Regeneron Is Good Value But At A Lower Price

Summary

Overpriced REGN shares are gradually sliding towards fair value.

The stock fell from peak of $579 in Aug 2015 to its current price of $370 and we expect the stock to continue that to levels of $275.

We recommend selling the stock at the current market price.

The company has remarkable growth rates, a good pipeline of upcoming products, strong balance sheet and good cash flows.

The stock would be considered a good 'Long Value Buy' below $275.

Overview

Based on 2015 Annual Earnings reported by Regeneron Pharmaceuticals, Inc. (NASDAQ:REGN) on 9th Feb 2016, we conduct a thorough fundamental evaluation of the share to reach the fair value estimate.

The company has two products in development based on Aflibercept, a VEGF inhibitor, and Rilonacept, an Interleukin-1 blocker. REGN collaborated with Sanofi (NYSE:SNY) to develop a new cholesterol drug to help reduction in cholesterol up to 72% more as compared to other similar products. On 23rd March 2016, in a press release, Regeneron Pharmaceuticals and Sanofi announced "positive results from the Phase 3 ODYSSEY ESCAPE trial evaluating Praluent (alirocumab) Injection in patients with an inherited form of high cholesterol known as heterozygous familial hypercholesterolemia (HeFH), whose cholesterol levels required chronic, weekly or bi-weekly apheresis therapy." Regeneron is recognized by Forbes as one of the top five most innovative companies on the globe across all industries.

The company has incredible scaling revenues with five-year average annual growth of 50%, strengthening net income with return on equity of 17% (2015), probable treasure of assets including a good pipeline of upcoming products in Phase 3 of research, an excellent balance sheet with cash reserves of $809 Million and debt ratio of only 0.35. It can be stated that these good fundamentals created hype that led to an overpriced share.

The past 5 years (2011-2015) have witnessed tremendous and persistent growth of revenue from $445 million in 2011 to $4,104 million in 2015. However, these increments in sales have not converted to net income at the same pace. Net income has been flat at $414 Million (adjusted) in 2012 to $636 Million in 2015.

In the same time frame (2011-15), total assets have increased from $653 million to $2,915 million, demonstrating a phenomenal rise of 344%. The company has cash reserve of $809 Million. Fixed assets have increased from $367 Million in 2011 to $1,594 Million is 2015, largely due to heavy investments in Plant & Equipment. The debt to asset ratio is currently 27%, suggesting that Regeneron has ample scope to leverage opportunity for expansion through debt.

Their blockbuster formula "EYLEA," an injection for the cure of retinal diseases, had a strong past year with net global sales increasing from $1,881 Million in 2014 to $2,775 Million in 2015, a growth of 48% on a YoY basis. 4Q15 saw a 44% YoY jump in Eylea's US sales from $518 Million in 4Q14 to $746 Million in 4Q15. However, competition is fast catching up and the product may not be able to maintain high growth rates. A study by the American Academy of Ophthalmology (AAO) that EYLEA performs similar to other formulas in the market is making the matter worse.

In Aug 2015, the stock reached its peak at $579/share; subsequently, there was a gradual slide to the current price of $370. We expect that the stock will continue to slide further.

Relative Valuation

Comparative analysis of REGN reveals that it is still a very expensive buy. The share is trading at a P/E of 67 whereas its closest competitor Amgen Inc. (NASDAQ:AMGN) currently trades at a P/E of 16.

Based on our expected 2016 conservative EPS of 6.6 (2015 EPS is 6.17), forecasted P/E of REGN is 56. Even on an optimistic approach for forecasted 2016 EPS of 9.2, the share looks expensive at a P/E of 40. The Industry average P/E is 26.

Discounted Cash Flow Valuation

In our conservative estimates, at an annual income growth rate of 34%, the fair value of the share is $206, P/E of 32 on 2016 forecasted EPS of 6.6, and RoE of 16%. We have calculated conservative growth estimates using average of analyst estimates, fundamental growth rate and the last 5-year average growth. Weights allotted are 20% to analyst estimates (Source: Yahoo Finance), 50% to five-year average growth rates and 30% to fundamental growth rate.

On an optimistic approach, at an annual income growth rate of 50%, the fair value is $354, P/E is 38.26 on 2016 forecasted EPS of 9.2, and RoE is 20%.

2020 onward, stable growth period to perpetuity is forecasted at 4% and cost of equity is 15%.

Discounted Cash Flow Calculations:

Fiscal year ends in December. USD in thousands except per share data.

Full Year 2016

Dec-11

Dec-12

Dec-13

Dec-14

Dec-15

Conservative

Optimistic

Revenues

445,824

1,378,477

2,104,745

2,819,557

4,103,728

5,496,453

6,155,592

Cost of Revenue

4,216

83,927

118,048

129,030

241,702

251,531

362,553

Depreciation and amortization

31,082

36,940

41,204

52,686

74,909

102,706

112,364

Operating expenses

615,685

799,897

1,185,465

1,799,410

2,535,201

3,507,775

3,802,802

Operating Income (Loss)

(205,159)

457,713

760,028

838,431

1,251,916

1,634,440

1,877,874

Interest Expense

14,241

-

21,362

Other income (expense)

(17,733)

(43,292)

(46,668)

(62,684)

(12,578)

(122,196)

(18,867)

Income before taxes

(222,892)

414,421

713,360

775,747

1,225,097

1,512,243

1,837,646

Income Tax Expenses

1,132

335,848

(288,998)

(427,673)

(589,041)

(833,707)

(883,562)

Net Income

(221,760)

750,269

424,362

348,074

636,056

678,536

954,084

Net earnings per share:

Basic

(2.45)

7.92

4.33

3.46

6.17

6.58

9.26

Diluted

(2.45)

6.50

3.81

3.07

5.52

5.89

8.28

Weighted average shares

Basic

90,610

94,685

97,917

100,612

103,061

103,061

103,061

Diluted

90,610

115,382

111,290

113,413

115,230

115,230

115,230

AT YEAR END

Dec-11

Dec-12

Dec-13

Dec-14

Dec-15

fDec-16

fDec-16

Total assets

1,323,583

2,080,490

2,951,013

3,871,827

5,609,132

Total Liabilities

837,851

835,105

998,937

1,329,502

1,954,295

Total Stockholders' equity

485,732

1,245,385

1,952,076

2,542,325

3,654,837

4,333,373

4,608,921

Debt Ratio

0.63

0.40

0.34

0.34

0.35

Debt/Equity

1.72

0.67

0.51

0.52

0.53

Return on Assets

-17%

36%

14%

9%

11%

Return on Equity

-46%

60%

22%

14%

17%

15.7%

20.7%

Capital Expenditure

57,217

49,337

156,323

333,006

677,933

908,010

1,016,900

Non-Cash Working Capital

33,896

812,186

972,495

864,082

1,294,831

1,734,271

1,942,247

Change in Non-Cash Working Capital

-

778,290

160,309

(108,413)

430,749

439,440

647,416

ROA

11%

Retention Ratio

100%

Debt/equity

0.53

Interest rate

10.0%

Tax Rate

30%

Fundamental Growth Rate

13.7%

Income Growth Rates Forecast High Growth Period

Weight

Analysts (Source: Yahoo Finance)

24.20%

0.2

5-Yr Avg Growth Rate

50.00%

0.5

Fundamental Growth Rate

13.66%

0.3

Weighted Average Forecasted Growth Rates

33.94%

Expected Debt Ratio

0.35

Beta

1.16

Risk Free Rate

2%

Return from Market

13%

Cost of equity

15%

Click to enlarge

Conservative Value

All Figures in '000s except per share data

High Growth

Stable Growth Period

Year

2016 E

2017 E

2018 E

2019 E

2020 Onward

Growth in Revenue

33.94%

33.94%

33.94%

4.0%

Net Sales

5,496,453

7,361,841

9,860,305

13,206,700

13,734,968

Depreciation

102,706

137,562.73

184,248.82

246,779.25

256,650.42

Net Income

678,536

908,818

1,217,254

1,630,366

1,695,580

CAPEX

908,010

1,216,171

1,628,916

2,181,738

2,269,007

Change in Non-Cash Working Capital

439,440

588,578

788,329

1,055,873

166,682

Cash Flow to equity

1,489,595

1,995,135

2,672,245

3,579,152

3,115,413

Cost of Equity

15%

15%

15%

15%

15%

Terminal value

28,953,655

PV of cash flows

1,298,009

1,514,925

1,768,091

18,756,827

FCFE (In '000)

23,337,853

No of shares (In '000)

115,230

P/E

Conservative Share Price

203

30.76

Current Market Price

370

Return

-45%

Click to enlarge

Optimistic Value

All Figures in '000s except per share data

High Growth Period

Stable Growth Period

Year

2016 E

2017 E

2018 E

2019 E

2020 Onward

Growth in Revenue

50.00%

50.00%

50.00%

4.0%

Net Sales

6,155,592

9,233,388

13,850,082

20,775,123

21,606,128

Depreciation

112,364

112,364

168,545

252,818

379,227

Net Income

954,084

1,431,126

2,146,689

3,220,034

3,348,835

CAPEX

1,016,900

1,525,349

2,288,024

3,432,036

3,569,317

Change in Non-Cash Working Capital

647,416

971,123

1,456,685

2,185,027

262,203

Cash Flow to equity

1,965,315

2,984,580

4,476,870

6,715,305

5,598,304

Cost of Equity

15%

15%

15%

15%

15%

Terminal value

52,028,850

PV of cash flows

1,712,544

2,266,221

2,962,122

33,869,010

FCFE (In '000)

40,809,896

No of shares (In '000)

115,230

P/E

Optimistic Share Price

354

38.26

Current Market Price

370

Return

-4%

Click to enlarge

Our Recommendation

REGN fundamentals are very strong and the share price is gradually moving towards its intrinsic value. To those who are interested in REGN, it is strongly recommended to wait for the stock to hit the bottom and start accumulating the share slowly at prices below $275.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.