- REGN saw strong sales in Q1, driven by Dupixent and Eylea.
- Hopes that it can help solve the COVID crisis were just one of the reasons the stock has doubled in recent months.
- Some of the potential future growth drivers are discussed.
- REGN may be ahead of itself both technically and on valuation, but it also may have its mojo back on an intermediate and long-term basis.
Regeneron (NASDAQ:REGN) more than doubled from its depressed $272 early-October lows, initially because of risk-on sentiment returning to the market (SPY). The surge above $400 - which was my rough estimate of fair value as of Q4 last year - in Q1 was likely almost all due to its participation in the rush to deal with the COVID-19 pandemic.
As I will show next, REGN is suddenly trading as a glamour stock, not the value stock it has frequently been the prior few years.
If the only catalyst were the COVID story, then I would not be writing about REGN now, but there's more.
The main investment question I see, with REGN pushing toward a $70 B fully diluted market cap, is whether it can rapidly segue from being a value stock that got over-hyped to being viewed again as a growth vehicle that deserves a reasonable price:earnings:growth ("PEG") ratio.
I will discuss valuation in more detail later. For now, I'll just focus on Q1 revenue annualizing at $7.3 B. This metric puts REGN near a 10X price:revenue ratio, which is at the upper end of its multi-year trading range.
The next sections address REGN in several aspects, beginning with its hopes to contribute to the COVID crisis.
REGN: from Ebola to COVID? How pandemics play to its strength
REGN has devoted the past 20 years to building a better set of antibody development and manufacturing mousetraps. This allows it to respond ultra-fast to a new threat such as the novel coronavirus (n-COV).
While not a rush, REGN developed a successful treatment for Ebola, a technique it is replicating now for the n-COV. As Dr. Yancopoulos said in the Q1 conference call, it makes a group of antibodies (which it calls a cocktail):
... we have utilized our VelociSuite technologies to rapidly generate and select thousands of potent antiviral fully human antibodies from both our genetically humanized Velocimmune mice as well as from convalescing human volunteers, creating what we believe is the largest and deepest collection of potent antiviral antibodies to choose from.
We have selected two distinct antibody cocktails from this collection, our initial cocktail as well as the backup. And we have already begun large-scale manufacturing and anticipate initiating clinical trials with elite cocktail in June.
REGN's ambitions here are extensive:
... we hope that this specifically designed antiviral approach has a significant chance for success in providing both a prophylactic treatment to prevent infection in those at risk as well as for treating those already infected and symptomatic.
In other words, perhaps healthcare workers and family members of someone newly diagnosed with COVID could be dosed with REGN's "cocktail" and in effect be vaccinated for the (perhaps) month or two that the antibodies last in the body.
This was discussed in more detail in the Q&A. In response to a question from Cory Kasimov, Dr. Yancopoulos delineated three groups that could benefit from REGN's antibodies:
- high-risk, uninfected people
- early treatment (out-patients)
- hospitalized patients.
Dr. Yancopoulos also mentioned that if Gilead's (GILD) remdesivir were a standard of care in some or all hospitalized patients, then the REGN treatment would be given along with remdesivir.
This is an ambitious program. Providing passive immunity to at-risk people could be a large business opportunity. Treating outpatients who have received a COVID diagnosis could also be a meaningful opportunity, either because the patients are moderate-to-high risk of developing pneumonia or if treatment were shown to reduce their infectiousness. And of course, successfully treating inpatients along with standard of care would provide a very valuable service.
So, at least while the pandemic rages, this initiative by REGN could be highly profitable and could begin helping in the COVID fight before year-end.
Congratulations are in order both for having developed the VelociSuite platform and for moving so quickly in response to the COVID crisis.
In addition to the above, Kevzara is being studied at high dose to see if it will benefit seriously/critically ill COVID patients. Because this drug is more under the control of partner Sanofi (SNY), and because a similar drug from Roche (OTCQX:RHHBY) called Actemra is also being studied for similar use, I do not give this effort much dollars and cents value to REGN (of course, I'm rooting for it to succeed).
What is this effort worth beyond goodwill toward the company?
It's too soon to say. There are no clinical data yet, and the extent of competition from competing antibodies as well as other treatments has not been delineated. I believe that, given REGN's much smaller sales base relative to GILD, its antibody initiative has a nicely positive present value and justifies a portion of the stock's run-up.
Moving on, before getting to cancer, another positive has occurred regarding Eylea.
Beovu has an obstacle
One of the several depressants to REGN's stock has been competition from Beovu, developed and marketed by Novartis (NVS). This drug was approved by the FDA last October for wet AMD, with more indications expected. Its main advantage was the ability, per label, to enable dosing every 12 weeks following monthly loading doses, versus every 8 weeks for Eylea and typically monthly for Lucentis.
Here is the good news for REGN, per prepared remarks made on the NVS Q1 conference call (emphasis added):
Beovu was off to a very strong start, possibly one of our best launches ever. And now we've been impacted by the safety signal. It's confirmed and rare... The labels are being updated, and we are now working with retina experts to find out how to best understand and mitigate the safety concerns.
These safety concerns were summarized by NVS in its Q1 press release; with Q1 sales in USD (p. 4/9):
Beovu (USD 68 million) was launched in the US in October 2019. Post marketing cases reported as severe vision loss, retinal artery occlusion and/or vasculitis had an unfavorable impact on US sales.
More detail was provided on p. 5/9:
... Novartis concluded that there is a confirmed safety signal of rare adverse events of "retinal vasculitis and/or retinal vascular occlusion that may result in severe vision loss. Typically these events occur in the presence of intraocular inflammation." Novartis has been in dialogue with regulatory authorities and based on this review, Novartis has initiated a safety information update to Beovu prescribing information worldwide. Novartis sponsored studies will be amended so that protocols, informed consent forms, and investigator brochures contain the new safety information and patients re-consented.
This is big news; a drug to prevent vision loss may cause it.
Beovu was important enough to analysts that the first questioner in the Q&A asked about it. Based on the following response from NVS, REGN may be dodging a big bullet here:
... we still believe that this product will be a blockbuster... we will play the long game on this one.
NVS saying it's now playing "the long game" with Beovu had to have been sweet music to REGN's ears.
REGN spent time in its prepared remarks reviewing Eylea's strong safety record.
In summary, one of the threats to REGN's major profit driver has receded, which has increased the stock's fair value.
On to oncology.
Libtayo gains momentum
This anti-PD-1 antibody is part of the I-O partnership between REGN and SNY; thus, its direct commercial importance to REGN is going to be relatively modest. So, the earlier strong data in squamous cell carcinoma, and positive data in basal cell carcinoma, released concomitant with Q1 earnings, are not game-changers for REGN's stock. What looks to help more is the very strong data in a subset of lung cancer, reported pre-market on April 27 (emphasis added):
Phase 3 trial of Libtayo® (cemiplimab) as monotherapy for first-line advanced non-small cell lung cancer stopped early due to highly significant improvement in overall survival
- Libtayo decreased the risk of death by 32.4% compared to chemotherapy.
To emphasize the importance of this result, in his prepared remarks, Dr. Yancopoulos put matters in context, saying of Merck's (MRK) Keytruda:
It is remarkable that in the decade since the first approval of an immuno-oncology agent, only one PD-1 antibody has been approved as monotherapy in first line non-small cell lung cancer.
Libtayo can now be the second such drug (in high expressers of PD-L1); I am targeting Q2 2021 for FDA approval of this indication.
Re survival advantage over chemo, this is how MRK describes Keytruda's results on its web site: 71% survival versus 58% with chemo. Note, these studies and endpoints are not identical to those in the Libtayo study.
The SNY/REGN study was not a head-to-head against Keytruda, and the study was of just one indication of many within lung cancer, but at first glance, it's impressive. This outcome supports REGN's longstanding contention that Libtayo is an especially good anti-PD-1 antibody, thus further giving credibility to its stance that its bispecific oncology program can be best-in-class.
Further note, Libtayo is late to the "PD" game and is not being developed for a broad range of indications by SNY/REGN.
This program is where REGN has a chance to demonstrate that it will be a secular growth company, aided by Eylea and its share of Dupixent profits as the Big 3 drivers of EPS through the 2020s. Most of REGN's bispecifics are controlled by it and are not part of the latest version of the I-O deal with SNY.
Having what now may become widely appreciated in the oncology community as a top-tier "PD" drug in combination with what REGN hopes may also be recognized as best-in-class bispecifics for many different cancers could be a game-changer for REGN.
More clinical data on REGN's various oncology initiatives will appear in the months and next couple of years.
REGN's diluted share count has been in the 115 MM range because many shares that were part of stock-based compensation were excluded from calculation due to the drop in the trading price of REGN. With the stock near its 2015 highs, the latest calculation per REGN's comments on the conference call would put diluted share count around 121 MM. I go all the way to including all potential shares and assume the 125 MM number that assumes a record share price with all option shares in the money.
Based on that and Wednesday's closing price of $553.50, REGN has a $69.2 B market cap. Because it continues to spend a very high percentage of revenues on R&D, earnings are depressed, so I use price:sales as a better valuation metric.
Consensus revenues for 2020 are $7.7 B, giving a forward P:S ratio of 9.0. This is at the high end of REGN's range. If Eylea in fact falls to biosimilars in the US at the end of 2023 - which I think could be held off due to REGN's USPTO #9,254,338 covering Eylea's dosing schedule - then no matter how fast the rest of REGN's products grow, a large hole in its P&L will appear just 4 years from now.
Thus, my opinion is that REGN is extended both technically and in terms of valuation... but with important positives now apparent.
REGN has numerous risks beyond the ones mentioned above. There are general market risks, given how strongly the stock has performed the past several months and given the depressed macroeconomic environment. Many risks other than competition from Beovu may challenge Eylea, and competition in oncology is highly intense. In addition, governments are running huge deficits right now, and reimbursements for biotech products may therefore become more constrained.
Please see REGN's list of risk factors in its regulatory filings before investing in the stock.
Conclusions - the 2020s may see another strong run from REGN, but risks are significant
As a smaller company than GILD and with a strategy to attack COVID both preventatively and as a treatment for different severities of the disease, it is possible that REGN could develop a material profit stream from its antibody "cocktail" approach to this disease. The setback Beovu has had is another unplanned positive. Most important to me is the growing success of Libtayo. I am optimistic that REGN can become a major player in oncology, driven primarily by its bispecific antibody program in conjunction with Libtayo. No guarantees exist on any of these, and I always remember that Eylea has competitive, reimbursement and loss of exclusivity issues.
In any case, I was impressed enough by the Libtayo data in lung cancer that I bought the subsequent dip in REGN. I do think that both technically and based on valuation, the stock could use a risk. But, thinking longer term, REGN may be able to move on past some of the bumpiness it has experienced the past few years and embark on a more diverse business path that would merit a higher relative P/E.
That is the major top-down question to me: will REGN begin to trade on a PEG basis as opposed to reverting to a value stock? Only time will tell. I'm hopeful that matters can break its way and that the stock can come back into the Street's favor as it did from 2011-15. World-class science may just win out here.
Thanks for reading and sharing any comments you wish to contribute.
Submitted Thursday pre-market.
This article was written by
Analyst’s Disclosure: I am/we are long REGN, RHHBY, MRK, GILD. 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.
Not investment advice. I am not an investment adviser.
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