Regeneron's Q2: Opportunities And Challenges

Summary

Regeneron reported Q2, with Eylea sales mostly in line.

The stock is down perhaps on profit-taking, perhaps on details of guidance, perhaps related to worries about Eylea's challenges.

Praluent is not looking good right now, a fundamental worry in my mind, as discussed in the article.

The company expresses substantial, sustained optimism regarding its late-stage candidate dupilumab; I concur and update my reasoning in the article.

Other key development-stage candidates and new collaborations are discussed, as well.

Background

I've been long-term bullish on Regeneron (NASDAQ:REGN) for exactly two years, when I first bought the stock around $335 and wrote my first of many bullish articles on it. The stock has been harmed this year by poor execution on the launch of its cholesterol drug Praluent, for which the lead marketer is Sanofi (NYSE:SNY). The companies also lost an initial legal decision to their direct competitor Amgen (NASDAQ:AMGN) in AMGN's patent infringement case; AMGN markets a very similar drug, Repatha. Separate from this legal case, where a decision on a permanent injunction against marketing of Praluent is awaited (US only), Repatha is slightly outselling Praluent on a worldwide basis, $27 MM to $24 MM for Praluent in Q2. Both numbers are far beyond consensus expectations as of the time of launch about one year ago.

In any case, Disney (NYSE:DIS) released John Carter, survived and prospered. You can't win them all. Apple (NASDAQ:AAPL) survived Ping; it even survived the soda guy.

Even if Praluent is a failure, which I am not predicting (see below), REGN is forging ahead with cutting-edge products and long-range growth plans. I'm disappointed in Praluent, but not obsessing over it.

I continue to think that REGN is an amazing product development story that may emerge in the 2020s as a biotech analogy to the largest, most dominant tech companies.

Before getting into the pipeline, some observations on Q2 are necessary.

Regeneron's Q2 - Overview

The commercial power of Eylea, a sight-restorer and sustainer continues, though with deceleration. In Q2, Eylea's US sales rose 27% yoy to $831 MM.

Ex-US Eylea sales from to $486 MM from $338 MM. REGN's share of profits, which the company shares equally with Bayer AG (OTCPK:BAYRY), the global ex-US marketer except in Japan, rose more sharply, from $107 MM to $167 MM. This continues a rapid growth of profits streaming back to REGN from the maturing ex-US Eylea market, in excess of sales growth.

I pay little attention to EPS with this company. That's because the pipeline is large even if Praluent is not doing well. It's also because of the R&D and infrastructure build-out, changing tax rates, varying payments to REGN from the SNY relationship, and other reasons. Basically, I look at REGN the way many look at Amazon.com (NASDAQ:AMZN): a growth vehicle that's building what is hoped to be a very profitable and large company looking, for now, well into the future.

Also, per guidance, some modest expenditure changes were made:

EYLEA U.S. net product sales

20% - 25% growth over 2015 (reaffirmed)

Sanofi reimbursement of Regeneron commercialization-related expenses

$310 million - $340 million

(previously $320 million - $370 million)

Non-GAAP unreimbursed R&D(2) (4)

$970 million - $1.01 billion

(previously $875 million - $950 million)

Non-GAAP SG&A(2) (4)

$980 million - $1.02 billion

(previously $925 million - $1.0 billion)

Effective tax rate

33% - 41%

Capital expenditures

$480 million - $530 million

(previously $550 million - $625 million)

Click to enlarge

I wonder if the decrease in capex relates to the greater-than-expected Praluent-related marketing losses (see below).

In any case, the company continues to be profitable, and despite significant marketing losses attributable to Praluent, shareholder equity rose yoy. More important, Eylea remains a growth engine, though with growing challenges.

Eylea marches on; some clouds are gathering, though

Global Eylea sales are in the range of $5.2 B annualized. The product only came to market in the US in 2011 and ex-US after that. Yet, it's approaching Celgene's (NASDAQ:CELG) Revlimid sales already, which CELG projected recently to reach $6.8 B globally this year.

In the Q2 10-Q, which as is typical for REGN, came out the day of the earnings release, the ongoing Eylea programs were summarized. International roll-outs are still ongoing, so growth is expected there for current indications. There is now a Phase 3 program for an important indication, a form of diabetic retinopathy with macular edema. The acronym is NPDR. Success with this Phase 3 study (which I would call a Phase 4 study and which some call a Phase 3b study) could have important commercial indications.

However, prepared remarks in the conference call confirm that REGN is seeing and expects to see additional competitive price pressures. I do not have a lot of insight to add on these points, so I'll just have to accept management's guidance for US Eylea sales to grow 20-25% this year on a yoy basis.

Later this year, we should get to see whether the first Eylea combo for wet AMD had encouraging results in its Phase 2 study. Management suggested in the conference call three months ago that it was not enthused about this combo, and has higher hopes for the Eylea/Ang2 antibody that's also in Phase 2. Management also pointed out that the hurdle for its one-injection combo approach makes for a lower hurdle for clinical use than the two-injection story for the Ophthotech (NASDAQ:OPHT) Phase 3 candidate (an aptamer, not an antibody).

Overall, there was nothing related to Eylea to make any trader get excited, and if one wants to worry about profit margins, there's definitely enough here to get the worry juices churning.

Praluent - No good news here (yet)

In addition to the widely-expected weak sales, management is finally admitting what I've been saying all along once it and SNY (especially SNY in my opinion) decided on pricing it at $14,000+ in the US), namely that the ODYSSEY OUTCOMES study is going to determine the success of this drug. An interim analysis may occur by year-end, but there is no guarantee at all that even if this Phase 3 CV outcomes trial is successful, the interim analysis will be positive enough to stop the trial before full enrollment. It sounds as if both the REGN/SNY and AMGN outcomes studies overestimated the CV event rates of enrollees. Given the huge investments each party has made, that's a serious error.

Worse news came after the quarter ended. From the 10-Q:

On July 25, 2016, Amgen filed a lawsuit against Regeneron, Sanofi-Aventis Groupe S.A., Sanofi-Synthelabo Limited, Aventis Pharma Limited, Sanofi Winthrop Industrie S.A., and Sanofi-Aventis Deutschland GmbH in the English High Court of Justice, Chancery Division, Patents Court, in London, seeking a declaration of infringement of Amgen's European Patent No. 2,215,124 (the "'124 Patent"), which pertains to PCSK9 monoclonal antibodies, by Praluent. The lawsuit also seeks an injunction, damages, an accounting of profits, and costs and interest. Regeneron has not yet been served with the documents relating to the lawsuit.

Also on July 25, 2016, Amgen filed a lawsuit for infringement of the '124 Patent against Regeneron, Sanofi-Aventis Groupe S.A., Sanofi Winthrop Industrie S.A., and Sanofi-Aventis Deutschland GmbH in the Regional Court of Düsseldorf, Germany, seeking an injunction, an accounting of marketing activities, a recall of Praluent and its removal from the distribution channels, and damages. Regeneron has not yet been served with the documents relating to the lawsuit.

At this time, the Company is not able to estimate a range of possible loss, if any, related to these proceedings.

The threat of being unable to market Praluent in the EU would be material. I would think that given the massive investment that SNY and REGN made in their clinical programs for Praluent, they would have made sure their intellectual property was pretty darn clean.

Whether any of these legal matters will be relevant to other pipeline REGN drugs is an important topic I cannot answer.

REGN's share of loss in conjunction with antibody commercialization, largely Praluent but also involving pre-launch activities for sarilumab and dupilumab, was $122 MM.

Dupilumab - Management gets increasingly aggressive on this one

Another jointly-developed product with SNY, REGN's management is encouraging the Street to thing big here, as in B.I.G. Real big.

In the prepared remarks, head REGN scientist George Yancopoulos spent lots of time reviewing the achievements of dupilumab in atopic dermatitis (eczema; AD). They think (believe? know?) that at least 1 million US residents suffer from moderate-severe AD. They also used the 1.6 million number, or 0.5% of the population. They believe there is a large unmet need, and that the insurance and pricing issues they have seen with Praluent will not be relevant to an actively symptomatic disease.

REGN is, I expect, in line for substantial revenues and profits from dupi for AD.

Dupi's BLA was filed recently with the FDA. If it takes the FDA two months to decide the application is acceptable, then since it has a priority review status, marketing might commence next April.

Enrollment in the second pivotal trial for dupi in asthma could allow a BLA filing next year, I believe. The company is emphasizing not one but two potential advantages here over currently-marketed and late-stage competitors. These are the ability to improve breathing ability (FEV1 is the metric) and to work on "low eo" or less-allergic asthma sufferers (roughly half the total).

Based on the strong results from a pivotal Phase 2 study, I'm expecting similar results from the pivotal Phase 3 study, and looking for FDA approval in 2018. I think that dupi for asthma has large commercial potential.

Beyond those indications, Dr. Yancopoulos reiterated that REGN believes that the dual approach (therefore the name "dupilumab") to block interleukins 4 and 13 together that dupilumab has pioneered will provide a key to treatment of other allergic diseases. It's working on the rare disease eosinophilic esophagitis. I expect other diseases to be studied in the future. There is also a late-stage study of AD in children underway; the FDA had wanted the initial AD studies to be in adults for safety reasons.

There's no way to be sure, but my estimation is that between Eylea and its potential follow-on products and dupilumab, REGN's market cap is justified, more or less.

Sarilumab - On track

Approval of this RA drug, which will challenge in the same class the fast-growing blockbuster Actemra (from Genentech), is anticipated in the US in late October. Sari looks to be a perfectly good product, with some advantages over both Actemra and AbbVie's (NYSE:ABBV) Humira.

Financial expectations are low for this one. I'm hoping there's no patent suit here from Genentech, a Roche (OTCQX:RHHBY) subsidiary.

Phase 3 updates

The company remains with RSV prevention drug for high-risk patients in Phase 3 and fasinumab for pain in Phase 3. It also has begun, in conjunction with its immuno-oncology partnership with SNY, a study that could be registrational in squamous cell carcinoma.

Other pipeline products are moving along, with more due to leave preclinical status soon.

Earlier-stage collaborations putting REGN in the forefront of hot areas

REGN made two notable early-stage deals recently. First, the Intellia (NASDAQ:NTLA) deal, which involved a $75 MM upfront payment, then the Adicet deal; per the 10-Q;:

(1) In April 2016, we entered into a license and collaboration agreement with Intellia Therapeutics, Inc., to advance CRISPR/Cas gene-editing technology for in vivo therapeutic development...

Certain targets that either we or Intellia select pursuant to the target selection process may be subject to a co-development and co-commercialization arrangement at our option or Intellia's option, as applicable. The terms of the co-development and co-commercialization agreement are expected to be finalized by the end of 2016. Transthyretin amyloidosis (ATTR), the first target selected by us, will be subject to the co-development and co-commercialization arrangement between the parties.

In May 2016, Intellia completed an initial public offering ("IPO") of its common stock and thereby triggered our obligation to purchase up to $50.0 million of Intellia common stock in a concurrent private placement. As part of the concurrent private placement, we purchased from Intellia at the closing of the IPO shares of Intellia common stock for an aggregate purchase price of $50.0 million (which is separate from the $75 MM payment).

(2) In July 2016, we entered into a license and collaboration agreement with Adicet Bio, Inc., a privately held company, to develop next-generation engineered immune-cell therapeutics with fully human chimeric antigen receptors (CARs) and T-cell receptors (TCRs) directed to disease-specific cell surface antigens in order to enable the precise engagement and killing of tumor cells. In connection with the execution of the agreement, we will make a $25.0 million up-front payment to Adicet, and are obligated to provide Adicet with research funding over the course of a five-year research term.

Under the terms of the agreement, the parties will collaborate to identify and validate targets and work together to develop a pipeline of engineered immune-cell therapeutics for selected targets. We have the option to obtain development and commercial rights for a certain number of the product candidates developed by the parties, subject to an option payment for each product candidate. If we exercise our option on a given product candidate, Adicet then will have an option to participate in the development and commercialization for such product. If Adicet doesn't exercise its option, Adicet will be entitled to royalties on any future sales of such products by us. In addition to developing CARs and TCRs for use in novel immune-cell therapies as part of the collaboration, we will have the right to use these CARs and TCRs in our other antibody programs outside of the collaboration.

I like these. REGN said in the conference call that the Adicet collaboration ties into its antibody-development capabilities. The Adicet technology is designed to have off-the-shelf capabilities. This could leapfrog the Kite (NASDAQ:KITE) and Juno (NASDAQ:JUNO) processes. A questioner on the conference call asked how the Adicet method differed from an off-the-shelf method being developed by Cellectis (NASDAQ:CLLS). REGN refused to elaborate.

Not mentioned by REGN was the collaboration on gene therapy with Adverum Biotechnologies (NASDAQ:ADVM) (formerly Avalanche).

Comments on the stock action

REGN, my stock of the year for 2016, has had a difficult year, largely due to Praluent, also due to various competitive worries about Eylea. So the stock is down from above $600 to around $427 as I complete this after noon on Thursday. It crashed to the $33-340 range not long ago. Given that this is exactly where I bought in two years ago partly in hopes that Praluent would beat expectations, and now it's coming in well below modest expectations, that's no great surprise.

With Eylea's growth decelerating and various challenges to its franchises, I'm treating this latest surge cautiously. The RSI actually approached 80 just a few days ago, somewhat of a danger sign. Given the moonshot the stock has had off its Great Recession low, and given the historical tendency for stocks to show some weakness during hurricane season, which has begun, I'm not in love with the technicals.

Potential good news for dupi is that I detected some skepticism from an analyst or two during the Q&A about whether it might be a dud as Praluent has been to date. The company stoutly defended dupi as different. Assuming it's marketed merely competently (great brilliance is not required assuming a strong label), I side with REGN here.

So, timing aside, I continue to like REGN as a potential big winner (no guarantees!) looking out to a 5-15 year time frame.

It should be clear to anyone who's read through this article that risks abound for REGN, regardless of any general market risks. This stock is not for everyone.

Thanks for reading. I look forward to any comments.

Disclosure: I am/we are long REGN,AAPL.

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.

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

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.