Mr. Market Rejects Risky Regeneron: Why Argue?

Summary

REGN offered up a weak sales forecast for its only important revenue driver, Eylea, for this year and reported slowing growth in Q4.

Legal issues that are dogging its Praluent hoped-for blockbuster are not resolved, and even if they are, the product has already been damaged commercially.

The potential blockbuster planned for launch next month, Dupixent, also has at least potential patent infringement issues.

The pipeline is now looking more average, and management and the board's judgment on Praluent and other matters may be questioned.

Thus, I've reluctantly mostly moved on from REGN to other stocks.

Regeneron (NASDAQ:REGN), one of the great stocks of the biotech bull run (NASDAQ:IBB) into its 2015 peak, now lacks any special rationale for new money to come into it I can see. And that means net selling pressure.

A look at its summary financial highlights from its Q4 and full year press release disseminated Thursday shows the deceleration in yoy Q4 sales of its only significant revenue driver, Eylea:

($ in millions, except per share data)

Three Months Ended

December 31,

Year Ended

December 31,

2016

2015*

% Change

2016

2015*

% Change

EYLEA U.S. net product sales

$

858

$

746

15

%

$

3,323

$

2,676

24

%

Total revenues

$

1,227

$

1,098

12

%

$

4,860

$

4,104

18

%

GAAP net income

$

253

$

155

63

%

$

896

$

636

41

%

GAAP net income per share - diluted

$

2.19

$

1.34

63

%

$

7.70

$

5.52

39

%

Non-GAAP net income(2)

$

353

$

258

37

%

$

1,319

$

944

40

%

Non-GAAP net income per share -
diluted(2)

$

3.04

$

2.23

36

%

$

11.32

$

8.12

39

%

I'll keep this brief, as the product details are well known.

Offsetting the promise of the probable new product intro next month, Dupixent, and the international rollout of the RA drug Kevzara, both of which are partnered with and led by Sanofi (NYSE:SNY), are now more negatives than I like.

So since I am effectively almost out of the stock as of the market open Friday, I'm going to accentuate the negatives. As I said more than two years ago:

I have cut back my exposure to all biotech substantially. The field is immensely complicated, burdened by litigation, full of exciting possibilities, and littered with investment minefields.

Unfortunately, REGN is proving to be burdened by litigation and unsuccessful lately; only time can show us how the process(es) play(s) out. The exciting possibilities that investors and traders saw then may not look so exciting anymore.

Having referenced that bullet point from an interview that Seeking Alpha did with me in December 2014, "the year of biotech," and published early in 2015, next I'll comment further on some ways that REGN may be an investment minefield going forward; a stock that's down a lot from its high can drop further.

I don't like the litigation risks in REGN at this point

Its cholesterol drug, Praluent, had always struck me as a swing factor that provided "exciting possibilities" to be another Eylea or even more than that. Now, it faces removal from the US market, with a Court of Appeals victory apparently required to avert that, unless Amgen (NASDAQ:AMGN) settles out of court. It won a victory in court this week, but that could be temporary. AMGN is pursuing patent infringement litigation against Praluent in more than one venue in the EU, as well.

All this is known, though, and the following might be in the stock as well, but in the setting of the courtroom loss to AMGN and the judge disliking REGN's case so much he put a permanent injunction on sale of Praluent, I don't like it.

In the latest 10-K, released yesterday, REGN has provided more detail about risks to Dupixent (p. 38) than it provided in the 2015 10-K (p. 35). It now specifically references Dupixent as potentially infringing an AMGN (!) patent, #8,679,487. This patent, issued in 2014, is titled Anti-interleukin-4 receptor antibodies; the first claim begins:

1. An isolated human antibody that competes with a reference antibody for binding to human IL-4 interleukin-4 (IL-4) receptor...

Does that cover Dupixent, and if so, is the claim valid?

Now that management has staked a lot on disproving that AMGN claims that it admitted it infringed with Praluent, and failed to persuade a jury, is there any reason to trust the company if there is a second such trial with AMGN involving Dupixent?

Who needs these questions with an individual stock?

As of now, there's no disclosure that AMGN has filed suit on this, and REGN's disclosures of actual or pending competition do not disclose AMGN as having an IL-4 blocker or IL-4 receptor blocker under development, but may there be at least headline risk.

Other patent risks to Dupixent are disclosed in that section.

REGN has lost credibility in my eyes given the courtroom loss to AMGN. Better from this standpoint to deal with Celgene (NASDAQ:CELG), where there are not these infringement issues, just the more standard ones of generic wannabes going after its patents.

All businesses have risks, and patent risks in pharma and biotech are prominent. But I'd rather be with a proven winner in that regard.

Relative strength is now a negative

When CELG and all, or almost all, the major biotech stocks had poor charts, trading under the 50 and 200-day exponential moving averages, it was one thing for REGN to be with them. After all, given how many years it had gone nearly vertical, a serious bear market was not the end of the world as it just "corrected" a modest part of the gigantic move. However, we now have CELG with a bullish chart pattern, and AMGN's is almost as strong (though short-term more overbought).

No guarantees on any one indicator, but for what it's worth, the DoctoRx observation is that when a sector booms, then busts, it tends to work its way back; and the odds historically have favored going with the stocks that come back in favor first and/or have fallen the least. That's at least if the fundamentals look sound.

Unfortunately, REGN is a laggard, along with Gilead (NASDAQ:GILD).

There is chart support at $300 going back to H2 2013 into H1 2014.

Fundamentals are deteriorating

At a certain point, a 30 or so year old company becomes an operating company, not just a promising start-up. Last year, REGN earned $7.70 per share, up 63% yoy. If that sort of rapid growth were to continue, then its premium P/E could easily be justified given today's valuations. However, REGN guided for as low as 1% yoy US sales growth for Eylea, by projecting single-digit sales growth. The CEO refused to even guide toward the 5-9% growth range.

Meanwhile, the company has heavy promotional costs for Praluent and the upcoming launches of Dupixent and Kevzara.

Now that least I'm forced to consider possible significant royalty payments eventually being due on Dupixent, adding potentially zero growth in US Eylea sales and the potential removal of Praluent from the US market means that EPS could be down, not up this year.

This "growth" stock might not be so "growthy," after all.

The pipeline is more iffy now

Now that dupilumab is becoming Dupixent, and sarilumab has become Kevzara (approved in Canada and likely in Q2 in the US), the pipeline certainly looks OK for a $40 B or so market cap company, but no longer compelling. That's my view because one of the major pipeline drugs, fasinumab for pain, has recurrent safety issues. Even if it comes to market after an expensive development program, its effectiveness on pain is modest, the price tag will be sky-high, and there are often significant neurologic side effects. So I see no commercial success ahead for this drug and potential product liability. As usual, J&J (NYSE:JNJ) may have shown the way when last year it suddenly ceased its Phase 3 program for a similar drug and returned it to AMGN. When JNJ acts so decisively with such an unusual action, I pay attention.

Beyond this, there's a preventative for RSV (REGN2222) in Phase 3 with Fast Track status at the FDA that may be superior to the standard of care, Synagis, an AstraZeneca (NYSE:AZN) drug. However, AZN has a competitive product moving through the pipeline as well, so while I give some present value to REGN's candidate, that's not great.

The immuno-oncology projects with SNY, and REGN's unpartnered I-O drug(s), will operate in a crowded field. Not only are there no ways to value this R&D project, but now I wonder about patent infringement issues in this crowded field.

Concluding discussion

The biotech sector has come down from 2015 valuation levels. TTM P/Es for AbbVie (NYSE:ABBV), AMGN, Biogen (NASDAQ:BIIB), and GILD are 16.6, 16.3, 15.7, and 7.4. Fast-growing CELG, with nearly guaranteed revenue and operating profit growth this year and next, has guided to GAAP EPS for 2016 that at its current $115 price put it around 19X. REGN is an outlier here.

But it now has no EPS visibility. With Eylea US sales stalling (and ex-US growth slowing), with the unresolved Praluent issue and now potentially Dupixent under a legal cloud, I think that REGN can trade to a lower P/E. Just to be scary, not that this is a prediction, but if EPS come in at $7/share and the stock trades to a P/E of 30X, then it's a $210 stock, not $360. If heavy spending to promote the drug launches and continued losses on Praluent drop EPS to $5, a 20X P/E puts the stock at $100. Whereas, until Dupixent is in the clear from a patent standpoint and Praluent clears its legal and commercial hurdles, it's now hard for me to see a strong and durable outperformance for REGN.

One learns about managements over time. Management, the board and SNY have, in my humble opinion, exercised questionable judgment in how they handled the Praluent matter. I have questions about why REGN spent large amounts of money for a company its size marketing Praluent so aggressively in the face of A) the AMGN lawsuit and B) an overpriced product that insurers were leery of reimbursing. If SNY wanted the product to launch at risk, it was the senior partner and perhaps its decision would have overridden any objection from REGN (not that there is evidence that REGN objected). But REGN did not have to do more than token co-promotion.

Now, not only has it lost a major jury verdict to AMGN and faces removal of a potential blockbuster from the US market, but at least in my eyes, its judgment surrounding patents and its business judgment are in question.

As I've disclosed, after 2015, my stakes in REGN and GILD were with "house money," meaning that even if they had gone to zero, my foray into them was already profitable. But I wanted to be patient. I was thinking of the periodic sell-offs in such stocks as Apple (NASDAQ:AAPL), where so far every time one sold after it entered a bear market, it was a mistake; and I have held AAPL through its last sell-off. But REGN and GILD both have failing charts that are lagging their own peers; each has legal issues; and management's decision-making is in question for each. So while biotech and general pharma businesses have their political and competitive issues, I've reluctantly pulled the plug on owning those two names except for extremely small placeholder positions. Instead, as I've discussed on and off since the post-Brexit sell-off, there's growing evidence of an end to the industrial recession. Meaning, there's no obvious reason for healthcare stocks to outperform. CELG has its own risks, but that's been my favorite biotech since its beat and raise Q3 last October; and now AMGN with its (tentative) victory for Repatha now has a chance to overcome its patent/biosimilar cliff.

Beyond them, there are a number of reasonably valued economically sensitive stocks with strong charts that are still within their trading ranges. So, in a highly valued set of financial assets, there are opportunities still.

Thanks for reading and sharing any comments you may wish to provide.

Disclosure: I am/we are long REGN,AAPL,ABBV,CELG,GILD,AMGN.

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.

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