After suffering from a prolonged dip that came after the company's Q3 2013 earnings, shares of Regeneron Pharmaceuticals (NASDAQ: REGN) have seen a major rebound and are now approaching their 52-week high of $166.39/share.
The stock has become increasing popular throughout the year due to pipeline developments (particularly with their chemotherapy supplement ZALTRAP/ziv-aflibercept for patients with colorectal cancer) and the sales growth of their marketed product EYLEA (aflibercept) in the treatment of wet AMD. Wet AMD (or wet age-related macular degeneration) affects about 10% of the total AMD population – about 15 million patients in the United States alone. The disease is caused by the expansion of blood vessels in the retina into the macula, which causes the vessels to become weak and “leaky”. Wet AMD patients can have severely impaired vision and even blind spots as the condition worsens.
Since the start of the year, shares of REGN have moved up about 190%, meaning that investors who bought in early January would have triple their initial investment in the company at this point. Going back to a two-year frame, we see ROI jump to over 550%. How did Regeneron generate such enormous returns in such a short timeframe, and how did it end up at a market cap of $15.5 billion so soon? Keep in mind that Regeneron was basically a “failure” of a biotech company for two decades prior to this big reversal in fortune.
One the major reasons that Regeneron has become such a success is because of the underestimation of EYLEA by Wall Street analysts, who had projections for the drug's sales growth around November 2011 (when EYLEA was finally FDA approved for the treatment of Wet AMD) that were beaten by the actual sales growth of EYLEA. EYLEA has been so successful that Regeneron is expecting a full-year sales revenue of $790-815 million, which is an impressive figure given that the treatment has been available for less than a year. The treatment is marketed outside of the United States by Bayer, which has given Regeneron very favorable arrangements which allow for substantial milestone payments and rights to the US market for REGN.
In evaluation of their investment, Regeneron shareholders should be particularly focused on the projected growth of EYLEA and how important it is to the valuation of shares of REGN. Last quarter (Q3 2012) the company posted $244 million in EYLEA sales, which was a 26% increase relative to the last quarter. Double-digit revenue growth per quarter isn't truly sustainable in the long run, but does justify the stock's seemingly-expensive financial ratios for the time being. For instance, the super-high P/E ratio of 74.5 or the P/S ratio of 14 may make Regeneron seem expensive at a glance, but factoring in the extremely rapid growth of EYLEA sales you actually see a very inexpensive ticker. The market should also be factoring in Europe, since the CHMP (the European Committee for Medicinal Products for Human Use) recommended approval to the EMA (European Medicines Agency), which makes final approval likely close to the end of this year or soon after.
Investors who are considering REGN should also factor in the company's new cancer therapy supplement ZALTRAP, which was approved by the FDA in August of this year under priority review. Created collaboration with the French pharmaceutical giant Sanofi (more specifically with their subsidy Aventis, which was acquired by Sanofi), ZALTRAP is a treatment that is used in conjunction with the chemotherapeutic agent FOLFIRI in patients with metastatic colorecal cancer that have already received an oxaliplatin-containing regimen. Sales in the United States were very limited so far (only $8 million in Q3), but the market is expecting the number to explode in coming quarters in the same fashion as EYLEA due to the benefits of partnership with Sanofi. ZALTRAP is also expected to progress smoothly to the European market due to a very positive opinion from the CHMP, which should pave the way for another approval by the European Medicines Agency.
So while Regeneron stock may seem a bit bloated given its historic returns and its enormous market capitalization of $15.5 billion, it has the financial support of two high-growth drugs that will be seeing incredibly fast sales growth in the next few years, which should are also benefiting from the collaboration of the two pharmaceutical giants Bayer and Sanofi. The implication is that any investors considering a stake in REGN should be almost exclusively focused on the sales growth, since these drugs have already passed their clinical trial hurdles and are now reaping the benefits of the lengthy wait for their approval. Other drugs in Regeneron's pipeline should also be considered, although they will play a smaller role given the size of the company at this point.