Regeneron: Growth Plans In Immuno-Oncology (ASCO Update)

Summary

• REGN has gone from doormat to leader in short order.
• There have been multiple drivers of this, one of which is discussed below: immuno-oncology (IO).
• Behind the scenes, REGN has been doing more cutting-edge R&D than it was letting on; commercial potential is significant and could go into the 2040s.
• REGN is no longer cheap, but it may represent good value for the market we are faced with. Risks to buying the stock near $600 are, however, significant.

What bear market?

And just like that, Regeneron's (NASDAQ:REGN) bear market is gone. Years of striking out with a drug the company believed in (Praluent) or hitting a bunt single with another one it overestimated (Kevzara) have been erased with the latest surge in the stock that recently eclipsed the 2015 high before a modest pullback.

Some of the good news was covered in my bullish article of May 7, 2020, Regeneron: Cancer, COVID, And More Could Be Breaking Its Way.

Positive news since then includes:

• removal of the Sanofi (SNY) overhang, with REGN engaging in its first large-scale buyback
• strong results in Part A of a Phase 3 trial of Dupixent in eosinophilic esophagitis
• strong long-term data of Libtayo in a form of skin cancer.

REGN closed May 6 at $553.50. It is now at $597.

The next section reviews my vision for REGN's revival as discussed about a year ago.

REGN begins to follow the script for a winning stock

On May 13, 2019, I wrote How Regeneron Can Take Its Sad Song And Make It (Much) Better. The stock was around $302.

One key point came from the title of a section, namely:

Immuno-oncology: better prospects than the headlines suggest.

I was getting more bullish ahead of the evolving data. So far, that looks like the right call.

Another key point came in the final section, where I led with this:

Perhaps REGN will consider some of the following measures:

1. Announce a large stock buyback...

3. Find a way to show investors how REGN plans to generate much larger profits down the road.

These have now been accomplished.

I summarized my views by saying:

Due to REGN's many strengths, I continue to look toward the 2025 time period with optimism.

All the above hold up well a year later.

Later last year, while remaining bullish overall, I suggested that it would help the stock if management provided its plans for Eylea, in view of its loss of exclusivity in November 2023. This has not been done, but the market is looking past those uncertainties.

I am also, because while right now, REGN is little more than a 1-product-equivalent company (it controls about 80% of Eylea profits and less than half of Dupixent profits), the Street's image of REGN may be changing for the better.

REGN invested heavily to allow it to become a technology leader in oncology

REGN decided 20 years ago to focus not on what had suddenly become hot - sequencing the human genome - but to do something much less glamourous but more rewarding. Its thinking at the time was that the sequencing techniques were too slow to be useful yet for a profit-seeking company. Instead, it has steadily innovated. Much of its focus has been on developing technically superior bispecific antibodies, which are occupying a growing niche in oncology. These build upon its top-tier VelocImmune technologies that have been used to develop Libtayo, Dupixent and its other antibody products.

A natural antibody binds to one antigen. In order to create an antibody that is specific for two antigens, such as one on a T lymphocyte and a different one found on a cancer cell, requires creating a bispecific antibody, which is not found in nature. The goal is to get more T cells (or other cells if desired) in contact with the cancer cell, which when on the march typically have defenses that cloak them from immune surveillance.

Designing and constructing a bispecific is no easy task. The more durable, specific and long-acting it is, the better. Thus, in its ASCO slideshow accompanying the presentation, REGN emphasizes the following about its bispecifics (slide 22):

• Next-generation VelocImmune used to create several distinct classes of BiSpecifics, with varying specificity and affinity
• Regeneron BiSpecific approach is unique:
• No linkers or artificial sequences
• Ease of manufacturing using same process as regular antibodies
• Similar PK [measure of acidity] as regular antibodies.

(For schematics of standard, and bispecific antibody structure over time, you may see this web page.)

A superior platform technology, built on 20 years of improvements, can give REGN a durable competitive advantage when applied to many products.

One example of this advantage could come from a point that REGN made in its ASCO conference call regarding the well-known immuno-oncology ("IO") target GITR. In response to a question from Geoffrey Porges about TIGIT, a target being attacked by Roche (OTCQX:RHHBY), Dr. Yancopoulos minimized Roche's efforts re TIGIT, saying:

...we are excited about our GITR antibody, which in some ways leads to interactions or relationships with the TIGIT space...

Our GITR antibody we believe is very different from any other GITR antiybodies out there. We have shown that ours have the ability to very effectively deplete Tregs, that suppressor cells that are holding back tumor responses, while actually sparing the effector cell that you want to go after the tumors. We're very excited about this... that program... is already in the clinic.

The elided parts of the above quote are worth reading.

Dr. Yancopoulos ascribes REGN's ability to create an extra capability for its drug to its constantly improving VelocImmune technology. REGN's hope will be that the GITR target will finally be a worthwhile one for cancer drug development. But that's off in the future, and REGN has several new approaches to discuss next, beginning

Libtayo and "basic bispecifics"

Libtayo is the third anti-PD-1 antibody on the market.(Other anti-PD-L1 drugs are marketed and are similar.)

Libtayo is jointly owned by REGN and SNY; SNY will gain a slightly greater share of profits the drug generates than REGN. Based on success as a monotherapy for metastatic non-small cell lung cancer ("NSCLC") with high expression of the programmed death, or PD, ligand, I expect this indication to be granted next year. Subsequent study of Libtayo in inoperable, metastatic lung cancer not as monotherapy but with chemo will, I believe, also provide strong data and come to market perhaps in 2023.

Libtayo has generated strong ongoing data for use in its only current indication, squamous cell carcinoma of the skin; strong data in basal cell skin cancer makes me expect approval in this indication as well.

Beyond the above indications, the major use of Libtayo will be in combination with bispecifics and other treatments. The lack of other indications for Libtayo is going to be a negative for sales. For example, I count 25 indications for Keytruda, with more coming.

In the slideshow, please see slides 22-31 for a discussion of what I am calling "basic bispecifics." SNY has opt-in rights on some, but REGN1979 is controlled by REGN and could be a major drug both as monotherapy and as part of combinations (slide 28). Deeper in the pipeline, I think that REGN's bispecifics will all be 100%-controlled by it, but to be sure, I will have to review its SEC filings more carefully than I have done lately.

However advanced as REGN's technology is, bispecifics have been under development within the industry a long time. My take is that in order for REGN shares to generate alpha, it has to bring more cutting-edge products to market than Libtayo or standard bispecifics on known targets.

The good news for me is that REGN is presenting a growth program I view as credible and - this is a judgment call - that has a positive risk-reward program at a 10-12% hurdle rate.

The breakthrough REGN has been talking about the most is discussed next.

Costimulatory bispecifics

In the ASCO presentation, co-founder and lead REGN scientist George Yancopoulos was followed by Israel Lowy. His background is one of the reasons I have begun putting some long-term chips on REGN now. (In the conclusion, I will spend some time providing context for my thoughts on biotech investing in the 2020s, including REGN, Gilead (GILD) and other stocks.)

As Dr. Lowy described it:

I'm Senior Vice President of Translational Sciences and Oncology.

I had the privilege for about a decade before coming here, leading many of the foundational first studies of anti-CTLA-4 and anti-PD-1 at a company called Medarex. And after its acquisition by BMS [in 2009], I came and joined Regeneron to join George and his team to really take combination immunotherapy to the next level.

Unpacking the above: Medarex was the key to the BMS (BMY) "string of pearls" acquisitions that turned BMY from a foundering Old Pharma ship to a biotech powerhouse. The anti-CTLA-4 antibody became Yervoy. The anti-PD-1 antibody became Opdivo, still the world's second-best-selling "PD" drug after Keytruda. The intellectual property associated with Medarex and Opdivo is bringing BMY hefty royalties from other companies, including REGN/SNY for Libtayo.

So, Lowy joined REGN in 2009 or 2010 when he presumably could have worked for a major, safe, established company with lots of equipment, cutting-edge research, and a high salary. Something about what REGN was doing - with Eylea in late-stage development (approved in 2011) and Dupixent and others probably in early-stage development brought him to this company. He certainly did not go to REGN just to develop another version of Opdivo, which means that after 10+ years at REGN, he still has no innovative IO drug on the market. (It is possible that he helped conceptualize and develop Dupixent, which can be considered an immunotherapy). In other words, he came to REGN to develop products to be launched in the 2020s.

I view his arrival and multi-year persistence at REGN as a positive for the stock, one that does not show on the spreadsheets of analysts.

The first of his team's IO breakthroughs to be commercialized (after Libtayo) should be one of the basic bispecifics discussed above (REGN1979). The real, next-level achievement will be the costimulatory bispecifics.

To explain them very briefly, I'll refer to RHHBY's slideshow presentation at ASCO (slide 7). This describes a stylized view of the interaction between different types of cancers and a key type of immune T-lymphocyte. RHHBY describes the landscape as having three paradigms:

• immune inflamed (CD8+ T cells infiltrate the cancer, but not in sufficient numbers to control it)
• immune excluded (those T cells are present but just in the periphery of the tissue)
• immune desert (those T cells are absent).

The more that T cells are excluded from the epicenters of the metastasized cancer, the harder a job IO therapy has. So, safe drugs that add more cancer-killing power to current drugs are needed, which is the point of REGN's costims. It is doing this by findings ways to bring CD28 T-cell receptors into play. These were described in a 2015 review article this way:

Their [T-cell] activation requires... co-stimulation via the CD28 molecule... The control of T-cell responses by CD28 co-stimulation provides a means of preventing unwanted (anti-self) and triggering wanted... immunity.

What REGN is calling costims are bispecific antibodies that bind to the CD28 moiety on the T cell and also to a cancer cell. REGN believes it has solved the problem of triggering unwanted/anti-self actions via its approach. Its lead costim is REGN5678, which binds to prostate cancer cells via PSMA as well as to CD28 on T-cells. REGN5678 is in a Phase 1/2 study in combination with Libtayo (cemiplimab); you can see the trial design at Clinicaltrials.gov.

Why is this approach potentially game-changing for a company of REGN's relatively small size?

Because of how Dr. Lowy answered a question from Yatin Suneja:

So there's no tumor that can't be thought of as a target for both the CD3 and/or a CD28 co-stim.

While there is much more to say about costims, I'll leave Lowy's broad point as a summary, given that this is an aspirational program lacking human data.

I see a bet on REGN as in good measure a bet on the long-term success of its costim program. It could be very big - or a washout. Only time will tell. See slides 32-40, and much of REGN's prepared remarks and Q&A for more on costims.

Moving on to another opportunity I view as exciting...

"Peptide-in-groove" highlights REGN's scientific excellence

This preclinical-stage advance was the highlight of a "one more thing" follow-up set of prepared remarks by Dr. Yancopoulos.

See slide 39 for an introduction before continuing on with my comments.

Basically, as presented - probably oversimplified to some extent, small parts (peptides) of intracellular cancer-specific proteins are found in grooves on a structure on the surface of the cancer cell. These are called PiGs: Peptide-in-Groove. The question is how to turn that target into a druggable one.

Dr. Yancopoulos discussed this in technical terms. I hope this quote makes sense to readers:

Well, heretofore, T-cell receptors [TCRs] had been the only approach to detect and address these sorts of Peptide-in-Groove targets. So we've been able to generate a new class of antibody and the antibody that we can generate in bispecific format that can do sort of exactly what T-cell receptors are designed to do, but now in a highly selective fashion, once again generated from a next generation version of VelocImmune mice. So, antibodies that can be made, much higher affinity and much more specific for these Peptide-in-Groove targets, than you can normally get from the natural TCRs themselves.

He went on to say that not only antibodies such as bispecifics could do the job (emphasis added):

We believe these create a whole new class of reagents that allow us to attack potentially the many tumor specific proteins that are intracellular and otherwise inaccessible to traditional antibody efforts, but will be presented as these peptides and will now be accessible to our PiGs put in various formats.

Later, in response to a question from Mohit Bansal, Yancopoulos provided some color to that line of research, talking about a PiG-related approach:

... incorporated into engineered T-cell approaches with our collaborators such as bluebird bio (BLUE) for example. And that could be within the next one to two years.

So REGN is talking about applying their advances to CAR-T as well as antibodies.

I like REGN innovating in these ways within a single field, rather than being a platform technology (antibody) company targeting diseases all over the map without much of a focus.

Finally, investors can begin to see REGN as a focused growth story with immense potential.

Time to sum up, first by highlighting risks.

REGN as a risk-on play

REGN has moved rapidly from being a value play, where the debate was whether it was a value trap (i.e. dead money or worse) or an undervalued growth story. A clear risk is that Eylea does falter to competition, reimbursement cuts and/or biosimilar competition after 2023 and that REGN's growth in oncology is slow and weak.

Many other risks to a REGN investment exist, ranging from company-specific to general market risks. Please study its disclosures of those risks in its 2019 10-K and the Q1 10-Q before investing in REGN.

Concluding comments

REGN is acting a bit like something out of quantum mechanics. One moment it's a boring company that is making money via an aging drug for retinal diseases, plus a less-than-50% ownership of a one-off drug for allergic diseases - but the overall story has lots of warts.

But suddenly it is a premium-P/E company.

Which is correct? Is the company here, or there? Was it too cheap last year, or is it too expensive now?

How should investors value this volatile stock? Is it headed back to the $300/share muck, or might it pull a Tesla (TSLA) and break out of a multi-year trading range by suddenly doubling again to $1200, taking no prisoners along the way? Etc...

I wish I knew.

My investing posture now is that REGN and the biotech industry are well-positioned for the 2020s, both fundamentally and in their market valuations.

I see the risk-reward for REGN, at 30X TTM GAAP EPS as pretty good when considering that AMD (AMD), a good operator in a commodity price-driven industry with notably short product life cycles, trades at a 130X P/E. Or, one can compare REGN to junior partner Alnylam (ALNY) which trades at an infinite P/E (no GAAP earnings) and at greater than 50X TTM sales per share.

However, I do not know how to put a valuation on REGN. Even Eylea, a known quantity, has uncertainties as to the extent and timing of the entrance of biosimilars as well as whether the once-touted Beovu will ever again be a strong competitor. Only Dupixent has a somewhat predictable value for REGN. The large REGN pipeline, which is IO-centric, also has potentially valuable assets beyond oncology.

Several years ago, I suggested that biotech's (IBB) immense alpha-generation from 2010-15 "required" a multi-year cooling off period, but just as happened to tech after its massive alpha-generation in 1995-2000, the enthusiasts would be proven correct and the future would be bright for the sector. The ongoing investment in biotech since the sector peaked in 2015 is reminiscent of the ongoing, large investment in tech 15+years ago despite the Tech Wreck of 2000-3. Thus, I see the analogy working and view REGN as part of biotech's upcoming resurgence this decade and in the 2030s.

Consistent with the above view of the sector and the science-driven focus on IO breakthroughs, I plan to hold REGN for the long term.

Risks, however, are significant.

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

Submitted Sunday afternoon. REGN closed Friday at $597.

Analyst’s Disclosure: I am/we are long REGN, RHHBY, GILD, TSLA. 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.