RHHBY - Regeneron: Innovation And Disruption Done Right

Summary

• Regeneron has a respectable portfolio of commercialized medicines and is working on potentially transformative new technologies for immuno-oncology.
• Their collaborative energy is strong and the medium-term looks good, but a lot of their future hinges on emerging biotechnological developments.
• At the moment, the stock price has gotten out ahead of the business; it needs to retrace some of the recent froth to be considered "good value" again.

The recurring theme with our biotech analyses is that many mid-to-large sized companies are simultaneously reaching major pivot points in their businesses as a result of patent cliffs and new frontiers of medicine, resulting in a slow-motion yet frenetic battle royale for previously-off-limits market share, claim-staking on the bleeding edge, and the ever-present "whale hunters" looking to solve entire fields in one fell swoop. We've seen names like Biogen ( BIIB ), who are doubling down on their neurology expertise for their pivot with dubious success ; and on the other side, Roche (RHHBY), utilizing a "diversification" strategy to revitalize their portfolio, which has given them a few lifelines for the next "epoch" of business.

Also in this category is Regeneron Pharmaceuticals ( REGN ), a relatively mature biotech company that lives and breathes innovation. Their flagship drug is nearing the patent cliff, but they've already monetized several more drugs across other fields of medicine, pushing their trajectory to a "hockey stick" inflection in 2017-2018. The technology that drives their innovation opens numerous opportunities for collaboration and even helped them to play a key role in responding to the COVID-19 pandemic. Competition is fierce, but their early adoption of a revolutionary technology has them looking very appealing in the coming years.

?Portfolio Breakdown

?Eylea: The flagship

Eylea is still far-and-away the drug of choice for its ophthalmological indications, and Regeneron is doing all they can to put distance between themselves and competitors. All eyes (no pun intended) are on the results of the 8 milligram dosing regimen trials (cf. 2 milligrams for current dosing regimens). Success on this front would mean patients need fewer injections for the same benefit without any increase in adverse effects, a win on pretty much all fronts. During the Q4 earnings call , CEO Len Schleifer summarized very well the myriad knock-on benefits of reduced injection frequency:

...the primary driver will be that patients would prefer to get a needle in the eye less frequently. With every time you put a needle in the eye, there is a risk of inflammation or more serious complications hemorrhages, detachments, things like that… And it's better for the patient from the number of times they have to come to the doctor's office. These are elderly patients. Frequently, they have to have a caregiver. From a practice perspective, certainly, as many doctors' offices are overwhelmed by - in the number of injections that they are giving and that they could free up time with if you could get the same result. From a practice point of view with less frequent injections, certainly that would free up more time and would drive them.

Additionally, Regeneron is working on a pre-filled syringe preparation for Eylea, which would streamline delivery and ensure consistent dosing, a key consideration with the potential for a quadrupled dose on the horizon.

Meanwhile, the first real challenger of an ophthalmological therapeutic entered the US market last year: Vabysmo from Roche, a bispecific antibody targeting the neovascularization pathway, following their last-generation therapeutic Lucentis (and the off-label usage of Avastin, also targeting the same mechanisms with similar efficacy at a fraction of the cost). Eylea came to market in 2012 and took about three years to outpace Lucentis and then some. Vabysmo's initial launch brought in about two-thirds of Eylea's first full year of revenue, a respectable showing in absolute terms but less than 10% of Eylea's annual sales for 2022. Eylea's position in the market will be much harder to assail than Lucentis' was ten years ago, and market share isn't going anywhere anytime soon with an aging population increasingly susceptible to conditions such as AMD and DME.

?Dupixent and Libtayo: The hockey stick

We became interested in Regeneron as we were building our healthcare/pharma basket because, back in 2021, it appeared their revenues from Eylea were established, they were commercializing a respectable seven or so different medicines, and the revenue from those other pharmaceuticals was starting to break out. Of the "other medicines", the two main drivers have been Dupixent for a number of type 2 allergic conditions, including atopic dermatitis (eczema) and asthma; and Libtayo, a PD-L1 inhibitor with a growing list of indications for cancers. Both were approved within the last six to seven years, and their year-over-year sales growth has been most impressive:

Regeneron heavily promotes Dupixent as the go-to treatment for type 2 allergic conditions. Schleifer commented at the JP Morgan Healthcare Conference in January that "if you talk to some expert[s] and you say, how do you define a type 2 allergic disease, some experts will say, well, if it responds to Dupixent. So, it has sort of become the standard, if you will, of type 2 allergic diseases." On the Q4 earnings call recently, president and co-founder George Yancopoulos stated "because many patients suffer from systemic Type 2 inflammation, they often suffer from several of these diseases concurrently. And thus, Dupixent has the potential to holistically address these patients' multiple Type 2 conditions for which Dupixent is approved." Leadership also commented at the JP Morgan conference, when asked about potential competition in the immunology space, that "in most of our trials, when you look at one disease like atopic dermatitis, more than 50% of the patients have another comorbid allergic disease, many of which are also treated with Dupixent."

The explosive growth of Dupixent's revenue is a testament to its status as a cornerstone blockbuster therapeutic, having surpassed Eylea's US revenue and closing to within $1 billion of worldwide Eylea revenues this past year. Data on treatment for COPD, a market consisting of at least 16 million US patients alone, is due later this year and also could benefit from an aging population along with Eylea.

Interestingly, Regeneron seems content to receive just a share of the Dupixent sales, letting their collaborator Sanofi (SNY) take the bulk of the profits. They did, however, exercise an option last July to purchase from Sanofi the full rights to their co-developed PD-1 inhibitor Libtayo, a cancer treatment earning only $578 million worldwide last year (compare the other PD1-related drugs: Keytruda, Opdivo, Tecentriq and Imfinzi, all earning over $2 billion as of Q3 last year), for $1 billion up-front and 11% of net sales until 2034. Libtayo did gain approval in the US in November of last year as a first-line non-squamous cell lung cancer treatment in combination with chemotherapy, but was that alone worth such a price tag?

Comparing these two treatments, Dupixent is immediately and broadly useful, but it will likely saturate the market before too long and additional indications will eventually dry up, resulting in a leveling off of revenue over the medium-term; Libtayo, meanwhile, is a longer-term play, slowly accumulating indications that will increasingly become meaningful, especially as the springboard for a new phase of Regeneron's innovation into bispecific antibodies.

?Bispecifics and "costim" therapies: The paradigm shifter

After making big splashes in ophthalmology with Eylea and immunology with Dupixent, Regeneron is charging headlong on the back of Libtayo into immuno-oncology, one of the true final frontiers of medicine but also an exceptionally crowded space. We mentioned in a previous article that Roche was winning the race to market with bispecific antibodies - Hemlibra and Vabysmo - and another seven or so in the pipeline. The only other company we've seen with as many bispecifics in the pipeline is, you guessed it, Regeneron. Their bispecifics are focused on applying techniques from hematological cancers - T-cell recruitment to cancer cells - to solid tumors otherwise resistant to immunological therapies, with the newly added twist of PD-1 pathway inhibition (via Libtayo, naturally) to push the immune reaction to the tumor cells into overdrive.

This "costimulatory" therapy is the product of Regeneron's basic research into oncology, and they are steadily releasing positive preclinical and early clinical trial data suggesting the combination therapies are producing dramatic improvements in patients with otherwise poor prognoses. Regeneron presented results at the JP Morgan conference that for one particular costimulatory bispecific treatment, PSMAxCD28 + Libtayo for castration-resistant prostate cancer, the therapy showed dose-dependent antitumor responses in patients, and that severe immune-related side effects only occurred in patients exhibiting antitumor activity.

The speed with which Regeneron has been able to capitalize on opportunities in this rapidly-advancing field of medicine is nothing short of remarkable. Immuno-oncology is itself a fairly new field, and already we are seeing progress happen in leaps and bounds. Opportunities abound in this space, particularly around advanced-stage cancers. The glaringly unmet need was addressed by Schleifer in the earnings call when asked about the company's priorities for their oncology treatments:

Cancer cures in serious advanced tumors are still far and few between. And there is still tremendous need which makes this a very dynamic treatment marketplace because people want that extra benefit because it's not like they are getting cures. We haven't cured lung cancer or we haven't cured most serious cancers. So, the ability to have foundational individual treatments and then get more by combining them really does position us to leapfrog ... the treatment paradigm out in the world because patients and their doctors are very sensitive to improve outcomes because there is still tremendous, tremendous need.

The outlook may be a bit rosy, however, and with a lot of data set to come out this year, the picture will likely become much clearer on how transformative this technology really is.

?COVID and the embryonic collaborations

As if these disruptive developments weren't enough, Regeneron made waves with their research into the COVID-19 pandemic and the quick development, in collaboration with Roche, of the REGEN-COV/Ronapreve therapy. They landed some generous government deals funded by emergency relief measures, but that windfall left as quickly as it came. Just as the pandemic was a trial-by-fire of mRNA vaccine technology for companies like Pfizer ( PFE ) and Moderna ( MRNA) , it served as something of a field test for Regeneron's proprietary high-throughput in vivo antibody development platform, VelociSuite , whose superiority in rapidly developing antibodies was questioned in 2015 by American and Chinese scientists in response to a study on MERS-CoV. Although REGEN-COV is no longer recommended by the WHO due to its reduced effectiveness against the contemporary mutants, Regeneron did demonstrate early in the pandemic the likely mutation hot spots and emphasized the high likelihood of virus mutation if only antibody monotherapies were employed.

VelociSuite encompasses a variety of related technologies for rapid development, production and testing of antibody therapeutics in humanized mouse models, and this platform is only possible due to Regeneron's strength in genetic basic science. The harnessing of genetics and animal models makes them an absolute powerhouse, and it continues to open doors for them in terms of collaboration. In particular, they have a partnership with Alnylam ( ALNY ) exploring RNA-based therapeutics and a partnership with Intellia ( NTLA ) on a CRISPR/Cas-based gene therapy. What particularly caught our attention, however, was a comment at the JP Morgan conference, where they mentioned a rather unorthodox new gene therapy strategy:

Regeneron has invented a proprietary approach ... to use antibodies to deliver genetic payloads to specifically targeted cells in the body, and we have validated this approach in non-human primate studies. With this antibody targeting technology for systemic genetic medicine delivery, we believe we can empower the winners in the gene medicine field and become a leader ourselves in gene medicines by combining these unique targeting approaches with innovative payloads across many disease settings.

It's quite the claim to make, but it also has enormous potential if it pans out. Combining the high specificity of antibodies with the versatility of gene therapy could completely obsolete the current standards of viral vectors, resulting in a much safer therapy with the same benefits.

?Risks

?Leadership

There's no doubt that Regeneron has world-class scientists running the company, that's been the case since they founded it in 1988. Conversely, they've been the company's only leaders for the last 35 years. While it clearly hasn't stifled their innovation, we have to ask the awkward question: do they have a succession plan in mind? Several of the co-inventors of Regeneron's VelociSuite have also been with the company a long time, so we consider them unlikely to accede to an executive role. Looking at the company leadership profiles , there are a few names that stand out as possibilities:

• Marion McCourt, head of Commercial, former COO at AstraZeneca. She speaks at the earnings calls, conferences and knows a lot about the business side of things.

• Christos Kyratsous, head of genetic therapeutics and Infectious Diseases therapeutics. His name appears on a number of Regeneron's publications related to COVID.

An outside hire isn't out of the question either; we commented on Bill Anderson's departure from Roche's Pharma division at the end of last year, and earlier this month news came out that he will be taking over as CEO at Bayer in April. For Regeneron, the focus of any transition will be more on "don't fix what's not broken" with their basic research, innovation, collaboration and commercialization efforts.

?Drug Pricing

Considering a large portion of Regeneron's current and potential patient base is of advanced age (i.e. - more vulnerable to ophthalmological conditions, cancers and infectious diseases), the risk of revenue effects from drug pricing policy and government-sponsored healthcare programs such as Medicare is substantial. Last month, Medicare announced they will publish their shortlist of drugs for price negotiation in September. Analysts consider Eylea to be a potential candidate for negotiation, but given any negotiated prices won't take effect until 2026, there is a good chance Eylea's revenue has already fallen off by that point. Alternatively, Keytruda and Opdivo have both been suggested as negotiation candidates, which might give Libtayo more of an opportunity in the PD-1 monotherapy space. That being said, more drugs are supposedly going to be brought up for negotiation in the coming years; if Regeneron ends up with a drug like Dupixent covering a lot of indications for patients on Medicare, like COPD, that might ping on HHS' radar in a year or two.

? Novel Technologies

Innovation and pushing the envelope are typically all-or-nothing affairs: they produce incredible results or they don't produce anything. On two recent occasions - the Q4 earnings call and the SVB Securities Biopharma Conference - analysts asked about the usage of CD28 as a target in their immunotherapies, recalling the disastrous "superagonist" theralizumab , whose Phase I clinical trial in 2006 resulted in severe toxicity to healthy participants and, in Yancopoulos' own words, "almost killed the field." This haunting memory has resulted in a very slow dose escalation for CD28 bispecifics in clinical trials, which fortunately has not resulted in any severe generalized toxicity so far. Many of the modern advances in biotechnology are equal parts brilliant and terrifying in how they manipulate the body; it always feels like they're one misstep away from a hard fall. This threat may be the reason Regeneron is continuing to explore other types of drugs besides immunological agents, such as siRNA and CRISPR/Cas9. In the end, it's always a risk/reward assessment, and so far they've been on the right side of that balance.

The other consideration with a highly innovative, bleeding edge company is the R&D spend. Regeneron's R&D expenses, according to Seeking Alpha, have historically hovered around 40% of revenue, even dropping to 30% in recent years thanks to some short-term tailwinds. This historical average is in line with the industry according to Prof. Aswath Damodaran's data .

?Competition

Regeneron's marketed products face competition from products by the true "Big Pharma" names, but it feels unfair to compare to them from a business standpoint, so we've pared the peer group list down to names we consider reasonably similar in size and scope: Amgen ( AMGN ), Biogen, Gilead ( GILD ) and Vertex ( VRTX ).

?Business

Business lifecycle-wise, Regeneron is firmly middle of the pack compared to their peers:

• Vertex has their flagship Ivacaftor for cystic fibrosis, but the rest of their treatments are still in mid-stage clinical trials.

• Biogen we've written about several times in the past; their MS portfolio is starting to flounder and there may be hope with lecanemab and zuranolone, but it's too early to tell.

• Amgen is arguably at a maturity level we could see Regeneron reaching eventually, with 27 approved medicines and a vibrant pipeline still producing.

• Gilead is also more mature as far as their organic product line in virology and their bolt-on businesses, but also pushing a very interesting pipeline.

Amgen and Gilead might also present direct competition to Regeneron. Amgen is very deep in the immunology space, including a rheumatoid arthritis drug, Repatha, that competes with one of Regeneron's less-lucrative medicines, Praluent. Amgen also co-developed Tezspire, currently used for asthma and being investigated for other indications, posing a larger risk to Dupixent's space in type 2 allergic conditions. They also have rocatinlimab for atopic dermatitis, a biosimilar to Stelara (an interleukin inhibitor, similar mechanism to Dupixent) and a biosimilar to Eylea in the pipeline, so they most certainly have the firepower to besiege Regeneron's position. Gilead, meanwhile, has infectious disease experience and the drug remdesivir approved for treatment of COVID, a treatment still recommended by the WHO unlike REGEN-COV. They are also making inroads into oncology on the back of their acquisition of Kite Pharma, with two lymphoma gene therapies approved and a number of additional immuno-oncology therapies in development (although many involve an anti-TIGIT antibody, domvanalimab; Roche's experiences with tiragolumab may not bode well in that regard).

?Fundamentals

Regeneron's appeal compared to its peers has definitely faded recently as the stock has seen a bit of a run-up. Just a year ago, their P/E was hovering around 10; it has doubled as of 2023:

ROE for all of these companies well outpaces the industry average of 0.68% and actually nears the Pharmaceutical industry average of 24.54%, but Regeneron's ROE has been in decline recently:

However, Regeneron is able to achieve their results with one of the lowest debt loads of the group, along with Vertex (Amgen's debt-to-equity ratio is so large it distorts the rest of the chart if included):

?Valuation

Everything seems positive as far as Regeneron's prospects, but in the short-term the market has run away and left them a bit overexposed. Their long-term cash flow CAGR is 8.4%, which is impressive, but it is also a fairly "lumpy" growth, which means a wider range for the forecast of the present value of future cash flows. We'll stick to the low-side for this analysis.

Inverting the Gordon growth model gives us a 15.56% discount rate at current prices. We've been fortunate enough to acquire below $600/sh; at that round number, that would translate to a 17.3% discount rate. An earnings multiple of 15 (compared to their present P/E of just over 18) gives a price of $620/sh, which also comes out to an almost exactly 17% discount rate. It sounds so convenient, we'll just leave it at that.

?Conclusion

Regeneron is the kind of innovative, disruptive biotech name with solid fundamentals that we feel confident will continue to deliver for the foreseeable future. Right now, though, they aren't as appealing as they were previously compared to similar names in biotech, but that's not because they aren't delivering good research and good drug prospects. We welcome any sort of pullback that will let us add to the position, even if it doesn't reach that magic number, but for now, we're happy to continue to let this company do good and do our portfolio well.

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