Seeking Alpha
Long/short equity, growth, momentum, event-driven
Profile| Send Message| ()  

In a world bereft of big-cap technology leadership and with a dwindling array of growth stories to re-allocate into, where will the money exiting big-cap tech go? As the market continues to grapple with one of the worst earnings period for tech in quite some time, we feel that institutional money will have no choice but to turn to a few big-cap biotech names.

While we think the market correction is not over for the NASDAQ in the very near-term, we expect strength in such areas as housing and the regional banks to continue into year-end. In addition to these areas we consider the biotech sector best positioned for money being re-allocated out of such big-cap tech names as Checkpoint Software (CHKP), Fortinet (FTNT), Google (GOOG), and Intel (INTC), all of whom disappointed in one shape or form with their earnings last week.

While the group has already had a massive move, a handful of biotech companies have begun to scale their revenues and earnings in ways that technology companies can only dream of right now. Surging fundamentals in a select few will not go unnoticed in the back half of this earnings season. We therefore think there is one final move up for the best of breed within biotech.

This brings us to Regeneron Pharmaceuticals (REGN), our favorite big-cap biotech name which we feel is poised for one final up-leg, along with a possible move to $200 by year-end. With its wet-eye drug, EYLEA, seizing market share and continuing to see impressive momentum heading into year-end, we think analysts have under-estimated the eventual market share gains that EYLEA will garner. Channel checks continue to show gathering strength, positioning REGN to beat current revenue and earnings estimates and raise forward guidance for the third straight quarter in a row.

REGN Price Targets Increased By 4 Analysts Over The Past Month

Over the past month, four different analysts have raised their price targets on the company:

  1. Goldman Sachs increased their price target to $170 on September 24th after the company received approval for a new indication for Eylea.
  2. On October 4th, Baird increased their price target to $175 after their channel checks showed continued momentum for EYLEA.
  3. BMO raised their price target to $192 on Monday morning, October 22nd. They feel that EYLEA can gain additional market share over the next 6-10 quarters.
  4. Leerink & Swan joined the upgrade party on Monday afternoon, increasing their price target to $182 after channel checks implied that EYLEA could continue to beat revenue estimates for this year and for 2013.

We Expect 2013 Estimates To Rise by 40-50%

Because EYLEA's gross margins are 90%, an additional $200 million of EYLEA revenues in 2013 will immediately result in a big lift upward for forward earnings estimates.

We feel that earnings estimates for 2013 will trend up to $6 a share if another beat and raise materializes with tomorrow's earnings report. This type of forward bump up in estimates does not exist elsewhere this earnings season.

Not so for REGN. With expected earnings growth of 100% from 2012 into 2013 and with earnings most likely up another 50% in 2014, REGN's shares should immediately appeal to new institutional investors recently burned in tech.

Less Than 600 Funds Own Regeneron

There is ample room for additional institutional investors to gravitate into Regeneron this quarter. While Alexion (ALXN) seems to take the crown for best biotech over the past decade, it has already seen a surge in funds holding a stake in its shares. While ALXN's institutional fund base stood at 1,243 funds as of September 30th, at the close of Q3 there were only 584 funds already invested in Regeneron. How many funds are going to flee from names like Intel and Google after their disappointments this past week? While not all will be able to switch into REGN, there will be many funds looking to put money to work into something with stellar fundamentals into year-end. REGN foots that bill.

EYLEA's Momentum Continues to Accelerate

EYLEA is showing strength in a myriad of ways. These include:

· Dose frequency by patients has been higher than expected.

· Patients are switching from Avastin in increasing numbers.

· Patients are on pace to take EYLEA 50% more frequently than previously modeled. This equates to 6X a year, as opposed to 4X a year.

In addition to the current momentum which will carry into year-end, institutional investors will have additional catalysts to look forward to next year. After just receiving approval in Japan, Regeneron will also benefit from an expected European approval in 2013. Also, a permanent J code will only act as another future catalyst to increase EYLEA's market penetration.

Taken together, one final up-leg in Regeneron's shares seems to be in the cards. While certainly pricey with its $15 billion market-cap, what is to preclude the shares from garnering a $20 billion market cap over the next 12 months with expected momentum very strong for another 4-6 quarters?

One final thought. Because this catalytic trade is essentially an earnings trade, only those investors with a tolerance for risk should consider it. Our assumptions could be wrong and the positive momentum in the company's fundamentals may already be priced into the stock. Therefore, REGN's shares are only appropriate for those investors with a tolerance for risk and a tolerance for any movement downward should Wednesday's earnings and guidance not live up to already high expectations for the company.

Source: Why Regeneron Should Benefit From Money Flows Exiting Big-Cap Tech

Additional disclosure: Also, long REGN November 170 calls.