In my earlier post on the explosive growth potential of genomics, I explained that the market is made up of gene-sequencing specialists, who are helping researchers identify specific genes, and gene therapy companies, who are using discoveries enabled by gene sequencing to revolutionise treatment of a growing multitude of diseases. Today I would like to tell you about Regeneron, a large cap US company I hold in my personal portfolio which is not only a world leader in genetic sequencing but also offers exposure to the explosive growth of new gene therapies. What’s amazing is that the shares currently trade on just 13x PE which means the company is unjustifiably valued at a huge discount to its sector and the market as a whole. This valuation anomaly I believe gives investors incredible upside potential, rarely found in a large cap stock in a fast growing sector.
Regeneron has traditionally been valued as a typical large-cap pharma stock. However, it is closer to a biotech company in terms of its promising pipeline and innovations, but with the actual infrastructure and resources of ‘Big Pharma’ needed to deliver on this promise. Regeneron is at a critical inflection point in its history as a company with both near term and long term growth avenues now bearing fruit. At a forward PE ratio of 13x, the stock is being valued at a price that seems to be focusing solely on the patent overhang for its best selling drug, Eylea, while ignoring the truly enormous revenue growth opportunities from several sources.
Past performance is not indicative of future performance.
Leonard Schleifer and George Yancopoulos launched Regeneron over 30 years ago. These two still lead the company today. The first 20 years of the company involved writing a lot of academic papers and doing clinical testing. The duo kept the lights on by doing contract manufacturing for other drugmakers. But in 2008, the Food and Drug Administration (FDA) approved Regeneron’s first drug, Arcalyst. And after that, it approved Eylea, the big moneymaker for Regeneron, in 2011.
Eylea is a VEGF (vascular endothelial growth factor) inhibitor, meaning it stops the body’s VEGF protein from forming abnormal blood vessels in the eyeball. A body with an overactive VEGF protein can form too many blood vessels in the eye, and those vessels can leak, causing vision loss. After the FDA approval of Arcalyst and Eylea, Regeneron’s sales really took off. From 2007, the year before the first approval, through 2015, revenue grew from $125 million to $4.1 billion. The compounded growth rate was 55% for that eight-year period. In 2019, Regeneron had $7.8 billion in revenue, and roughly 60% of that was just from Eylea. The remainder of its revenue was primarily from its collaborations with Sanofi and Bayer HealthCare, two pharmaceutical giants.
As we see above, the revenues from Eylea have been the cash cow for the company… literally. Regeneron reported over $2 billion in free cash flow for 2019. Currently, Eylea is the “#1 prescribed treatment in its class”; FDA-approved for Wet Age-related Macular Degeneration (AMD), Diabetic Macular Edema (DME), and Macular Edema following Retinal Vein Occlusion. But fears of increased competition for Eylea have worried some investors. These fears are overblown… First, Eylea has had competition from other drugs for years now. Second, the big threat of competition is coming from a drug from Novartis called Beovu that was approved in October 2019. This drug isn’t as big of a threat as it was initially feared to be. Beovu has shown strong efficacy – or effectiveness – on a once-every-12 weeks shot program. The results are marginally better than Eylea. But Beovu has higher rates of inflammation, immunogenicity (the effects may wear off before the next dose), and a lack of flexibility for more frequent dosing if needed.
I believe it is going to be difficult for Novartis to crack this well-established market with a product that’s far inferior in terms of side effect profile. It’s true that sales of Eylea are likely to slow down and even decline a bit. But I believe they won’t fall off a cliff like some investors fear. We can expect steady and very high gross margin sales from Eylea for years to come. Case in point: even despite the disruption of the pandemic in 2020, Eylea U.S. net product sales grew 7% year-over-year to $4.95 billion, with nearly $8 billion in sales globally. This means that Regeneron will continue to generate increasing levels of free cash flow that it can use to fund clinical trials for REGN1979 and the rest of its exciting product portfolio. And as I’m about to show you, Regeneron already has two new blockbuster drugs recently approved by the FDA giving the company near term revenue growth opportunity.
The company is also finding ways to extend the patent life of Eylea. The consensus view is that Eylea revenues will gradually decline until its patent expires in November 2023 (or May 2024 if it receives 6 months of additional exclusivity for a paediatric indication) at which point the product will be superseded by competing name-brand drugs or biosimilars. This is one possibility, but not the only outcome. Regeneron is also developing a high-dose formulation of Eylea for less frequent dosing, which would extend patent exclusivity through 2032.
Eylea is also in trials to expand the label for treating diabetic retinopathy, which is expected to further broaden its market. Recently, Regeneron announced positive results for Eylea in a trial for treating diabetic retinopathy. The primary outcome of Protocol W “showed a 68% reduced risk of developing vision-threatening complications…in patients who received the EYLEA every-16-weeks dosing regimen.” Patients in the placebo group “were almost five times more likely to experience disease progression requiring EYLEA rescue therapy” while “EYLEA-treated patients were three times more likely to experience at least a two-step improvement in their DR severity score.”
Dupixent is a recently FDA approved drug for Regeneron with enormous potential. It’s already approved for targeting type 2 inflammation problems which is a massive market. Dupixent is marketed by Regeneron in collaboration with Sanofi (NASDAQ: SNY). Dupixent is approved for treating (in the U.S. and Europe): atopic dermatitis, severe asthma, and chronic rhinosinusitis. And it’s already well on its way to becoming a blockbuster drug. Regeneron earned $2.32 billion for the full year 2019 from sales of Dupixent. (That’s roughly half of the $4.6 billion Eylea generated.)
And the drug has barely scratched the surface in terms of patient populations who could benefit from this drug. Dupixent is currently being evaluated in clinical trials for treating a “broad range of diseases driven by type 2 inflammation or other allergic processes”, including paediatric asthma (6 to 11 years of age, Phase 3), chronic obstructive pulmonary disease with evidence of type 2 inflammation (Phase 3), paediatric atopic dermatitis (6 months to 5 years of age, Phase 3) eosinophilic esophagitis (Phase 3), bullous pemphigoid (Phase 3), prurigo nodularis (Phase 3), chronic spontaneous urticaria (Phase 3), and food and environmental allergies (Phase 2)." In addition Regeneron is putting this drug through testing to help desensitize people to grass and peanut allergies. This way it can potentially cure the enormous number of people who suffer from these allergies.
According to Bloomberg, Dupixent has:
“a peak estimate of $5.7 billion in five years to overtake Eylea as Regeneron’s top product.”
According to Regeneron’s February 2021 corporate presentation, “~190k patients in the U.S. have been prescribed Dupixent (~6% market penetration to date)”. A considerable opportunity exists for the total addressable market to increase. Assuming that Dupixent is approved for at least the 8 indications currently under investigation, there could be “up to 4M+ eligible patients in U.S. by 2023”. This remarkable amount of possible treatment indications effectively makes Dupixent a “pipeline in a product” with massive potential that is not being fully taken into account by Wall Street and the market at large. With patent protection through 2031, Dupixent has a long runway to grow into this expanding market.
There are several potential challengers for Dupixent in the atopic dermatitis market, including JAK inhibitors Rinvoq from AbbVie (NYSE: ABBV) and abrocitinib from Pfizer (NYSE: PFE). However, over the last several years, safety concerns regarding JAK inhibitors have been growing steadily. In 2019 the FDA issued a “black box” warning for Xeljanz due to heightened risk of blood clots and death. The European Medicines Agency also warned that “Xeljanz at any dose should be used with caution in patients who face a high risk of blood clots.” Xeljanz and Rinvoq also carry boxed warnings for serious infections and cancer.
A post-marketing study compared Pfizer’s rheumatoid arthritis drug Xeljanz, a JAK inhibitor, to a TNF inhibitor in rheumatoid arthritis patients over age 50 who had at least one cardiovascular risk factor. The comparison was not a favourable one. In the category of “major adverse cardiovascular events” the most common was “myocardial infarction” (heart attack) and these events occurred for the JAK inhibitor at a rate nearly triple that of the TNF inhibitor group. Similarly, triple the amount of patients taking Xeljanz developed cancers compared to the TNF inhibitor. A greater prevalence of adverse events in both categories was observed for patients with more risk factors for cancer and cardiac events.
Not surprisingly, the FDA postponed its decisions on several similar drugs, including AbbVie’s Rinvoq and Pfizer’s abrocitinib in atopic dermatitis by three months. This shows that the FDA takes the cardiac safety issues seriously, as it could be a common theme with all JAK inhibitors. At the very least, these stumbles will delay competition for Dupixent in atopic dermatitis, but also could have lasting effects on their widespread use in the long term. Considering that both AbbVie and Pfizer are only estimating about $2 billion or $3 billion in peak sales for their respective drugs “in an eczema market worth more than $10 billion” shows that these companies are predicting a number of obstacles ahead that their drugs will need to overcome.
Dupixent has no black box warning. The same cannot be said for JAK inhibitors. This means that Dupixent will most likely be the first choice for treating patients before moving to a JAK drug if at all.
It seems hard to imagine anyone being comfortable with taking a drug that could cause side effects that are so much worse than the disease that it is supposed to be treating. Furthermore, atopic dermatitis patients treated with Dupixent tend to stick with it, “with about 75% to 80% of them remaining on treatment after six months, which is ‘higher than industry average and speaks to the drug’s impact on patient’s quality of life,’ SVB leerink analyst Geoffrey Porges summarized in a February note.”
One of the only other drugs that come to mind with the sheer number of approved indications that Dupixent potentially has is Humira, the best-selling drug in the world that generated $19.8 billion in revenue for AbbVie in 2020. Dupixent global net sales for full year 2020 increased 75% versus 2019 to $4.045 billion. This astonishing growth rate may not be sustainable year after year over an extended period, but the total revenue for Dupixent would in theory only need to grow at a 75% CAGR for the next three years (including this year) to reach $21.7 billion and eclipse Humira as the greatest selling drug of all time.
Of note is the fact that this 75% year-over-year growth for Dupixent in 2020 was achieved solely by virtue of its currently approved indications. It is only logical that adding eight more label indications to the current number of three will add a substantial amount of fuel to drive the growth of Dupixent for the next decade.
Past performance is not indicative of future performance.
Source: SVB Leerink analyst research
Despite the handful of very successful blockbuster cancer drugs on the market today, there are many cancers that simply don’t respond to existing treatments. Due to the maddening complexity of the disease, even within a particular subset of cancer, there are patients who respond differently than others to the same drug. Clearly, the mythical ‘cure for cancer’ has not been found, as this complex problem likely requires a complex solution. From my perspective, if there ever was a platform with hope of one day overcoming these challenges in treating cancer, it is Regeneron’s. A slide from the February 2021 corporate presentation provides a glimpse at their extensive oncology pipeline.
Source: Regeneron February 2021 Presentation
A new drug which Regeneron got FDA approval for this year is Libtayo. Libtayo is Regeneron’s first foray into cancer immunotherapy, which was first approved in Advanced Cutaneous Squamous Cell Carcinoma in 2018. On February 9, 2021, FDA approval was announced for Libtayo as the inaugural immunotherapy designated for patients with advanced Basal Cell Carcinoma, making it “now approved for patients with advanced stages of the two most common skin cancers in the U.S.”
Less than two weeks later, Libtayo was also approved for the first-line treatment of patients with advanced non-small cell lung cancer whose tumors have high PD-L1 expression. In this group of patients with PD-L1 expression of ≥50%, “Libtayo reduced the risk of death by 43% compared to chemotherapy.” According to the World Health Organization, lung cancer was the most common cause of cancer death worldwide in 2020 at 1.8 million deaths. While Libtayo’s efficacy only extends to a fraction of the total lung cancer cases, any expansion of the drug’s addressable market will be a beneficial contribution to the company’s bottom line. So far, Libtayo is going after markets worth over $20 billion annually but applications to other cancers are likely and the drug remains in trials for other cancer therapies.
Only three weeks after announcing the third FDA-approved indication for Libtayo, Regeneron and Sanofi announced positive results demonstrating an overall survival (OS) benefit from the Phase 3 trial investigating the PD-1 inhibitor Libtayo® (cemiplimab) monotherapy compared to chemotherapy, in patients previously treated with chemotherapy whose cervical cancer is recurrent or metastatic…The trial will be stopped early based on a unanimous recommendation by the Independent Data Monitoring Committee…based on the highly significant effect on OS among these patients" (emphasis added by author). Cervical cancer is the fourth most common cancer among women globally.
In fact, “Libtayo is the first immunotherapy to demonstrate improved overall survival in patients with cervical cancer, reducing the risk of death by 31% compared to chemotherapy.” Given such unambiguous positive results, eventual approval seems to be a foregone conclusion.
In an effort to estimate the potential magnitude of Libtayo’s future market, it is instructive to draw a comparison with Keytruda developed by Merck (NYSE: MRK). Keytruda, which has the same mechanism of action as Libtayo, is one of the top-selling drugs in the world with over $14 billion in global sales in 2020. Over a five-year period from 2015 to 2020, Keytruda’s total sales grew at a CAGR of 91%, owing to their expanding list of approvals from treating multiple types of cancer.
Libtayo is only just beginning on its journey of securing additional FDA approvals for treating various forms of cancer, as two more approvals were announced in February of this year alone. While Libtayo faces strong competition from Keytruda as well as other cancer drugs, the patent for Libtayo expires in 2035, while Keytruda faces patent expiration in 2028. Libtayo has some big shoes to fill if it hopes to take the place of Keytruda in terms of sales, but with its patent exclusivity period extending for years beyond that of Keytruda, Libtayo has the potential to match the success of its competitor in the future.
In addition to Regeneron’s two newly approved potential blockbuster drugs, Regeneron has over 20 other drugs under development… any of which could end up being big but I am most excited about the potential for REGN1979 (which isn’t yet FDA approved).
The existing best treatment for Non Hodgkin’s Lymphoma (NHL) is Rituxan which impacts B cells, which are immune cells responsible for producing antibodies to help fight infections. Rituxan binds to the CD20 proteins, which are found on B cells, and triggers the body’s T-cells (think of these as the foot soldiers that fight off evil diseases) to attack.
Since we only find the CD20 protein on mature B cells (healthy and unhealthy), this can destroy the malignant cells that cause NHL. The ground-breaking finding was that immature B cells don’t have CD20 proteins. So Rituxan kills off all the mature cells while leaving the healthy immature cells to grow back. Ideally, this returns the immune system back to normal.
Source: National Cancer Institute
But if all the cancerous cells don’t leave the body, they will come back. And the patient will have to continue with the treatment. This has been the best way to attack NHL for the past couple of decades. But I believe that’s changing…
Thanks to Regeneron’s research, a compound that has better efficacy numbers than Rituxan is in Phase 1/2 trials. It is codenamed odronextamab (REGN1979). REGN1979 is like Rituxan, but the difference is that it doesn’t just bind with the CD20 protein and hope the T cells come and find it… It bonds with both the CD20 protein and the T cell. This ensures the T cells escort the mature B cells out of the body. And as I said, the results are amazing.
When a disease initially responds to therapy but stops responding after a period of months, we call it “relapsed.” When a disease stops getting worse but remains present after a therapy or gets worse within months of the last treatment, we call it “refractory.” In relapsed and refractory (the most difficult of cases) follicular lymphoma, REGN1979 had an incredible 100% overall response rate!
And in the notoriously difficult to cure large B cell lymphoma, it received a 60% response rate. Remember, these are cancers that either came back or are difficult for other drugs to cure. And yet Regeneron’s REGN1979 showed incredible response rates.
Regeneron did another study that included four people whose disease progressed after a first therapy. These four patients had CAR T cell treatments done, which is another common treatment method for NHL. But in these cases, it didn’t work. But with REGN1979, two out of the four had complete responses.
The key point is that this drug has already demonstrated that it can treat previously untreatable cancer. Stats like these are very exciting. REGN1979 has the potential to be a blockbuster like Rituxan.
And if it matches Rituxan’s sales, it will double Regeneron’s revenue. This is a pivotal drug for Regeneron’s future. However, it is important to note that the FDA did put a partial hold on REGN1979 in December 2020 while waiting for further safety data, temporarily halting the enrolment of new patients. But analysts don’t see any cause for concern with this minor delay. Regeneron has already responded to the FDA’s concerns and expects the hold to be lifted later this quarter.
Still, it may be a couple years until the FDA potentially approves this drug… and therefore a couple of years away from Regeneron earning revenue from it. But when a drug shows this much potential, the valuation uplift will be reflected in the prices far sooner.
The Regeneron Genetics Center (RGC) is another asset that has grown out of the company’s vision for investing in scientific research and development. I could rattle off a bunch of buzzwords like “state-of the-art automation and cloud-based informatics” to describe what this research endeavour is pursuing. Put simply, RGC manages a database of genomic information that sequences the genetic code of consenting volunteers and analyses this data to identify patterns and connections with certain health conditions.
According to Regeneron, this effort has “identified hundreds of novel candidate disease genes”. Scientists from RGC discovered a genetic variant that is correlated with a reduction in risk of “various chronic liver diseases for which there are currently no approved therapeutics.” Regeneron is collaborating with Alnylam Pharmaceuticals (NASDAQ: ALNY) to develop potential RNA interference (RNAi) therapeutics based on this discovery.
Although RGC is in the very early stages of building scientific knowledge in this way, this groundbreaking data approach using genetic sequencing is self-evidently likely to yield a number of important new discoveries. As discussed in my earlier post Illumina, a leading 'picks and shovels' play in genetic sequencing, the cost of genomic sequencing has fallen over tenfold in the last ten years and genomic sequencing has only become truly cost-effective for the mass market in the last couple years. As of July 2019, Regeneron had sequenced DNA from more than 600,000 people at a rate of 500,000 per year. Extrapolating to the present implies that greater than one million genomes have been sequenced.
Regeneron is also working with Intellia Therapeutics (NASDAQ: NTLA) to develop CRISPR-based gene therapy drugs. Last year the two companies expanded their collaboration to discover potential cures for hemophilia A and B. At this time, Regeneron made a $30 million equity investment in Intellia at $32.42 per share. The current share price of Intellia Therapeutics is around $75.
Many prominent scientists and investors alike such as Cathie Wood believe that genomics is a key area of study for driving the future of medical and pharmaceutical innovation. In fact, Regeneron Pharmaceuticals is the fourth largest holding in the ARK Genomic Revolution ETF (NYSE: ARKG).
In the Barron’s article Regeneron: The Best Bet in Biotech Stocks, Jack Hough, Senior Editor writes: “There are sequencing efforts underway elsewhere, of course, but none matches Regeneron’s for its combination of size, speed, diversity of samples, and detail of their accompanying health records.”
This wealth of data firmly establishes Regeneron as a world leader in the emerging science of pharmacogenomics and provides a competitive advantage as this field becomes increasingly more relevant to the discipline of drug discovery in the future.
Regeneron was involved in trying to help fight COVID-19 last year. Its antibody cocktail received FDA emergency use authorization last November. Prospective Phase 2/3 results showed that REGN-COV2 significantly reduced virus levels and the need for further medical attention in non-hospitalized patients.
Understandably, some are sceptical that this drug will remain relevant or have the potential to be a significant source of future revenue for Regeneron considering the proliferation of COVID-19 vaccines in recent months and competition from antibody drugs developed by Eli Lilly (NYSE: LLY). But this idea that the boost in revenue from REGEN-COV will be short lived is another assumption that may prove to be spectacularly incorrect.
New phase 3 trial data reported on March 23, 2021, showed the treatment reduced the risk of hospitalization or death “in high-risk non-hospitalized COVID-19 patients” by 70% compared to placebo. In addition, the “FDA recently updated U.S. EUA fact sheets for all authorized monoclonal antibody treatments, indicating that REGEN-COV is the only one to retain potency against key emerging variants.”
These recent trial results expand on those previously reported and provide validation that this antibody cocktail is useful at multiple junctures in the time course of disease progression and underscores the imperativeness of quickly adopting this therapy as a solution to mitigate the increasingly rapid spread of any new COVID-19 variants throughout the world.
Regeneron is forecasting revenues of “approximately $260 million in REGEN-COV U.S. net product sales to the U.S. government in the first quarter of 2021.”
These developments relating to the potential for a much more convenient subcutaneous administration versus intravenous infusion, the effective doubling of the supply by cutting the dose in half, and confirmation as the only available treatment to retain potency against five major coronavirus variants including those originating in South Africa, the U.K. and New York City are extremely positive and completely change the narrative of this drug compared to just weeks ago.
The $260 million in sales could well be just the tip of the iceberg. Recently, SVB Leerink analysts sent a note to clients estimating that sales of the treatment could hit $2.6 billion in the second quarter. Morningstar analyst Karen Andersen said last year that it could hit “$6 billion in sales this year”, or twice the sales she forecasted for Remdesivir made by Gilead Sciences (NASDAQ:GILD). This model factored in a 60% probability of approval, and since we now know that it was indeed approved, this implies a sales figure as high as $10 billion. Importantly, the rising cases of COVID-19 including troubling variants across the world including India and several European countries are and may continue to be an unanticipated source of demand for REGEN-COV that could lead to very surprising future earnings reports.
REGEN-COV is undergoing other trials around the world to not only treat COVID-19 infection but to prevent it entirely. On January 26, 2021, Regeneron “positive initial results from an ongoing Phase 3 clinical trial evaluating REGEN-COVTM used as a passive vaccine for the prevention of COVID-19 in people at high risk of infection (due to household exposure to a COVID-19 patient).” The key takeaways were a reduction in overall infections within the first week with 100% prevention of symptomatic infections, distinctly decreased levels of viral shedding in asymptomatic infections that did occur in the REGEN-COV group, and the ability to achieve these results using a 1,200 mg dose administered by subcutaneous injection, providing greater convenience and efficiency than infusion.
Even with the emerging availability of active vaccines, we continue to see hundreds of thousands of people infected daily, actively spreading the virus to their close contacts. The REGEN-COV antibody cocktail may be able to help break this chain by providing immediate passive immunity to those at high risk of infection, in contrast to active vaccines which take weeks to provide protection. There are also many individuals who unfortunately may be immunocompromised and not respond well to an active vaccine or are otherwise unable to be vaccinated and REGEN-COV has the potential to be an important option for these individuals. Overall, the REGEN-COV development program has demonstrated definitive anti-viral activity and the collective data strongly it can be effective both as a therapeutic and as a passive vaccine.
This subtle distinguishing factor of being the most advanced if not the only suitable preventive measure against the virus for people with suppressed immune systems is an extremely important and equally underappreciated aspect of the REGEN-COV antibody cocktail. The number of people in the U.S. who have some degree of immunosuppression due to organ transplantation or autoimmune conditions is estimated to be approximately 11.5 million, and this number is likely continuing to increase.
Coincidentally, vaccines are contraindicated for patients who are being treated with Dupixent. As the number of patients prescribed Dupixent continues to grow, a greater proportion of people will also require Regeneron’s antibody cocktail as a substitute for vaccination.
The total number of people worldwide with suppressed immune systems is unknown, but it is most likely several times greater than the amount estimated to be living in the United States. Interestingly, there is growing evidence suggesting that the majority of COVID-19 variants around the world originate in people with weakened immune systems which give the virus more opportunities to mutate in “an extended period of within-host evolution”.
This raises the possibility that as long as an immunosuppressed population exists, the Catch-22 situation of being unable to adequately respond to vaccines while simultaneously being susceptible to prolonged infection and acting effectively as factories for more infectious viral variants will make stopping the spread of COVID-19 and reaching “herd immunity” never completely attainable. Moreover, even if a majority of the world’s population receives vaccinations, the possibility remains that a new variant could become the dominant strain and completely undo this collective immunity that the world had worked so hard to achieve.
Against this backdrop of continuing potential demand, analysts have predicted that the revenues from REGEN-COV will decay to almost nil after 2021 as the global population reaches “herd immunity”. I am not as optimistic in seeing COVID-19 essentially eradicated from the Earth in the next year or two. I believe it is more likely that the coronavirus will remain a seasonal phenomenon whereby the immunity from each preventive dose may only last for around 12 months, and it will be advisable to receive a “booster” shot every year similar to the influenza virus. This recurring revenue from REGEN-COV is not even considered as a possibility by the analyst community, and consequently, the company’s valuation is being underestimated from this source too.
Regeneron has traditionally been valued as a typical large-cap pharma stock. However, it is closer to a biotech company in terms of its promising pipeline and innovations, but with the actual infrastructure and resources of ‘Big Pharma’ needed to deliver on this promise. Although Regeneron Pharmaceuticals is already a large cap stock ($42bn), I believe the company has serious potential to achieve Mega-cap status, i.e. $200 billion or greater valuation in the next ten years. An analysis of all the growth avenues available to the company above highlights the strong prospect for exponential growth in sales as expanding applications of its marketed products, annual recurring revenue from the coronavirus antibody cocktail REGEN-COV and its leadership in genomics data play out. Over the next few years, we could easily see a doubling in Regeneron’s share price even if the low PE multiple doesn’t change. And if REGN1979 becomes the hit I believe it will be and we see expansion in valuation multiples, we will have even greater upside.
As a consequence of an aging population, the market for AMD is expected to double in size in the next ten years. If the market’s assumption that Regernon’s top selling drug Eylea’s life cycle is quickly coming to an end proves to be incorrect, this will have a significant effect on the company’s valuation. Assuming the AMD market does double in the next ten years, this implies about a 7% compound annual growth rate, which incidentally is congruent with Eylea’s recent 7% growth in full-year U.S. net product sales last year. Even their ‘ex-growth’ drug has revenue upside potential!
Total revenues increased by 30% from $6.558 billion in 2019 to $8.497 billion in 2020 while GAAP net income per share (diluted) increased by 65% from $18.46 to $30.52. In 2020, Regeneron repurchased 1.6 million shares of its common stock. Phrased differently, it bought back the full $1 billion the company was approved to buy. According to the related press release, “In January 2021, the Company’s board of directors authorized a new share repurchase program to repurchase up to $1.5 billion of the Company’s common stock.” “As of March 31, 2021, $1.177 billion remained available for share repurchases under the program.” In what was conceivably the most optimistic gesture from the company so far this year, this new share repurchase program signals that management has a high degree of conviction in the future direction of the company and has the shrewdness to take advantage of the hard to understand decline in stock price.
The return on invested capital grew from 20.14% at the end of 2019 to 27.94% as of December 2020. This is striking when compared to the S&P 500’s ROIC, which fell from 8.2% at the end of 2019 to 7.1% through 17/11/20. The trailing twelve-month Price/Earnings ratio is 14.91, with a % difference to Sector of -62.95%. Regeneron scores highly on all quality of earnings measures but the price is that of a far lower quality cyclical company.
Analysing the company’s history in terms of growth, total revenue has multiplied 18.5-fold over the last ten years. The apparent negative growth in 2018 was due to a change in accounting methods and does not reflect a reversal of trend. Calculating the compound annual growth rate over this ten-year period, we find a 33.9% growth rate on average. This is in agreement with the 30% revenue increase for full-year 2020 and 38% growth for first quarter 2021 revenues versus first quarter 2020.
In the first quarter of 2021, U.S. net sales for Eylea amounted to $1.347 billion, growing 15% compared to the first quarter of 2020. Multiplying by 4 to estimate the full-year U.S. sales for 2021 gives $5.388 billion, or about 9% higher than in 2020. Assuming revenues from Eylea continue to grow at 7% annually until 2031 (for the reasons highlighted earlier), we arrive at total revenue from Eylea of $13.139 billion in 2031.
Past performance is not indicative of future performance.
Source: Company Presentation
U.S. net sales for Libtayo grew 54% from 2019 to 2020. Sales in the rest of the world grew 328% from 2019 to 2020, putting the total sales growth at about 80% for 2020. Due to the two additional FDA approved indications Libtayo received in February 2021, it seems fair to assume 100% growth rate for U.S. Libtayo sales in 2021. The full benefits of these expanded treatment indications will likely be distributed over several subsequent years in addition to further potential approvals. Taking growth trends in Keytruda as a guide, Libtayo could grow sales from 2022 by an 88% increase in 2023, 54% growth in 2024, 30% growth for 2025, 17% growth for 2026, and 9% growth in 2027.It is important to note that Keytruda’s U.S. patent will expire in 2028. International sales of Litayo can be expected to at least match US levels of growth. This produces a result of $1.534 billion in the year 2031. Adding this to the estimated 2031 U.S. Libtayo sales of $8.304 billion gives total revenue from Libtayo in 2031 of $9.838 billion.
Total collaboration revenue from Dupixent in 2020 was $1,203.2 million. Making the assumption that this collaboration revenue will grow internationally at the same rate predicted for Dupixent in the US, this results in total revenue for Dupixent of $7.281 billion in 2031.
1.25 million REGEN-COV doses are expected to be produced and delivered under the agreement with the U.S. government by the first half of 2021 at a price of $2.625 billion. In collaboration with Roche (OTCQX:RHHBY), the goal is to increase manufacturing capacity by “at least 3.5 times”. This equates to 8.75 million doses in total. At $2,100 per dose, the total revenue figure by this estimation is $18.375 billion. Assuming Regeneron will sell as many doses in the U.S. as it can theoretically produce this year (2.5 million) implies revenue of $5.25 billion. The remaining $13.125 billion of revenue in this equation accounts for the rest of the world, of which Roche and Regeneron will share profits. Roche sold $176.6 million worth of REGEN-COV in the first quarter of 2021. Regeneron’s share of this revenue was $66.8 million. Calculating the percentage of Regeneron’s share and multiplying by $13.125 billion, we arrive at an estimated $4.965 billion in Roche collaboration revenue for 2021. Combining this with the predicted $5.25 billion from 2021 U.S. sales gives $10.215 billion in total revenue for REGEN-COV.
Making the assumption that 11.5 million people in the U.S. with immunosuppression will require one dose of REGEN-COV annually, a total of $24.15 billion in revenue could be expected, of which Regeneron’s share is $7.149 billion which when added to the theoretical $5.25 billion produces a total of $12.562 billion of other recurring revenue. This alone is more than Regeneron’s total revenue in the year 2020.
The trailing twelve month Price/Sales ratio is currently 6.19 for Regeneron. Assuming this ratio will remain constant, we next multiply the predicted total sales for the year 2031 by 6.19 to obtain a resulting $279.435 billion dollar market cap valuation. This implies a greater than 6-fold increase in market cap over the next ten years.
Looking at PE multiples, it’s astounding that the stock trades on a forward P/E ratio of about 13x, a sizable discount to the sector and the market as a whole. Regeneron is priced at extreme value levels despite its explosive growth prospects. I believe as the market concerns are assuaged on the risk of Eylea revenues and Covid antibody business disappearing, there will be significant upside in the shares.
Eyelea revenues could decline faster than expected (Eylea’s U.S. patent exclusivity runs into 2024 and it comes off patent in 2022 in China and Japan. The European patents for Eylea will expire in 2022 and 2025. There is a strong possibility that competing biosimilars will be launched in China and Japan as soon as Eylea goes off patent.
Covid could disappear negating the need for antibody treatment
Regeneron may be unable to manufacture enough doses of its REGEN-COV antibody cocktail to meet the spiking demand
Less expensive Covid treatment could appear
New and more effective competing drugs approved, reducing revenue prospects in key products
Drug trial outcomes are uncertain and success in newer applications in oncology may prove elusive
The company’s patents may be challenged, invalidated, held to be unenforceable, or circumvented (Regeneron is facing ongoing patent litigation with Amgen (NASDAQ:AMGN) over the intellectual property of PCSK9 inhibitors, namely Praluent. Regeneron may face penalties if it is found to be infringing on Amgen’s patents)
Political pressure to reduce drug prices in the sector
“In 2021, in addition to our ongoing work on COVID-19, we expect further diversified growth driven by continued EYLEA momentum, expanded approvals and increased market penetration for Dupixent, and new launches for Libtayo in oncology. We anticipate U.S. regulatory action for Libtayo in both non-small cell lung cancer and basal cell carcinoma within the next month – and anticipate additional readouts later this year from across our oncology pipeline, including the bispecific platform.” Leonard S. Schleifer, M.D., Ph.D., President and Chief Executive Officer of Regeneron.
Regeneron achieved three FDA approvals in February 2021 and continued to announce positive clinical results in the following months, but the shares have since traded roughly sideways.
Regeneron is conducting one of the largest genetic sequencing efforts in the world, positioning the company as a leader in the field now and in the future.
The stock benefited from optimism for a COVID-19 treatment last year but declined by 33% from the high over the following eight months (presumably as investors assumed we are seeing the end of Covid) despite consistently beating earnings estimates.
The potentially expanding FDA approved indications, large pipeline of product candidates, and overlooked opportunity for recurring revenue from REGEN-COV makes the stock very undervalued at current levels.
Trading at a forward P/E ratio of about 13, Regeneron is priced for value with meaningful growth and significant upside in the years to come.
Regeneron is at a critical inflection point in its history as a company with both near term and long term growth avenues now bearing fruit. At a forward PE ratio of 11, the stock is being valued at a price that seems to be focusing solely on the patent overhang for Eylea, while ignoring the truly enormous revenue growth opportunities from several sources. Even in the event that Eylea revenues fall off the so-called patent cliff, it is very clear that the revenues from other products will more than compensate for any potential losses by the time Eylea’s patents fully expire.
Regeneron has a significant moat as a leader in the development of fully human monoclonal antibodies with a high degree of efficiency due to its proprietary technology platforms that are protected by patents in addition to their accumulated scientific expertise. The company’s high return on invested capital, $1.5 billion share repurchase program, and its solid management with a Board of Directors including two Nobel Laureates and seven members of the National Academy of Sciences are likely to continue to drive the creation of value for shareholders over time.
Regeneron has traditionally been valued as a typical large-cap pharma stock. However, it is closer to a biotech company in terms of its promising pipeline and innovations, but with the actual infrastructure and resources of ‘Big Pharma’ needed to deliver on this promise. Regeneron shares have historically been highly volatile due to the level of uncertainty surrounding the company’s future. Indeed, it is precisely this uncertainty that provides the opportunity for buying the shares at such a steep discount to the sector and the market.
Regeneron is currently in the strongest position it has ever been by all objective measures. Despite the valuable contributions Regeneron made to quell the pandemic while beating earnings estimates every step of the way and the fact that its revenue has never been higher, the stock had produced a trailing one year return of -8% as of 1st June 2021. I believe the pessimism that produced this price action is based on unfounded assumptions of the company struggling to compete in the drug markets of tomorrow.
Regarding the future of Regeneron, the best is yet to come. The vigorous revenue growth of its antibody drugs such as Dupixent, Libtayo, and perhaps REGN1979 is likely to continue due to expanding indications. Given the overlooked opportunity of recurring revenues from REGEN-COV in addition to the ambitious oncology pipeline, Regeneron’s earnings have the capacity to grow exponentially for years into the future. Consequently, I believe the current share price materially undervalued the company and provides an excellent opportunity to investors.
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