Why I Bought Into Monday's Move In Regeneron


Regeneron has just announced a surprise data release on its main pipeline drug over the Labor Day weekend.

I speculate that the news will be favorable.

The stock is acting well and Regeneron has been doing well operationally.

Valuation may explain why there is a decent short position on the stock, but the shorts may be getting uncomfortable now.

Background: On August 8, I did my first and only article on Regeneron (NASDAQ:REGN), titled The Case That Regeneron May Be Significantly Undervalued. This company has a rapidly-growing franchise for retinal problems and a large partnership with the French major pharma company Sanofi (NYSE:SNY). In addition to growth in ophthalmology, with which REGN partners with Bayer Healthcare, the greatest amount of pipeline excitement comes from the REGN injectable protein alirocumab. This is a cholesterol reducer designed to work alone or in addition to statins.

The market for this drug is uncertain, as alirocumab and Amgen's (NASDAQ:AMGN) competitive pipeline product evolocumab are both expected to come to market next year, but I believe that sales could be explosive with the right evidence of clinical efficacy beyond simply lowering LDL cholesterol.

The breaking news that moved REGN was two-fold Monday. One is already history so far as trading is concerned: the announcement of a takeover of a smaller biotech, Intermune (NASDAQ:ITMN) by Roche (OTCQX:RHHBY). The other news item relates specifically to REGN, as follows.

Note: This was written Monday night, thus my comments reflect the closing price as of Monday August 25.

Introduction: On July 30, REGN and SNY jointly announced limited data about their many studies of alirocumab. They also announced their intention to file regulatory submissions before year-end. They did not say much about their data, but did reveal this in a press release titled Sanofi and Regeneron Report Positive Top-Line Results from Nine Phase 3 Trials of Alirocumab in People with Hypercholesterolemia:

The 2,341-patient ongoing ODYSSEY LONG TERM trial evaluated the long-term safety and efficacy of alirocumab compared to placebo. Both treatment groups received statins and some patients also received additional lipid-lowering therapies. The trial met its primary efficacy endpoint at 24 weeks. A pre-specified interim safety analysis was performed when all patients reached one year and approximately 25 percent of patients reached 18 months of treatment. A lower rate of adjudicated major cardiovascular events (cardiac death, myocardial infarction, stroke, and unstable angina requiring hospitalization) was observed in the alirocumab arm compared to placebo in a post-hoc analysis (p-value of less than 0.05). The potential of alirocumab to demonstrate cardiovascular benefit is being prospectively assessed in an ongoing 18,000-patient ODYSSEY OUTCOMES trial...

More detailed data will be presented at upcoming medical congresses.

The primary efficacy endpoint would presumably have been LDL lowering. A secondary endpoint would have been lowering of cardiac events. The p-value below 0.05 means that statistical significance was reached, which is impressive given the small number of expected events with the placebo group. How far below 0.05 the favorable statistics were was not alluded to. Perhaps it was 0.047, perhaps better (lower p-value).

A week ago, we learned the following:

Regeneron Announces Upcoming 2014 Investor Conference Presentations

Regeneron Pharmaceuticals, Inc. August 19, 2014 9:30 AM

TARRYTOWN, N.Y., Aug. 19, 2014 /PRNewswire/ -- Regeneron Pharmaceuticals, Inc. (NASDAQ: REGN) will webcast management presentations at the following investor conferences:

  • Sanofi and Regeneron will host an IR Thematic Conference Call on Alirocumab at 8:30 a.m. Eastern Time on Tuesday, September 2, 2014

So the Street may have expected that after Labor Day, REGN and SNY would begin to lay out general themes and suggest their remaining product development strategy, perhaps hinting at their marketing tactics and strategy. But there was no need at this early stage for the companies to share more details of their clinical data.

The news: Sanofi, an expert marketer, and Regeneron may be eager to start publicizing results because they are strong. Here is Monday's press release:

Regeneron and Sanofi to Present Results from Four Phase 3 Alirocumab Trials in Hot Line Session at ESC Congress 2014

TARRYTOWN, N.Y. and PARIS, Aug. 25, 2014 /PRNewswire/ -- Regeneron Pharmaceuticals, Inc. (REGN) and Sanofi (EURONEXT: SAN and NYSE: SNY) today announced that details from four pivotal trials in the alirocumab ODYSSEY clinical program will be presented on Sunday, August 31, during a Hot Line session at ESC Congress 2014 in Barcelona, Spain, the world's largest cardiology meeting. The data will also be highlighted in the official ESC press conference on August 31, at 09:00 CET / 03:00 ET. (Emphasis added)

Alirocumab is an investigational monoclonal antibody targeting PCSK9 (proprotein convertase subtilisin/kexin type 9). Top-line results from nine ODYSSEY Phase 3 trials were announced in late July 2014. The four trials that will be presented at ESC Congress 2014 include:

ODYSSEY LONG-TERM - The 2,341-patient, double-blind trial is evaluating the long-term safety and efficacy of alirocumab versus placebo in combination with maximally tolerated lipid-lowering therapy, including statins, in patients with hypercholesterolemia who are at high cardiovascular (NYSE:CV) risk...

ESC stands for European Society of Cardiology.

As stated above, on July 30, the companies told us that this small study, ODYSSEY LONG -TERM, already had statistically significant positive results.

Now they mention that on Sunday, the data will be important enough not only to deserve a presentation but to be highlighted in the ESC press conference.

Do you think the data will be found to be disappointing?

I do not. How powerful can data from a study of this size and duration be? That's hard to say. But since I like the stock, I look at this set-up as a good entry point.

Sanofi and Regeneron will be talking about all the studies mentioned above, not just ODYSSEY LONG-TERM. So we will just have to see what we learn about the outcomes data beyond "mere" LDL cholesterol-lowering, which we know is strongly-affected by alirocummab.

To summarize, on Sunday we will learn a good deal more about alirocumab. Tuesday morning, before REGN opens for trading after Labor Day, we will learn more about the JV's plans for this product.

Will what we learn be enough to move the stocks from here, especially the smaller stock, REGN?

We will have to find out - obviously - but as a bull on this drug class, I added to my long REGN position intra-day Monday and may buy more today or soon.

Technical discussion: REGN has a strong chart. It went more or less nowhere for years, then had the energy to bust out massively to the upside the past few years in a move that continues:

Click to enlarge

Splits: none

As an REGN long, I find this chart a powerful one.

I also find the presence of 4.3 million shares sold short, out of 99 million outstanding, a good thing for the longs in the face of this chart. The shorts are likely shorting on valuation, as there is a large difference between GAAP and non-GAAP earnings (the P:E:G ratio on non-GAAP earnings is very attractive).

Over 20% of REGN shares are held by Sanofi, which may buy more and will not sell at virtually any price. I am sure there are other strong holders as well. Might we see a bit of a short squeeze in REGN? Now that would be fun.

REGN is now within a percent or two of its all-time high. Very recently it broke through its prior high, set in February. The 50 day ema is above $322 and the 200 day ema is at $300. In the past, at the February high and the prior high set last October, it has traded at or well greater than 30% above its 200 day sma.

Between legitimate enthusiasm, speculation, and short-covering, I could see this move taking the stock to and through $375 at least after the weekend, and perhaps by the end of week if anticipation is powerful enough (and enough shorts see the bullish light and capitulate). Note that there are investor conferences that REGN is participating in early in September, so it will be telling its story repeatedly.

On a strong day for biotechs, AMGN also hit an all-time high Monday. I take this as a positive for REGN, and I also upped my AMGN exposure. The data on alirocumab very likely reflects a class effect and likely is not specific to alirocumab. Amgen owns 100% of evolocumab, whereas REGN owns less than half of alirocumab's profits. (I discussed evolucumab and the class of PCSK9 inhibitors just last week in An Analysis Of Amgen.) I believe that evolocumab could provide material upside to AMGN.

Fundamentals: As alluded to, there is a large difference between GAAP and non-GAAP earnings for REGN. Most of the difference relates to equity-based compensation accounting, and much relates to non-cash tax provisioning. I discussed this in some detail in my earlier REGN article, and urge anyone considering an investment in this name to understand REGN's earnings (I favor GAAP).

I look at REGN as having done well simply to get to profitability with its Eylea product for retinal diseases, and think that alirocumab can be its breakout success. However, REGN can make a great deal of money in ophthalmology, which could be a durable franchise for it. Beyond alirocumab is a strong pipeline, though some of REGN's pipeline products face significant competition. In contrast, initially it should simply be Sanofi/Regeneron against Amgen in the PCSK9 inhibitor class, and Sanofi has decades of marketing to cardiologists, whereas Amgen has no such experience.

If it can be shown early on outcomes data suggests that alirocumab added to a statin prevents myocardial infarctions etc., investors know what a cure of hepatitis C has done for Gilead (NASDAQ:GILD) and can extrapolate to this drug class. With lipid control, we are talking about lifelong need for therapy. There are tens of millions of potential patients in the G7 countries alone. At perhaps $10,000 per year per patient.

Multiply 10 million by $10,000 and you get $100 billion in sales. Yearly. (That's theoretical sales for the class based on the above imaginary numbers, not potential profits to any one company.)

Could it happen? Not right away, of course.

I'm excited as a cardiologist and as an investor about what we might learn about alirocumab, evolocumab, and the other similar drugs coming later from other companies. The sales reality may, however, be relatively un-dramatic. To be sure, it is far too soon to make predictions rather than speculations. As investors, though, we are always calculating what some future situation might be worth and what the chance of it coming to pass should be estimated at.

Let's say that alirocumab does prevent cardiac events and saves lifes as well as averts other health care costs. A $4 B annual profit for REGN from alirocumab strikes me as a reasonable hope - just a hope at this point. Slap an 18X P/E on that and you have a $72 B market cap - a double from today for REGN - from this one product. Unrealistic? Well, hepatitis C treatment has increased GILD's market cap by at least $100 B.

Please be aware that the above commentary is speculative.

Alirocumab explains why I'm ignoring P/E metrics for REGN. Even moderate success for it, not in the mega-blockbuster range, plus Eylea and the rest of the ophthalmology franchise, might justify REGN's current valuation, with the extensive pipeline a de facto freebie for shareholders. At least that's the hope of this REGN long.

Risks: I largely ignore REGN's non-GAAP EPS accounting, as options expense is non-cash now but a true expense to shareholders assuming this non-dividend-paying stock rises as shareholders anticipate. Thus I view REGN's valuation as sky-high based on reported sales and earnings. Eylea faces growing competition, and alirocumab has not even been approved for marketing yet, much less proven that it will be a mega-blockbuster as I believe it may become.

REGN at this price may simply appear to have been, some time from now, just another overpriced stock, though clearly Regeneron is a fine company. REGN is a growth rather than a value stock, and future growth may disappoint.

Concluding thoughts: It appears as though Sanofi and Regeneron may be eager to tell us how fine a drug they think alirocumab is. REGN has now moved to yet another all-time high. In my experience, when an up-and-coming company in an up-and-coming industry is developing (or in this case co-developing) a first-to-market example of a potential mega-blockbuster drug class, there is no obvious top to the stock. Then I try to have the discipline to sit tight and hope/expect to be right.

If REGN keeps moving up, ultimately what will its fundamentals reveal? This is one story I'm looking forward to following closely.

Much of the content of this article involves guesswork. While I do not provide investment advice, I'd like to add that I do not believe that REGN shares are suitable for all investors.

Long REGN; may do more trading in it.

Disclosure: The author is long REGN, AMGN, GILD.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Not investment advice. I am not an investment adviser.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.