Currently quoting at nearly $150, Regeneron Phamaceuticals (REGN) is one of the most interesting plays in the biotech field and engages in the discovery, development and commercialization of several drugs, that range from the fields of inflammation (with already FDA approved Arcalyst), to metabolism, pain treatment, oncology (also with FDA approved drug Zaltrap) and finally ophthalmology.
The overall pipeline can be seen in the next picture:
And it's precisely the eye treatment field that is bringing a complete change to this company's income structure. In late 2011 EYLEA (aflibercept), which is an injection indicated for the treatment of patients with neovascular (wet) age-related macular degeneration (AMD), was launched in the market, and so far, it's being a complete success. Sales numbers are clearly surpassing expectations; in the last quarter results presentation, the company revised its full year sales projection from $500-$550 million to $700-$750 million.
Later this week, on September 23, Regeneron expects an additional indication for Eylea to be approved, in this case for retinal vein occlusion (RVO). The latest expectations from RBC Capital are that this new indication will be approved by the FDA.
Regeneron owns 100% of Eylea's profits in the U.S., sharing with Bayer (BAYZF.PK) 50% of that for non-U.S. sales. By the latest data available, Eylea is gaining traction in the market, specially to its most direct competitors, which are Roche (RHHBY.OB) and Novartis (NVS). Regeneron as opted to choose quite an intelligent strategy, by pricing Eylea in the mid range between the more expensive Lucentis, from Novartis, and the much cheaper Avastin, from Roche.
To improve an already interesting picture, it is expected that Eylea will get commercial approval in Europe and Japan in the next few months. The non-U.S. anti-VEGF eye market is predicted to be of nearly $2 billion, and with Eylea's rate of success, one can expect quite a spectacular revenue stream in the near future.
Regeneron is still an unprofitable company, however not for long. In fact, the last two quarters started to show the impact of Eylea on Regeneron's balance sheet. And what an impact it has been! In the second quarter the company reported a net income of $102 million or $0.90 per diluted share, and it's expected to report full year profits at the end of 2012. This is a major turnover for Regeneron and something that every investor searches for ... a company on the verge of a profitability inflection point.
With no full year results still available, and no previous year's comparison point, it's always difficult to achieve a proper valuation for this kind of company. Even when we try to compare it with its peers that have been profitable for a long time, the most common measure would be checking its comparable P/S (price to sales) ratio, which is currently far higher than the one of Roche, Novartis and even Amgen (AMGN). However, there is another metric that can bring a light to the reason why Regeneron is trading at such a high sales multiple, which is growth expectation. In fact, the current PEG ratio (1.66) is among the lowest in the industry (at least within this market capitalization). The company sees its revenue growth to be above 30% in the next year and, adding that to a very complete and well grounded pipeline, it's one of the main reasons that validate the current stock price.
It also should be mentioned that Regeneron has a very healthy cash position, around $570 million in the last quarter and a manageable debt.
From a technical standpoint the first thing to be noticed is that the price has recently achieved all time highs. When such case happens, it necessarily makes the forthcoming analysis trickier, due to the obvious lack of previous comparable perspective.
What I usually do when this happens is try to merge some technical indicators with the general momentum that the company is living. In the graph it's quite noticeable an existing trading range that's been in march since the beginning of the year, with lows circling the $100-$110 mark and highs around $145-$150. This represents a range percentage of roughly 35%. In the last month the price has been testing the upper part of this range, not being able (yet) to clearly surpass it.
In my opinion, and in light of the above mentioned facts and expectations, I believe that this range will be soon broken on the upper side, opening room to an expansion of at least the same percentage. Therefore, it's my expectation that the stock will quote near or even above the $200 level until the end of this year.
2012 is the most important year in Regeneron's recent history. On the verge of becoming profitable for the first time, this company has made some carefully planned achievements and it's on the pathway of being one of the most interesting biotech plays.
A very experienced management team, where a former Merck (MRK) CEO is included, has managed to avoid some of the most common biotech industry pitfalls. In a time where companies are cutting more and more on R&D expenses, Regeneron reached an agreement with Sanofi (SNY) where these costs are shared. In fact, Sanofi has agreed to fund antibody discovery (until 2017) by $160 million every year. Just very recently, a study showed that biotech companies are closing the spending tap to drug candidates that show limited promise, especially before they reach the much costlier Phase III trials. Just this shows how adequate such an agreement can be.
At the end, when a company reaches such an important inflection point, one can expect great things from its future and that's exactly where Regeneron is at this stage.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.