Regeneron Stock: Hard To See Past Lost REGEN-COV Sales In 2022 (NASDAQ:REGN)

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Investment Thesis

Regeneron (REGN) is an excellent pharmaceutical company by most measures. Over the past 5 years its stock price has risen by 73%, and over the past year by 24%, compared to the S&P 500’s 95% and 16% gains over the same periods.

Regeneron isn’t a dividend payer – yet – but the company has authorised $7.5bn of share repurchases since November 2019, and announced plans to repurchase $3bn more last November.

The low share count – for a major pharmaceutical company – of 108m helps to explain the high share price – currently $622, having declined from an all-time peak of $680 in September.

The last time I covered Regeneron for Seeking Alpha, in August last year, I introduced the company as follows:

Regeneron (REGN), the $66bn market cap biotech that markets and sells the blockbuster eye disease therapy Eylea ($8.4bn of sales in FY20), has just delivered a blowout Q2’21 earnings quarter, with revenues climbing by 164% year-on-year, and 103% sequentially, to $5.14bn.

To put that in context, $5.14bn is 60.5% of Regeneron’s full year revenues in 2020 of $8.5bn, and it is largely thanks to $2.76bn of revenue generated by its COVID therapy REGEN-COV which is itself a higher figure than the company’s reported earnings in Q121 of $2.53bn.

If you think that was impressive, Regeneron released its FY21 results on Friday, and arguably, things have got even better. Q4’21 revenues were up 104% year-on-year, to $4.95bn, and FY21 revenues were up 89% year-on-year, to $16.1bn.

There cannot be many companies across any sector that can match that kind of growth. Non-GAAP EPS was reported as $74.66 – up from $31.47 in 2020 – meaning Regeneron’s price to earnings (“PE”) ratio currently stands at 8.3x – all in all, an outstanding year for the company.

Can the company repeat its success and create further shareholder value for investors in 2022? I would actually be a little cautious on that front.

It’s likely that 8 of the company’s 9 commercialized products will deliver sales growth in 2022, but crucially, sales of REGEN-COV – which ultimately contributed $5.8bn of revenues – or ~36% of all revenue – in 2021, may vanish altogether.

In this post, I’ll discuss the reasons for this and take a deeper dive look at the company’s strengths, weaknesses, opportunities and threats in 2022 and looking further ahead.

Regeneron has one of the most intriguing pipelines in the pharmaceutical sector in my view, which I’ll also discuss below, but it may take 3-5 years for new products to win approval and generate meaningful revenue.

As such, I am forecasting a potentially tricky year for Regeneron in 2022 – this could be the first year since 2017 the company does not grow its topline revenues. Although the company undoubtedly has a bright future, a price correction seems the logical outcome for Regeneron this year.

REGEN-COV Sales May Be $0 In 2022, Leaving Regeneron With A Hole To Fill

REGEN-COV’s $5.83bn of sales in 2021 provided the bulk of company’s 89% year-on-year growth, but, as Regeneron’s CEO Dr Len Schiefer told analysts on the company’s Q4’21 earnings call:

Based on preclinical data, we recently announced that REGEN-COV is highly unlikely to be active against the Omicron variant. Appropriately, the FDA amended the emergency use authorization for REGEN-COV, limiting its use in the U.S. in light of the Omicron variant being dominant.

The company’s Executive Vice President (“EVP) and Chief Financial Officer (“CFO”) Bob Landry later confirmed that:

we do not expect to record any U.S. REGEN-COV sales in the first half of 2022

When the news that REGEN-COV was ineffective against the Omicron strain first broke on 16th December, Regeneron stock fell from ~$670, to $602 – or by 10% – which for me is a surprisingly minor drop considering the magnitude of the news – and the stock price has since recovered, to trade at $623 at the time of writing.

That strikes me as a very strong show of faith in Regeneron management – and even more so when we consider it was not especially forthcoming with its FY22 guidance, declining to provide any information related to income or profits.

Regeneron 2022 financial guidance

Regeneron FY22 earnings forecast (Regeneron press release)

Although Dr. Schiefer spoke at some length about Regeneron’s VelociSuite platform and its ability to deliver new monoclonal antibody treatment candidates against Omicron, or any other strain of COVID as the disease switches from “pandemic” to “endemic”, it is hard to imagine Regeneron delivering a new COVID antibody in the 2nd half of 2022 that can contribute anything remotely as significant to the top line as REGEN-COV did in 2021.

As such, it seems Regenron will likely have at least a $3 – $5bn earnings deficit to make up in 2022 from other sources.

The most likely candidate to make that deficit up would be Dupixent, its injectable interleukin-4 receptor alpha antagonist approved for the treatment of auto-inflammatory conditions Atopic Dermatitis (“AD”), Asthma, and Rhinosinusitis. Dupixent was co-developed with French pharma Sanofi (SNY), with revenues shared 50/50 in the US, and 60/40 in Sanofi’s favour ex-US.

Dupixent earned Regeneron $6.2bn of revenue in FY21 – up from just over $4bn in 2020, and the therapy is up for 4 more approvals in 2022, in Eosinophilic Esophagitis, Prurigo Nodularis, Chronic Spontaneous Urticaria, and Chronic Inducible Urticaria.

Whilst these may be smaller indications, CEO Schiefer told analysts on Friday’s earnings call that “there are significant opportunities to increase market penetration rates in approved indications”. Given profits are shared with Sanofi, however, Dupixent sales globally would likely have to top $20bn in 2022 to make up for lost REGEN-COV sales, which seems unlikely.

Dupixent isn’t the only drug that Regeneron has up for regulatory approval in 2022 – in oncology, both REGN5458 (Linvoseltamab), in multiple myeloma, and Odronextamab, in Non Hodgkins’ Lymphoma are new molecules – both bispecifics – entering potentially pivotal Phase 2 trials this year. Even if approved, however, neither would be expected to drum up more than double digit millions in sales in their first few months on the market.

Eylea Keeps Growing Sales But Faces New Threats in 2022

If Regeneron’s late-stage pipeline assets cannot compensate for lost REGEN-COV sales, then could the pharma’s old stager, Eylea, succeed in their place?

Again, that seems very much open to debate. The drug has been approved for the treatment of Wet Age Related Macular Degeneration (“Wet AMD”), since 2011, Diabetic Macular Edema since 2014, and most recently, in 2019, as an injection pre-filled syringe formulation across all approved indications.

Eylea has been a phenomenal success for Regeneron – the asset that allowed the company to progress from an ambitious biotech to a $67bn market cap global pharmaceutical – but surely it cannot dominate its market sector forever?

Or perhaps it can – in 2021, sales rose by 19%, to $9.4bn, claiming a 75% share of the US branded market, with 40m administered injections worldwide. Schiefer described Eylea on the Q4 earnings call as:

an enduring product, with significant future opportunity, despite new market entries.

An 8-milligram (as opposed to 2 milligram) dose is the latest indication that Regeneron is putting before the FDA, having guided it through a Phase 2 trial in which it met its primary safety endpoint.

Still, a new challenger to Eylea’s dominance may be emerging in the form of Roche’s (OTCQX:OTCQX:RHHBY) Faricimab – brand name Vabysmo – a bispecific antibody that binds to Vascular Endothelial Growth Factor (“VEGF”), as Eylea does, but also Angiopoietin-2 (“Ang-2”), another eye disease pathway.

Vabysmo may require fewer injections per annum than Eylea, meaning that even though it has a higher list price – $2,190 versus Eylea’s $1,850 – it may be a more cost effective option than Eylea.

Nevertheless, when quizzed about this “elephant in the room” by analysts during the Q4’21 earnings call, CEO Schiefer was dismissive of Vabysmo’s challenge, commenting:

we don’t see faricimab as a transformative therapy of any kind, notwithstanding any label. It’s very hard to see when you look at it dispassionately any scientific evidence for the contribution of Ang2 blockade.

People forget, nobody has a greater interest and would love to see Ang2 blockade being a value given that George and his colleagues were the ones who discovered and cloned Ang2, the first in the world on that. But there’s really no evidence that we can see where you’ve separated that out.

Roche also has another drug in Suvismo – an implantable treatment – approved for wet AMD by the FDA last October, as it attempts to take on Regeneron in its most important market, although there is a cautionary tale here, in the form of Novartis’ (NVS) Beovu.

When Beovu was approved for Wet AMD in 2019 it was forecast for ~$2.5bn of sales and appeared to represent a major threat to Eylea, but in the end the competition never materialised. Beovu, beset by safety issues, made just $135m of sales across the first 9 months of last year.

Portfolio & Pipeline Points To Bright Future – Although Nothing Is Guaranteed

With Eylea and Dupixent seemingly in control of their markets for the foreseeable future, the spotlight falls on the supporting cast.

Libtayo, which earned $458m of revenues in 2021, is approved for Advanced Cutaneous Squamous Cell Carcinoma, and Advanced Basal Cell Carcinoma – forms of skin cancer – as well as non-small cell lung cancer (“NSCLC”) where PD-L1 expression is >50% – cutting the risk of death by 43% over chemotherapy in its pivotal trial – or by 32%, depending on whether you believe Regeneron’s interpretation of the trial data, or the drug’s FDA labelling.

Libtayo must compete with Merck’s Keytruda – the gold standard of cancer treatments – in NSCLC – and may not quite have the data to best the mega-blockbuster – which cuts risk of death by 38% – but its data is nonetheless encouraging, and Libtayo looks destined for blockbuster sales, and could secure a further approval – as a combo with chemotherapy – in NSCLC, with a PDUFA date of September this year.

The cholesterol lowering Praluent earned $421m of revenues in 2021 – up 17% year-on-year – but faces stiff competition from Novartis’ RNAi therapy Leqvio going forward – whilst Kevzara – first approved for Rheumatoid Arthritis (“RA”) in 2017 earned $338m – up 25% year-on-year – and could eventually double that figure, analysts believe.

The remainder of Regeneron’s commercialized portfolio – Evkeeza, Arcalyst and ZALTRAP – indicated for high cholesterol homozygous familial hypercholesterolemia (“HoFH”), cryopyrin-associated periodic syndromes, and wet AMD respectively, made a <$100m contribution to 2021 revenues, but Evkeeza is notable in that it is a gene therapy.

Regeneron prides itself on being at the cutting edge of drug development, and Evkeeza – seen as a long-term replacement for Praluent – is the first approved drug to block a protein called ANGPTL3, which helps to break down bad cholesterol. The drug will eventually target hypertriglyceridemia – a 1m patient market – and comes with a $450k list price – it’s not uncommon for gene therapies to carry such a hefty price tag.

Regeneron is developing a Tranthyretin Amyloidosis (“ATTR”) candidate with Intellia Therapeutics, which generated the first-ever clinical data supporting safety and efficacy of in vivo CRISPR genome editing in humans – sending Intellia’s stock price soaring. It was a momentous breakthrough, for Regeneron also, although there are many more years of development and regulatory hurdles to overcome before the drug could be successfully commercialised.

Regeneron refers to a “future turnkey genetics therapeutics platform” in a presentation given at the JPM Healthcare Conference last month, and whilst there is an element of truth to that statement, it would be wildly optimistic to believe that Regeneron will be able to churn out gene therapies to tackle different disease any time soon – if it could, you should sell all of your other holdings and buy more Regeneron stock!

Similarly, while the oncology targeting bispecifics development platform is the envy of many pharmas, let alone biotechs, success is not guaranteed, even if R&D resources are.

To illustrate my point, compare Regeneron’s 30 product candidates in development, below:

Regeneron drug development pipeline

Regeneron drug development pipeline (Regeneron JPM Healthcare conf. presentation)

…with its expectation for product approval across the next 3-5 years, below:

Regeneron product approval opportunities

Regeneron product approval opportunities – next 3 years (Regeneron presentation at JPM Healthcare conference)

Conclusion – Hard To See How Regeneron Avoids A Down Year In 2022

As I discussed in my intro to this post, I find it surprising that the absence of REGEN-COV revenues in the first half of 2022 – and quite possibly, across the whole of the year – has not drawn more negative publicity and dragged Regeneron’s share price lower.

After all, the COVID therapy was Regeneron’s third biggest selling asset last year, with nearly $6bn sales, and no company – not even a Pharma the size of a Pfizer (PFE) – market cap $297bn – AbbVie (ABBV) – market cap $248bn – or even Bristol Myers Squibb (BMY) – market cap $144bn – could stomach a loss of revenues that size without its share price listing by at least 5-10%, in my view.

As such, I can’t see how Regeneron generates much upside momentum in 2022. Granted, the company does not need REGEN-COV revenue to be profitable – it’s net profit margins will remain staggeringly high – likely >35% even without it – while its PE ratio may remain <10x, which screams buy.

With that said, however, investors arguably value growth over profitability – particularly where there is no dividend – and pharmaceuticals that struggle to grow revenues tend to decline in value – Biogen (BIIB) is another good example of this.

That doesn’t make Regeneron any less exciting, as a cutting edge company with its fingers in multiple pies – from gene therapy, to bispecifics, to anti-inflammatory, and of course eye disease. But losing REGEN-COV is to lose one of the triumvirate of assets that made the company excel in 2021.

I look forward to seeing what breakthroughs Regeneron makes in 2022 – but investment-wise, I will be watching from the sidelines. Based on my past Discounted Cash Flow Analysis of the value of Regeneron, in which I set a DCF price target of $581, and a price of $848 based on EBITDA multiple, I would certainly favor the former target.

I would consider investing at anything below $575, in anticipation of 10-20% upside potential. But only after the market has swallowed the loss of revenues from REGEN-COV in 2022, and adjusted its model accordingly.

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