Sanofi And Regeneron Move Forward On Cholesterol Drug, But Face Competition

Includes: RDY, REGN, SNY
by: Freedonia Freelance

In the cholesterol industry, there is great demand for alternatives to the statins that are currently available. This will cause a huge shift for the entire industry, and Sanofi (SNY) is one of the companies leading the charge, along with its partner Regeneron Pharmaceuticals (REGN).

Statins are one form of a cholesterol drug, and researchers are finding that painful side effects are more common with these drugs than experts previously believed. About 10% of patients experience side effects, and about 30% of those patients stop taking the drugs as a result. This means that patients are going untreated due purely to side-effects issues. This research looked at patients using a variety of drugs, but main ones were Pfizer's (PFE) Lipitor, AstraZeneca Group's (AZN) Crestor, and Merck's (MRK) Zocar.

Sanofi and Regeneron do not expect to launch their drug until late 2015 though, and other companies are taking the same approach as Sanofi. The combined efforts of these two companies is being called ODYSSEY, and it focuses on lowering low-density lipoproteins (called "LDL"). As Columbia Medical Professor Henry N. Ginsberg explained, "Lowering LDL-C remains the primary objective for the management of hypercholesrolemia, and has been supported by numerous morbidity and mortality trials."

Furthermore, existing problems with statins have led several other large companies to look for alternatives in the way Sanofi has, so a huge battle could erupt in the industry over the next three years with unpredictable results. I recommend being a little more restrained in reacting to recent developments in the cholesterol treatment industry, however, as a lot can happen in three years that no one can predict. Still, the companies look quite sound, especially when this progress is coupled with more recent good news -- a U.S. approval for specific cancer treatments.

Sanofi is currently trading around $42 -- up over 13% from one month ago and setting the top bar of its 52 week range. It has an 8.48% earnings yield and --1.54% revenue growth. 2Q revenue was up, but margins were down from most of its 2011 reports. Its cholesterol drug could help the company grow significantly, but it is just too early to be sure. I think there is still too much uncertainty in the situation to act firmly on this stock.

Regeneron is currently trading around $138, and it's up almost 17% in the last month. Its 2012 has bordered on the ridiculous, doubling its price from January. Its revenue growth is sitting at a pretty 106.6%, and the growth doesn't seem to be ending, as some analysts have reiterated "buy" ratings.

I think its partnership with Sanofi puts it in a good position to continue growing, but the uncertainty of the cholesterol drug situation still makes me hesitant on this front. A little hesitancy isn't the worst thing, though, as Regeneron is clicking on so many other fronts.

Competition is growing in the already-existing cholesterol drug market, as Dr. Reddy's Laboratories (RDY) is introducing its new generic statin that is comparable to Lipitor. This shows that if companies wish to avoid generic competition in the cholesterol field again, they need to move beyond these kinds of drugs. This is important for sales as well, as generic competition has already brought Lipitor down to fourteenth place on the quarter-one list of the top 100 drugs despite being in first place previously. Luckily, the problems with statins are making it possible for major companies like Sanofi to make a huge grab at the industry once again.

Dr. Reddy's is currently trading around $29, which is relatively cheap at the moment. It has an earnings yield of 6.01% and revenue growth of 15.23%. Despite how companies will likely replace statins eventually with a new form of drug, this probably will not happen for many years yet. Dr. Reddy's should benefit from this generic drug launch, therefore, so it could be a wise investment move.

Sanofi and Regeneron are moving forward with their alternative to statins though, as their REGN727 is entering massive late-stage trials involving over 20,000 patients. Early trials of this drug have shown it to be as effective at reducing LDL levels as Lipitor or Crestor. This drug functions differently, however, as it reduces levels by blocking the PCSK9 protein that holds on to LDL cholesterol. Some analysts believe this could be quite profitable for these two companies, bringing in billions of dollars in sales annually. Of course, this is contingent on it being proven safe and effective and receiving approval. It is hoping to be approved by the fourth quarter of 2015.

Some have suggested that the two companies could apply for approval even before the clinical trials are finished. In addition, some have noted that earlier results were even better than Lipitor when it comes to reducing LDL levels. These outcomes are great, and the possibility of earlier approval is also good news. However, one must not get too excited. The trials are now massive, and the success of the drug is largely dependent on the success of these trials. While the early results have been positive, one can never know what will happen in large trials like this.

In addition, the market is saturated with competitors. Amgen (AMGN), Roche, Merck, and Pfizer are only some of the major players involved in these new treatments under development. Roche is even looking to enter its drug into Phase III trials in 2013. Alnylam Pharmaceuticals (ALNY) and Bristol-Myers Squibb (BMY) are also two major companies working on separate treatments that focus on the PCSK9 protein. Alnylam is even doing something more unique, as it is looking to stop the genes' production of PCSK9 proteins while others are looking to keep it from binding to LDL receptors. Alnylam is looking for a major partner and is set to become yet another major player in this race for a treatment. Clearly, this is not a race that Sanofi and Regeneron are going to win without a fight from other competitors.

For the short-term, I'd recommend waiting on Sanofi. I expect Regeneron to continue its upward climb, but it may be overpriced at this point, and unless pipeline drugs continue to inspire hope, I don't know if it can keep revenue growth so high. Dr. Reddy's also is an attractive buy, and one that can offer some quick turnaround and success.

Sanofi and the others may eventually have great success, especially with the poor satisfaction of patients taking statins. This will be far in the future though, and I see no reason to just assume that the trials will go smoothly. Sanofi may not be a buy right now, but it's certainly a company to keep an eye on -- it could be the stock to own come drug development in 2014 and release in 2015.

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

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