Headwinds For Regeneron's Dupixent Will Dissipate

Summary

• Dupixent and Eylea are critical to Regeneron's revenue growth but the former has plenty of catalysts ahead.
• Upcoming approvals.
• Regeneron's stock is undervalued by at least 10 percent and has up to 30 percent upside.

In the month following Regeneron’s (NASDAQ:REGN) fourth quarter results, the stock is mostly lower despite the company beating consensus estimates. The company earned $5.23 a share as revenue grew 28.5% year-over-year to $1.58 billion. At a forward P/E of around 16 times, why is Regeneron near a yearly low as analysts add to the bearishness by downgrading the stock?

2017 a Banner Year for Regeneron

Regeneron received regulatory approval for Dupixent, which treats atopic dermatitis (“AD”), and Keyzara, a drug that treats Rheumatoid Arthritis. The treatment market size for AD was $4.04 billion in 2016 and is expected to reach $7.66 billion by 2025, or a CAGR of 7.4 percent. Rheumatoid Arthritis has an addressable market of $30.4 billion by 2025 with a CAGR of 4.6 percent. Let’s focus on AD’s market potential. If Dupixent has a high success rate and faces no competition, why is the market not forecasting up to $7.66 billion in revenue for Regeneron for this product alone?

The current, traditional treatment for patients suffering AD is corticosteroids. This is administered as an ointment, so it is easy for patients to apply. The treatment also is cheaper than Dupixent. Patients administer Dupixent by injection. As a new product on the market, the drug is comparably more expensive than current topical therapies. Regeneron needs insurance companies to cover plan holders to realize the expected revenue growth. This takes time, so until coverage from most insurance companies is assured, REGN stock will not price in Dupixent’s success on the market.

Regeneron’s core drug product since 2011, Eylea, will face competition in late 2019. Eylea sales grew 11 percent Y/Y in the U.S. and 19% outside this market. Overall sales rose to $975 million in the quarter and $3.7 billion in 2017, compared to $858 million in Q4/2016 and $3.32 billion in the full year of 2016. The CEO did not sound worried about Novartis (NVS) and Roche Holding AG (OTCQX:RHHBY) putting pressure on sales since neither company had a formulation that was better. Even if they received approval, their generic version would be limited initially to wet AMD indication. Regeneron also is exploring the prospects of Eylea in a Phase 3 study for treating diabetic retinopathy without diabetic macular edema.

Below: Drug stocks are still on a downtrend, though Novartis bucked the bearishness by going up 9.39% in the last year. The stock spiked higher when Reuters reported on Feb. 16 that it would sell its U.S. Generics unit.

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Worldwide Dupixent Sales in 2018

Regeneron sold $139 million worth of Dupixent in the U.S. It received approval for the drug for Japan in January and in Canada after that. Though they are smaller markets, Dupixent’s combination of sales growth in the U.S. and starting sales in new markets will drive sales higher this year.

Dupixent’s Competition

Pfizer’s (PFE) EUCRISA, approved on Dec. 14, 2016, is a competitor to Dupixent. The ointment is unique to treating AD because it is a non-steroid. Officially, Pfizer reported a 61.5% success rate in trial results. But if you run a Google search for EUCRISA’s effectiveness, patients report that the product does not work. The average rating is 7.0 out of 10 on drugs.com based on 61 reviews.

AbbVie (ABBV) won the breakthrough therapy designation from the FDA on Jan. 8 for Upadacitinib, an oral drug for treating atopic dermatitis. The company reported positive Phase 2b results in September 2017. As shown below, ABBV stock is close to yearly highs, not only for its strong quarterly results but also its higher forecast for 2018. The company is also buying back $10 billion worth of shares and raising its dividend to $0.96 a share, up from $0.71.

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Upcoming approvals

It has 15 more products in clinical development and expects to advance four to six of them as new product candidates in 2018. On March 2, the FDA accepted Regeneron’s marketing application Dupixent for asthma. The same drug also is under a Phase 3 study for treating children between the ages of 6 months and 17 years. The company expects a decision on its supplemental BLA for Dupilumab in treating uncontrolled asthma by the second half of this year. Cemiplimab, which treats squamous cell carcinoma, may receive regulatory approval this year. Regeneron will file the BLA submission the current quarter.

Valuation

Assume Regeneron’s capital expenditure is $500 million, at the top end of its forecast. Using the 5Y DCF Revenue Exit model, if revenue growth slows to 10.7 percent this year, REGN stock still has 20 percent upside:

Source: finbox.io (click the link to change revenue assumptions).

The stock’s upside is in the range of positive 11 percent and 30 percent:

Source: finbox.io (click the link to change discount rate).

Takeaway

Regeneron is launching a new class of drugs that will shake up the traditional reliance on steroid-based therapy. If payers more willingly give coverage to those seeking coverage, Regeneron’s revenue will grow at a faster pace, justifying a higher share price.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in REGN over the next 72 hours. 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.