Regeneron: Exciting Technology, Inflated Stock Price

Regeneron (REGN) has been in operation since 1988. The company is one of the oldest of the pioneer biotechnology companies alongside Amgen (AMGN) and Genentech (DNA). However, its progress has been much slower than these other companies having no marketed products and only Phase II clinical products in the pipeline.

Activist investor Carl Icahn is reported to own 173,304 shares as of December 31, 2006 purchased in the 4Q 2006. This purchase may be a predictor of future purchases by the investor and more future shareholder activism. Last year, Icahn took over as chairman of the Biotech Company ImClone Systems (IMCL), begun in the mid 1980s, in which he holds a 13.7 percent stake, after aggressively seeking changes at the company.

The main value driver of this stock is the Phase II VEGF- Trap compound against multiple cancer types. Tumors must recruit a blood supply to provide the nutrients and oxygen required for tumor growth. VEGF or vascular endothelial growth factor is secreted by many tumors to stimulate the growth of new blood vessels in support of the tumor. VEGF binds to a protein called the “VEGF receptor,” which resides on the surface of blood vessel cells. When VEGF binds to its receptors, it stimulates their growth. A VEGF-Trap is a blocker of VEGF which prevents it from promoting blood vessels and thereby starves the tumor.

One of the VEGF Trap’s major competitors is Avastin, marketed by Genentech, which, though a different molecule, acts in a similar fashion by inhibiting blood vessel growth to tumors. The company’s method of reducing blood vessel growth is also used in its development of the “wet” age related macular degeneration program called VEGF-Trap for the eye, also in Phase II. A competitive product, Lucentis, is also marketed by Genentech.

The excitement over this research and the success of Genentech, have been strong catalysts for this stock over the past 6-9 months. But we think that this excitement has been overdone resulting in the present inflated stock price. Competition is fierce in these therapeutic areas from both marketed products and compounds in the clinic. This will result in increasing segmentation and reduced market share for cancer therapies.

In addition, we think any launch of the VEGF Trap molecule for cancer will probably be between 2 and 3 years after the initiation of Phase III trials or in 2009 or 2010. One prediction we have read has the EPS in 2010 being $1.82 assuming a 2008 launch. Assuming a launch in 2009 we believe it is more likely to be between $0.50 and $1.00 per share. This gives a price of approximately $16 at an EPS of $0.85 using a PE of 45 and discounted by 25%. The current stock price is $21.60. This valuation at $16 per share is approximately $900 million which is more in line with comparable companies with Phase II compounds. For these reasons, even though the technology is very exciting and there is a reasonable chance of success in the clinic, investors should proceed cautiously before making an investment at current prices.

REGN 1-yr chart

Disclosure: Author has no position in any of the above-mentioned securities.