Regeneron Reports Q3: Updating Its Growth Prospects

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About: Regeneron Pharmaceuticals, Inc. (REGN), Includes: BLUE
by: DoctoRx

Summary

REGN has been providing a lot of news on important products lately.

It announced earnings Tuesday, which were solid, but Eylea growth has slowed.

In this update on REGN, I'm focusing on tying the existing products and some of its potential long-term growth drivers into one picture of the company.

REGN may not have visibility for alpha for the year ahead, but the reasons why I have a certain allocation to it with a very long-term time frame may interest some readers.

It's a Buffett-type approach for a very non-Buffett-style stock, and risks are significant.

Introduction

Regeneron's (REGN) Q3 earnings report and conference call join with some recent news to make this an update of why I continue to hold this as one of a tiny number of non-dividend paying stocks in this retiree's portfolio. Based on many promising marketed and pipeline opportunities, I am looking at REGN as a true multi-year investment, Warren Buffett-style. In that sort of time frame, basically with a 5-10-year perspective, current Fed policy and the latest economic (or election) news drop out. What I see is that REGN is the only mid-sized US biotech that has numerous attributes which are in the good or great range (all subjectively judged by yours truly, not scientific in any way), including:

  • multiple major growing products
  • strong free cash flow
  • Big Pharma-like flexibility on expenditures
  • strong marketing team
  • among the very best balance sheets anywhere in the industry
  • experienced, stable, cohesive senior management.
  • gigantic pipeline
  • alliances with Big Pharma
  • strategic alliances with junior biotech.

The only mistake I have seen REGN make that I cannot mostly blame senior partner Sanofi (SNY) for is the recent Complete Response Letter for a single dose version of Eylea, which the company hopes does not delay a 2019 intro of that version to compete with that innovation rolled out by competitor Roche (OTCQX:RHHBY).

Otherwise, many possibilities exist to let this stock provide well above average economic returns over time, not especially dependent on the mood of the mythical Mr. Market given an adequate time frame. Again, this is applying the Buffett buy-and-add philosophy to a non-Buffett-type stock.

Here's a rundown of what I'm focusing on with REGN, a sort of summary of my recent articles that are now behind a PRO firewall along with updated numbers. Note, the sales and EPS numbers are in the press release and 10-Q, so I will refer to them only in passing in the interests of keeping this article at a certain length but not too long.

First up, the major asset:

A panoramic view of Eylea's risks and potential rewards

First, note that there are risks here. For example, check out pp.18-19 of the 2017 10-K. Is that enough potential competition to scare you? If so, you may not be right for single stock biotech investing - but you still may enjoy keeping up with the medical progress that is occurring. Another risk that may be keeping a tight lid on REGN is that the Federal government may sharply lower reimbursement levels for Eylea that is administered as part of the Medicare program.

Re Eylea, I have been asserting for a while that it's not easy to kill the king of retinal disease treatments. A further reason came from the PANORAMA study of Eylea in DR, or diabetic retinopathy. The data looks quite strong to me based on the 12-month data. REGN released interim data in March, and analysts were mostly unimpressed. Lucentis, the major branded competitor to Eylea, obtained approval 1 1/2 years ago for DR. The Eylea data appears to me to surpass Lucentis in efficacy, though I will wait for the FDA and academic experts to opine on patient populations and other matters before going 100% on that point. However, the dosing frequency for Lucentis is monthly, but for Eylea is either every 8 weeks or every 16 weeks.

I believe that Eylea's DR opportunity can provide substantial commercial upside. I also believe that if the retinal community believes that Eylea is superior to Lucentis for DR, that will also mean that it is superior to Avastin (used off-label in place of Lucentis to save money). Given the serious nature of DR, with a high rate of life-threatening vision complications in only 12 months of PANORAMA, I'm hopeful that Eylea can thoroughly dominate this market. No guarantees of course, but the upside potential - just potential at this point - strikes me as large and well-defined.

When will Eylea get hit with biosimilar competition?

An analogy and possibility: For a long time, AbbVie (ABBV) was pinned in the $60 range because of worries that its major product, Humira, might fall to biosim competition around 2019 in the US, in addition to what has just been happening in the EU, a 2018 launch of the biosims. One of the reasons ABBV soared to new highs last year was its deal with Amgen (AMGN) in which AMGN acknowledged the validity of ABBV's Humira patents and agreed to both pay an undisclosed royalty to ABBV to license them and to delay entry of its generic in the US until January 2023. This more than anything sent ABBV's stock to new highs last year. This time frame made ABBV's assertions that it would have US patent protection until at least 2022 just right.

REGN may have a somewhat similar situation, though at this point, I have not seen REGN specifically defend the two relevant US patents it mentions in its 10-K (p. 25). These are #8,092,803 and #9,254,338. The '803 patent is a formulation patent that runs until 2027 and the '338 patent is a method of treatment patent that runs until 2032. There may be other patents that exist, or that are being applied for; REGN states that the ones it lists are of greatest importance in its opinion. Eylea was approved by the FDA in November 2011, which by statute gives it 12 years of protection from biosims; that date is later than its composition of matter patent expiration. Thus Eylea has no comp of matter protection that matters in the US. In much of the EU, however, Eylea does have comp of matter protection until May 2025, and a formulation patent that expires in 2027.

I hope that information is of some help to people who want to do research on REGN and Eylea. Because of the several material uncertainties, personally I try to think of a weighted average of possibilities. Because these possibilities can be stochastic, it is possible to be wrong but for all the right reasons, just betting on a 60% outcome is wrong 40% of the time. (Humility requires saying that I can be and have been wrong on things for all the wrong reasons.)

In any case, Eylea represents a major success for REGN. In Q3, its global sales annualized near $7 B, and product revenues and royalties on profits from ex-US marketing partner Bayer (OTCPK:BAYRY) annualized around $5 B. Of that number, about 20% or $1 B is pure pre-tax profit to REGN; the other about $4 B is very high-margined.

With REGN insisting that the touted competition from Novartis (NVS) and RHHBY does not appear to improve upon Eylea, I like the Eylea set-up and am guessing that the Street is rerunning the ABBV-Humira playbook and taking too glum a view of Eylea. Just a guess.

Moving on...

Dupixent could be a mega blockbuster

Dupixent has already annualized above $1 B in Q3. That's with limited exposure ex-US. REGN reports extraordinary numbers for refills of first prescriptions and for how many people stay on therapy for a full year. That said, the company believes it has a lot of potential to add new patients in the US among the current approved age range, adults. Early next year, adolescents should be eligible per label for treatment, another large patient population. Younger children are likely in my opinion to also receive approval to receive Dupixent in the not-distant future. There will be competition (see p. 20 of the 10-K), but I remain steadfast in thinking that Dupixent for atopic dermatitis, its first indication, is going to be a major commercial and therapeutic success.

As mentioned above, I covered Dupixent for asthma two weeks ago. Briefly, the label was as good as or better than I expected. I remain bullish on this drug in that indication, later on for the expected nasal polyps/sinusitis indication, and for patients with more than one of all the above three conditions.

REGN responded to a conference call question by clarifying that its plan for Dupixent in food allergies is for it to be used during desensitization therapy. Whether this would extend to every desensitizition therapy is not clear to me, but if it gains general use, I think that offers up a very nice and unique market opportunity.

Remember that Dupixent is slightly more an SNY product than a REGN product; REGN will receive less than half the drug's profits. Nonetheless, I am comfortable now assigning a very significant present value to this drug. How significant? More time is needed, as the asthma launch is just getting going.

REGN is optimistic about REGN3500, a different allergy treatment that is being studied both alone and, with Dupixent for asthma, and later possibly for other diseases. See pipeline and Clinicaltrials.gov for a little more on that antibody.

Thus, REGN may be developing an allergy franchise that it can leverage down the road to bring in drugs invented elsewhere and either develop them to FDA approval and then market them, or more simply just market them using what should be a strong knowledge of best marketing practices in all the diseases and conditions described above and related ones.

Moving on...

Kevzara and Praluent pick up the pace

First, Praluent.

Reluctantly, SNY/REGN did what they should have done initially, that is price Praluent to value (at least for some insurers) rather than on an unimaginative Big Pharma cost plus basis (Amgen did the same with its competitor, Repatha). So now we see Praluent annualizing at $320 MM in Q3, up yoy from about $200 MM. There's a 'but:' net pricing is going to be too low for margins to be at all attractive. The best I can say about Praluent is to guess that it no longer is a cost center for REGN, and could grow to be a modest profit driver. The lawsuit from AMGN remains in the court system.

Kevzara has more profit likelihood as I see it right now.

This is a second-in-class drug for rheumatoid arthritis; Actemra from RHHBY was first and is a major product with mega blockbuster status possible. Kevzara was launched in the US in Q2 2017 and has had slow sales, but did achieve $25 MM in sales on a global basis in Q3. More hopeful was this information from the Head of Commercial at REGN, Marion McCourt:

Within the IL-6 subcutaneous class, Kevzara now has 42% of dispensed NBRx [new to brand prescriptions] share and 20% share of TRx [total Rx'es].

Note, Actemra is also given IV, so Kevzara's market share within its IL-6 blocking class is less than stated. But the market is moving to IV. Kevzara is not highly differentiated from Actemra, but there are one or two points the drug reps can make; and there is always the ability of the second-in-class to gain share by discounting. With other indications for Kevzara probably coming in the next few years, I expect it to be a modest source of value for REGN.

Interim summary

There are too many variables to show the work, but I would say that between the Big Two of Eylea and Dupixent (plus the pipeline antibody REGN3500) and the three other more major marketed drugs of Praluent, Kevzara and Libtayo, their present value roughly equals REGN's diluted market cap of $41 B. That's calculated using 115 MM shares and a stock price of $357.

That's unusual for a growth company, and perhaps the Street:

  • disagrees strongly with my thinking
  • wants to be cautious about Eylea for any or all of the reasons mentioned above
  • is not optimistic about Dupixent
  • does not think much of the pipeline.

Any or all of those are possible. It is the pipeline that keeps me in REGN and that keeps me providing these updates. Another analogy, this to either Apple (AAPL) or Amazon (AMZN). Why are these two names, along with Microsoft (MSFT), the most highly valued companies? I would say it's because time after time, they came out with some new thing that was commercially important, that changed the image and earnings of the company.

That's what Dupixent and perhaps someday Libtayo may do, and in a general way, what the Regeneron Genetics Center might do.

In the final substantive section of the article, I'm going to highlight two opportunities that I like, both early stage, but each potentially able to help take REGN from the era of Eylea (depending on when biosims come in against it) to the late 2020s and into the 2030s.

Note, one often does not know which "shot on goal" will win the game, so if you're interested in REGN's pipeline, please look at all of it.

Two product concepts that should be worth watching

First:

REGN is moving to become a major player in immuno-oncology, with Dr. Yancopoulos first saying this in his prepared remarks:

Turning now to our bispecific antibody platform, the leading program here is our fully owned CD20xCD3 antibody. Next month at the Annual Meeting of the American Society of Hematology or ASH, we will be presenting additional data [on this bispecific] in B-cell malignancies. Our second bispecific antibody to enter the clinic targets MUC16 and CD3 for ovarian cancer. By year-end, we expect our BCMAxCD3 bispecific antibody to enter clinical development for the treatment of multiple myeloma.

So that's three bispecifics which, given the speed with which a promising drug for cancer may reach market, need to be watched closely. AMGN has been touting its bispecific platform, but quietly, perhaps REGN is matching it.

Next, REGN keeps teasing us with something, but we do not know much. I for one will be watching this very closely:

We have also announced that we will be progressing an entirely new class of bispecifics into the clinic starting in the first half of 2019.

REGN has changed the game twice, first with Eylea and then with Dupixent. Could it do it again?

Next, an update regarding the collaboration with bluebird bio (BLUE). In his prepared remarks, Dr. Yancopoulos simply said this:

Continuing on the theme of immuno-oncology, in the third quarter, we entered into a collaboration with bluebird bio to discover, develop, and commercialize new CAR-T and other cell therapies for cancer. This collaboration represents a great example of two companies with synergistic technologies working together to try to make a significant advancement in the field.

That's boilerplate, but we learned more that I liked from the Q&A's final question. Dr. Yancopoulous expounded on the relationship, saying:

In terms of bluebird, I think for us, this is a very exciting collaboration. Clearly, they've demonstrated and they've developed their technologies and abilities to develop these CAR-T therapies. What we bring to the table is we bring new targets and new reagents, whether they be antibodies or T-cell receptor-related reagents that can target new targets that can be put into and made into chimeric antigen receptors by bluebird to be put into their cells and used via their therapeutic approach. So, we're very excited about putting together our ability to bring new targets and new ways to make these chimeric antigen receptors together with their ability to take those forward and deliver them to patients... we're hoping to be able to change the future there.

This is difficult to translate into straightforward language, but REGN is making the case that its immuno-oncology expertise has gotten so advanced, for whatever reasons, that it brings something unique to the table to then essentially hire BLUE to bring the concept to CAR-T reality.

The point of thinking of the great tech giants and their many years of alpha in relation to the bispecific programs plus the CAR-T products is that in pharma and biotech, we get to see the new products years before they generate a dime of revenue. That's very different from AAPL and AMZN. So the question becomes: who do you trust to take what could be important platform technologies and generate sustained high returns on invested capital?

Let's conclude by discussing that point.

Biotech stocks as lottery tickets

As we move up the risk profile from cash and bonds to bond-like stocks such as Con Ed (ED), to deep blue chips and so on, what do we want from growth vehicles? It's always a gamble. To go back to the introduction, it's a company with a history of starting, as REGN did after failing in its nerve regeneration drugs in the '90s, with nothing and making a lot out of it. There are not many companies that have done this, have done so with limited dilution either from stock sales or from loading on debt. In the case of REGN, my reason to want to treat it in a very patient way is that it has been highly creative in a commercially successful way. The mispricing of Praluent, plus being outmaneuvered legally by AMGN, is what it is. My guess is that SNY, as the dominant player in that relationship, bears most of the blame; but AMGN made the same mispricing error. So I can't berate REGN, which was a fairly small company back in 2014-5, when those decisions were made.

Accidentally, because of the timing of news flow, I have ended up writing three REGN pieces in 5 weeks. And while I like its risk-reward with a very long time frame, looking for double-digit annualized returns, I do not mean to give the wrong impression. I am sure the stock is not for everyone. Furthermore, the chart is not in gear, and I am not heavily long this name. Most of my equities these days are blue chips or light blue chips that pay good dividends. Until there is more visibility on Eylea, Dupixent and the potentially lucrative parts of the pipeline, I look at REGN in this period of Fed tightening as my favorite riskier biotech stock for the long run, but I can't say it's my favorite new money buy for the next year.

Regarding EPS, for me it's the least important detail of REGN. The company can manufacture it by cutting capex or R&D, and its relationship with SNY is financially more complex than the real world relationship. The most important thing to remember when looking at the headline number of $5.87 for Q3 is that it is non-GAAP. But GAAP also has issues.

Doing good financial analysis on REGN is especially difficult because of the SNY relationship, with the existing partnerships on Dupixent, Praluent and Kevzara and the immuno-oncology relationship that is much more nascent. I have not had time to think about what I'm going to use for my preferred 2019 (forward) EPS. Therefore, I have focused on products and concepts of REGN as a growth company rather than just a group of individual products the way I do for companies that do not have the powerful innovation engine that REGN has, which great tech companies also tend to have - but many well-known Big Pharma or biotech companies lack.

Overall, though, I remain impressed both by the commercial upside potential of Eylea, Dupixent and the rest of the allergy franchise, and the pipeline. That REGN has accomplished so much while literally starting fresh with nothing around 1999 suggests to me that what we have seen may just be prologue to a future of further therapeutic innovation and financial success.

Thanks for reading and sharing any comments you wish to contribute.

Disclosure: I am/we are long REGN,RHHBY,ABBV,MSFT,AAPL.

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.