylea accounted for 67% of Regeneron's $2.1 billion of revenue in 2013. Regeneron partnered with Bayer HealthCare to market Eylea outside of the United States. Eylea faces competition for Roche's drug, Lucentis, and Genetech's Avastin. However, Eylea is preferred by many patients and doctors because it is more convenient and just as effective. Eylea and its competitors are administered through intravitreal injections, which are time consuming and uncomfortable for the patient. However, after the first three months, an injection of Eylea is needed every eight weeks, while its competitor Lucentis requires monthly injections. Hopefully, this added convenience will help Eylea continue to gain market share from Avastin and Lucentis. Most of Eylea's side effects are not severe and are limited to the eye, but Avastin has a much longer list of side effects, some of which are potentially fatal.
Regeneron is also waiting for an FDA decision, expected in late 2014, regarding the use of Eylea to treat diabetic macular edema. This new indication will increase the potential market for Eylea, which should lead to an additional boost in sales.
Ophthotech Corporation (NASDAQ:OPHT) recently announced that Fovista completed Phase 2b clinical trials with positive results. Fovista is designed to be used in combination with an anti-VEGF, like Eylea or Lucentis. In Phase 2b trials, the addition of Fovista was 62% more effective than the use of an anti-VEGF alone. The addition of Fovista also added no significant safety risks. Fovista will not take market share away from Eylea. When combined with Eylea, the outcome is much better, which will encourage more people with wet-AMD to receive treatments.
Zaltrap is a cancer drug used to treat metastatic colorectal cancer as part of a multi-drug chemotherapy regimen. Its sales were only around 3% of Regeneron's 2013 revenue. It was developed and marketed in collaboration with Sanofi.
Arcalyst is used to treat the symptoms of rare genetic inflammatory disorders, such as Muckle-Wells syndrome and familial cold autoinflamatory syndrome. These disorders only affect one in a million people. Arcalyst's sales were less than 2% of total revenue, and Regeneron predicts that Arcalyst's sales will be rather insignificant in the future.
Patents on all three products are set to last at least until 2020, and have the potential to be extended well beyond that, especially in countries that offer patent extensions. These three products, along with every product in Regeneron's pipeline, are biopharmaceuticals, which are not chemically synthesized like traditional pharmaceutical products but manufactured from biological sources, in the case of Regeneron, through its VelociSuite technologies. These products are very complex and expensive to manufacture, which will dissuade generic competition.
The rest of Regeneron's revenue is reimbursements from Sanofi and Bayer for R&D expenses incurred by Regeneron in its collaborations with these companies.
Regeneron's original area of research was the regenerative properties of neurotrophic factors, which are proteins which help existing neurons grow and survive. Since then, Regeneron has expanded its research into signaling proteins and receptors, such as cytokines and tyrosine kinase. Cytokines help signal cell functions relating to the immune system. They are important in immune responses, inflammation, and cancer. Regeneron is working to create pharmaceuticals based on cytokine research. Tyrosine kinases are enzymes which regulates cellular functions. Mutations can cause tyrosine kinases to continually tell cells to perform a certain function, leading to rapid cell growth. This process is closely connected to the development of cancer and plays an important role in the treatment of cancer. Novartis' Gleevec (imatinib) is a tyrosine kinase inhibitor used to treat cancer, and has achieved sales in the billions.
Regeneron currently has two potential products that have had successful Phase 2 trials, that are now being tested in Phase 3 trials. Both of these drugs were developed in collaboration with Sanofi. The first is alirocumab, which is used to reduce LDL cholesterol levels. So far, its Phase 3 results are positive, but a potential competitor, Amgen's evolocumab, has achieved similar results in lowering LDL cholesterol levels. Like many of Regeneron's products, alirocumab is a fully human monoclonal antibody, which was developed through its VelociSuite technology. The advantage of fully human antibodies instead of humanized, mouse, or chimeric antibodies is that fully human antibodies have less risk for inducing immune responses that may hinder FDA approval. Cardiovascular disease is the leading killer of Americans and a leading cause of disability. Over 10 million Americans have an increased risk of heart disease due to high LDL cholesterol levels, and could benefit from alirocumab if it is proven safe and effective in Phase 3 trials. If it reaches market, alirocumab will face many competitors, but has an advantageous dosing regimen.
In June, Regeneron released positive results for its other Phase 3 product, sarilumab. Sarilumab has proven to be an effective treatment for rheumatoid arthritis at several dosages. If approved, it will compete with Roche's drug, Actemra, which was approved in 2010. Sarilumab is also in Phase 2 trials to treat patients with non-infectious uveitis.
Regeneron also has 12 other product candidates in Phase 1 and 2 clinical trials. Through its partnership with Regeneron, Sanofi funds the research and development of many of these products, in exchange for a share of potential profits and losses. Sanofi will also assist Regeneron with marketing any product researched through their partnership.
Regeneron utilizes genetics to discover new potential products through its VelociSuite of technologies. VelociSuite has four components, VelocImmune, VelociGene, VelociMouse and VelociMab. The combination of these four components allows Regeneron to produce specific fully human monoclonal antibodies. VelociGene is used to manipulate and customize long strings of DNA, which allows for the replacement of target genes in mice with human equivalents. Regeneron can then create VelocImmune mice from embryonic stem cells with targeted genetic alterations using VelociMouse technology. These mice then produce a human antibody to target a specific antigen. VelociSuite technology utilizes both the variable region and the constant region of antibodies, allowing for the generation of more antibodies than competing methods. VelociMab technology is then used to screen for potential therapeutic uses for antibodies. Once potentially beneficial antibodies are identified, VelociMab technology allows rapid protein production with pharmaceutical quantity yields.
Regeneron's revenue began to soar in 2012, rising from $446 million in 2011 to $1.38 billion in 2012, then to $2.1 billion in 2013. After six years of losses, earnings per share for 2012 and 2013 were $7.92 and $4.33, respectively. Although net income dropped from 2012 to 2013, operating income was $300 million higher in 2013 and operating margins rose from 33% to 36%. Earnings before taxes were 30% of revenue in 2012, and rose to 33.9% of revenue in 2013. The main factor that led to this difference in operation and net income was Regeneron's provisions for income taxes, which were $289 million in 2013 but -$336 million in 2012. If all else was held equal, this alone would have led to a $625 million decrease in earnings.
Regeneron has spent heavily on research and development. In the last twelve months, research and development spending has totaled almost $1 billion, more than twice what was spent five years ago. Sanofi is willing to spend heavily on Regeneron's research as part of their collaboration agreement, which makes Regeneron's high research spending possible.
One factor that sets Regeneron apart for investors is its stellar balance sheet. While many of Regeneron's competitors have to turn to debt financing in order to fund research, Regeneron has remained almost debt-free, despite its high research and development budget. Currently, Regeneron only has around $325 million in debt and a debt-to-equity ratio of 0.2. For companies in the same industry as Regeneron, the average debt-to-equity ratio is 0.7. Regeneron also has $536 million in cash and $158 million in short-term investments as of the end of the 2013 fiscal year, so it should have no issues with debt or solvency.
Regeneron has an experienced and highly educated management team with a strong understanding of Regeneron's fields of research, and many executives who have worked for Regeneron for much of its 26-year history. Its founder, president, and CEO, Leonard Schleifer, is a physician who specializes in neurology, who also has a Ph.D. in pharmacology. He taught at Cornell University Medical College prior to founding Regeneron. Its founding scientist and chief science officer, George Yancopoulos, also has a Ph.D. and M.D, both from Columbia University. In the 1990s, he was the 11th-most highly cited scientist in the world, and is a principal inventor of all three of Regeneron's products and its VelociSuite platform. Former CEO of Merck, Dr. Roy Vagelos, has been chairman of the Board at Regeneron since 1995. Hopefully, the experience and expertise of these three individuals should continue to help guide Regeneron towards future success.
Currently, Regeneron is dependent almost solely on Eylea for revenue, which makes Regeneron at great risk if complications with Eylea arise or if a new competing treatment emerges.
Future scientific breakthroughs may render VelociSuite obsolete, if new, superior methods for making fully human antibodies are discovered.
Regeneron's cancer treatment, Zaltrap, has come under fire for its high cost, even after Regeneron cut its cost to around $11,000 a month. Many doctors refuse to prescribe it, choosing instead Roche's Avastin based on cost, and British cost regulators did not approve it. Many of Regeneron's potential products share several similarities with Zaltrap in their production process, and therefore, may also be priced too highly for widespread adoption.
Regeneron's future earnings outlook is positive, with 106% earnings growth expected for 2014 and 35% growth forecasted for 2015. This is fueled by Eylea sales, which are expected to grow at least through 2015. Interestingly, over the last 12 months, Regeneron has beat earnings forecasts by an average of over 80%. Currently, Regeneron trades at a forward P/E of 29, which is much more appealing for investors than its current P/E of 88.
Although growth in Eylea's earnings is important, Regeneron's pipeline and potential for future product candidates are where investors can find value in Regeneron. It focuses many of its discoveries in areas where medicines are lacking, often focusing on rare diseases with limited treatments. The complexity of its potential products limits competition, both from other companies pursuing similar treatments and companies attempting to create generic equivalents. Regeneron's strong partnership with Sanofi provides financial backing needed for its plans to rapidly move many new products through its pipeline and to add more to the pipeline each year. Increased research spending and Sanofi's increased interest in the company will help Regeneron research and test more potential biopharmaceutical treatments, expand its pipeline, and hopefully get more medications to market that are able to replicate the success of Eylea.
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