Regeneron Pharmaceuticals Inc. (NGS: REGN), but are lowering our target price to $675 from $715. The stock has performed well in 2020, rising 49% year-to-date as investors have recognized the company’s efforts to respond to the coronavirus. Using its proprietary VelociSuite platform, the company has developed an investigational double-antibody cocktail therapy candidate, REGN-COV2, which it is currently testing for both the prevention and treatment of COVID-19. The company has also announced positive developments for Libtayo and Dupixent, and recently received FDA approval for Inmazeb, making it the only regulatory approved treatment for Ebola.
Given the company’s strong balance sheet, earnings growth, solid pipeline progress, and promising COVID-19 drug, we believe that REGN merits a premium valuation.
The beta on REGN is 0.85.
The REGN share price is often driven by R&D developments. The company has more than 20 product candidates in clinical development, including five FDA-approved products that are being evaluated for additional indications. Key pipeline updates are summarized below:
– COVID-19. In October, Regeneron submitted a request to the FDA for an emergency use authorization (EUA) for REGN-COV2, its investigational double-antibody cocktail for COVID-19, for patients with mild-to-moderate COVID-19 who are at risk for poor outcomes.
– Libtayo (cemiplimab).
– Ebola treatments. Inmazeb is the only FDA-approved treatment for Ebola, which has survival rates as low as 10%. As part of an agreement with BARDA announced in July, Regeneron will deliver an established number of Inmazeb doses over the course of six years as part of U.S. Department of Health and Human Services’ efforts to prepare for public health emergencies. It expects to receive compensation of $10 million in 2021 and an average of $67 million per year in 2022-2026.
– Eylea (aflibercept). The drug may face competition from biosimilars as its patent expires in 2022 in China and Japan, 2023 in the U.S., and 2024 in Europe. Given that Eylea accounted for 70% of total revenue in 3Q20, Regeneron must continue to show progress in the development of new pipeline products.
– Dupixent (dupilumab). The CHMP opinion follows a May 2020 FDA approval for the same age and indication. Earlier, on September 14, the FDA granted a Breakthrough Therapy designation for the drug for the treatment of patients 12 years and older with eosinophilic esophagitis (EoE). The companies plan to submit regulatory submissions in the U.S. and EU in 1Q21. Dupixent is also being studied for other indications, including the treatment of chronic obstructive pulmonary disease (COPD) in patients with Type 2 inflammation.
– Regeneron is also studying other investigational treatments. Over the past few months, it has announced positive updates in its development of potential treatments for multiple myeloma and homozygous familial hypercholesterolemia (HoFH).
EARNINGS & GROWTH ANALYSIS
The company recently reported 3Q results that beat analyst expectations for both revenue and EPS, the sixth consecutive quarter of above-consensus results. On November 5, Regeneron reported that 3Q20 revenue, including product sales and collaboration revenue, increased 32% to $2.29 billion, beating the consensus by $209 million. Non-GAAP diluted earnings also rose 25% to $8.36, above the consensus of $6.99. For the first three quarters of the year, revenue rose 29% to $6.07 billion, while earnings rose 28% to $22.01 per share.
Regeneron does not provide explicit EPS or revenue guidance, but does provide projections for income statement and cash flow components such as R&D, SG&A and capex. On a non-GAAP basis for 2020, the company now expects R&D expenses of $2.42-$2.47 billion, raised from its earlier guidance for $2.27-$2.37 billion; SG&A of $1.235-$1.265 billion, narrowed from $1.21-$1.27 billion; COGS of $440-$470 million, lowered from $445-$485 million; and an effective tax rate of 10%-12%.
In 3Q, U.S. sales of Eylea totaled $1.32 billion, up 11% from 3Q19, while Rest of World sales rose 7% to $730 million. Regeneron’s collaboration revenue from Bayer, which it generates primarily from the Rest of World (ROW) Eylea sales, rose 2% to $300 million.
Within the Sanofi partnership, global sales of Dupixent rose 69% to $1.07 billion; Praluent sales rose 31% to $92 million; and Kevzara sales rose 28% to $70 million; although sales of ZALTRAP fell 15% to $24 million. In all, Regeneron’s Sanofi collaboration revenue rose 102% to $353 million. Among Regeneron’s other products, Libtayo had global 3Q sales of $96 million, up 87% from 3Q19. Regeneron also recorded roughly $40 million in revenue from REGN-COV2 and $4 million from Arcalyst.
In 3Q, non-GAAP R&D expense rose 35% to $629 million, above the rate of sales growth, driven by clinical development costs for REGN-COV2, a higher headcount to support its expanding pipeline, increased clinical manufacturing activities, and continued advancement of its partner programs with Alnylam, Intellia, and other early-stage partners. Non-GAAP SG&A expense increased 10% to $291 million, driven by an increased headcount and commercial costs for Eylea and Praluent. The non-GAAP cost of goods sold rose 22% to $122 million.
We believe that the company’s financial results will benefit from the expanded reach of Dupixent and the continued growth of Libtayo, the company’s close relationship with the U.S. government, and the rollout of its double-antibody cocktail for COVID-19, REGN-COV2.
Based on company’s better-than-expected 3Q earnings, strong revenue generation, and pipeline progress, we are raising our 2020 EPS forecast to $30.50 from $30.00.
FINANCIAL STRENGTH & DIVIDEND
The company achieves average scores on our four main measures of financial strength – debt/capital, interest coverage, cash flow generation and profitability.
However, it also had finance lease obligations during both periods, which may be treated as debt, of $716 million and $714 million, respectively, resulting in a total debt/capitalization ratio of 21.0%, up from 6.1%. The company had cash and marketable securities of $5.90 billion.
Regeneron does not pay a dividend, and does not plan to implement one in the near term due to its high R&D spending. Regeneron has a stock repurchase plan. During the third quarter, the company repurchased 179,824 shares of common stock for roughly $100 million. As of September 30, 2020, it had $373 million remaining on its November 2019 buyback authorization.
MANAGEMENT & RISKS
Leonard Schleifer, 64, is Regeneron’s founder, president, and CEO.
Investors in REGN shares face risks. Regeneron faces the risk that new drugs may disappoint in clinical trials or fail to receive regulatory approval. Regeneron is dependent on new products, and would be hurt by the failure of late-stage product candidates.
Regeneron relies heavily on Eylea, though this reliance has decreased. Eylea faces competition from Novartis’ recently launched Beovu, as well as an upcoming patent cliff. In addition, Regeneron’s key products are subject to reimbursement by government agencies and managed care organizations. As such, they are vulnerable to changes in reimbursement policies, particularly as payers seek to reduce healthcare spending.
The company also faces risks related to the coronavirus. While enrollment in both new and ongoing clinical studies has resumed in many cases, the company saw a pause in new enrollment in certain studies earlier in the pandemic. The recent resurgence of the virus in many regions could again impact clinical trials.
Founded in 1988, Regeneron has collaborated with Amgen, Procter & Gamble, Bayer, Sanofi, and Japan’s Sumitomo Chemical. The company has more than 8,300 employees worldwide and is based in Tarrytown, New York.
We think that REGN shares are attractively valued at current prices. They have traded between $328 and $665 over the past year and are currently above the midpoint of this range. While the stock has retreated since reaching an all-time-high in July, we believe that it is poised for a return to growth at current levels. The relative strength index is now a modest 44 on a 14-day timescale and 48 on a 14-week timescale, suggesting that REGN could advance considerably without becoming overbought. We also note that REGN’s 200-day moving average has acted as firm support as the stock has consistently closed above this average since November 2019.
On a fundamental basis, the shares are trading at 16-times our 2021 EPS forecast, below the average of 33 for peers that include Amgen, Vertex, Seagen, Incyte and Ligand, and near the low end of the company’s five-year historical range of 12-46. Given the company’s strong balance sheet, pipeline progress, earnings growth, and potential treatment for COVID-19, we believe that REGN merits a premium valuation.
On November 13 at midday, BUY-rated REGN traded at $563.43, up $6.65.