- Regeneron has just released its Q2 2022 earnings - revenues decreased by 44% year-on-year, to $2.86bn, but increased by 20% ex-REGEN-COV revenues.
- REGEN-COV - a COVID antiviral cocktail - made $5.8bn sales for Regeneron last year but is not effective against Omicron and will likely not make further sales in 2022.
- The ex-REGEN-COV performance is encouraging, as is Regeneron's profit margins >40% and cash position of ~$14bn.
- When/if powerhouse, ~$6bn per annum selling Eylea goes off patent it may be a significant problem for Regeneron.
- REGN posted decent results but needs to deploy cash to R&D if it wants to challenge the major US Pharmaceuticals as the pipeline is intriguing but generally earlier stage.
Investment Thesis
Regeneron ( REGN ) released its Q2 2022 earnings yesterday. As I predicted in a bearish Seeking Alpha note on the company's prospects for 2022 back in February, total revenues were down significantly versus Q2 2021, falling by 44% to $2.86bn, owing entirely to REGEN-COV, for which no sales revenues were recorded last quarter, versus $2.6bn in Q2 2021.
REGEN COV is/was Regeneron's COVID antiviral cocktail. After it became clear that the therapy was ineffective against the Omicron strain of COVID, in January this year the FDA limited its use to patients "likely to have been infected with or exposed to a variant that is susceptible to these treatments", ending its revenue generating life, at least for the time being.
The lack of REGEN-COV sales in 2022 after its $5.3bn of sales in 2021 was always going to be an issue for Regeneron, and perhaps that is why its stock declined from its April high of $738, all the way down to $548 in mid-June. Frankly, I would have expected the losses to have come a little earlier, although perhaps the $636m generated by REGEN-COV sales in Q1 2021 kept the share price buoyant.
Despite the year-on-year decline in revenues, however, investors have cheered Regeneron's results, which were impressive across the board ex-REGEN-COV - up 20% year-on-year. The share price has leapt to a value of $621 at the time of writing, almost exactly where it was 12 months ago, although still discounted by 16% from April highs.
In what direction Regeneron stock will move next, and where it is likely to be at the end of the year, at the end of 2023, and at the end of 2025 are the questions that investors will want answering, and there are a few clues in the Q2 2022 earnings data, which I will explore in this post.
Regeneron Q2 Earnings Overview - Eylea Sales Grow (Again) But Can It Last?
Regeneron Earnings Overview Q222. (earnings press release)
As we can see the vast majority of Q2 2022's revenues were driven by the company's old war horse, Eylea, which made sales of a staggering $9.4bn in FY21 - not bad for a drug that was approved for the ocular Wet Advanced Macular Degeneration ("Wet AMD") back in 2011 - and revenue generation was up by 14% year-on-year in Q2 2022, to $1.62bn. It should be noted that German Pharma Bayer (BAYRY) markets the drug in Europe, so Regeneron's share of revenues is derived from the US only.
Eylea's revenues in the US across the first 6 months of 2022 are $3.14bn, versus $2.77bn in the first 6 months of 2021 - up 14% year-on-year - so we can most likely expect double digit growth for the therapy in FY22. According to Regeneron's Q2 2022 earnings presentation, Eylea is the number 1 prescribed anti-VEGF therapy for retinal disease, with a 75% share of the US branded market, and ~50% share of the total category market.
With that said, key patents protecting Eylea from generic competition expire next year, and generics giant Viatris ( VTRS ) has already launched a challenge in anticipation of marketing a biosimilar version of the drug. No decision is expected until the end of this year, and Regeneron does have some patents protecting Eylea until 2032, but with other generics players such as Sandoz, Samsung Bioepis, and South Korea based Celltrio all already trailing Eylea generics, and a host of patents expiring around 2026 - 2027, Eylea's supremacy and multi-billion dollar revenue generating capacity may not last too much longer.
In my last note I also spoke about Roche's ( RHHBY ) 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. Regeneron has dismissed this threat, claiming that its scientists wrote the book on Ang-2 and there is limited benefit to patients. Management is targeting label expansions for Eylea, into e.g. diabetic eye disease, and treating preterm infants suffering from retinopathy of prematurity, as well as a new 8mg dose that might extend intervals between doses, for which Regeneron hopes to secure FDA approval next year. The fate of Eylea sales is understandably central to the Regeneron investment thesis.
Dupixent - A Mega Blockbuster Although Sanofi Earns The Lion's Share
Arguably, Regeneron's next most important drug is Dupixent, which earned $2.1bn of global net product sales in Q222, although only $678m of that figure is attributable to Regeneron, with the remainder going to French Pharma Sanofi (SNY), owing to a complex co-development and co-marketing agreement in which profits are shared equally in the US, with some development costs then deducted by Sanofi, whilst profits outside the US are shared on a sliding scale that favors Sanofi by 55% - 65% - according to an explanation I found in Regeneron's 2021 10K submission .
Dupixent is approved to treat Atopic Dermatitis, Asthma, Chronic Rhinosinusitis, and Eosinophilic Esophagitis ("EoE"), markets of respectively 2.2m, 975k, 90k and 50k patients, and there may be more indications to follow. In June, Dupixent was approved by the FDA in children with Atopic Dermatitis, in May, for children with EoE, and in April, Dupixent was approved for children with asthma in Europe. The next major indication looks like it will be in Prurigo Nodularis, an inflammatory skin disease, with the FDA assigning a target action data of September 30th (to rule on the success of Regeneron/Sanofi's supplemental Biologics License Application).
Chronic Obstructive Pulmonary Disease is another target, and at its peak, Sanofi believes Dupixent can rack up sales of nearly $15bn per annum, with up to 10 more approvals in different indications achievable by 2025. That ought to translate to ~$5bn in peak annual revenues for Regeneron, by my calculation - enough to help offset falling Eylea sales if patents are successfully challenged, perhaps, although nothing in Regeneron's portfolio is capable of offsetting the lost REGEN COV sales, which are best regarded as a one-off benefit in 2021.
Libtayo - Buying Out Sanofi's Share An Attempt To Dominate In Skin Cancer
During Q2 2022 Regeneron opted to buy out Sanofi's share of rights to market and sell Libtayo - an immune checkpoint inhibitor ("ICI") approved to treat 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% - in a deal worth $1.1bn , pus an 11% royalty on all sales.
It is an interesting decision - Sanofi and Regeneron have been partners for years, but recently Sanofi sold its 20% equity stake in Regeneron as it failed to repeat its success with Dupixent with joint-marketed cholesterol drug Praluent and rheumatoid arthritis treatment Kevzara.
Libtayo may have contributed only $91m in sales in Q2 2022 - up 14% year-on-year - but trials in prostate cancer are underway, as is a Phase 3 trial in first line metastatic melanoma, and an intriguing collaboration with BioNTech ( BNTX ), the mRNA vaccine giant, and its FixVax melanoma candidate.
Regeneron also spent more of the windfall cash from REGEN-COV on acquiring Checkmate Pharmaceuticals and its lead drug Vidutolimod in a $250m deal . Vidutolimod is "an advanced generation CpG-A oligodeoxynucleotide Toll-like receptor 9 (TLR9) agonist delivered in a virus-like particle ("VLP") that has "demonstrated clinical responses as a monotherapy in patients with PD-1 refractory melanoma", according to Regeneron's press release.
Regeneron hopes it will further bolster its opportunities to dominate the skin cancer market, in combo with Libtayo, and make further strides in the lung cancer market, although it is worth pointing out that this will not happen overnight - trials are generally at an early stage - and there is powerful opposition especially in the lung cancer market where Merck's (MRK) mega-blockbuster Keytruda reigns supreme.
Looking Ahead - Pipeline and Potential For Non-Organic Growth
Make no mistake, Regeneron's emergence as a globally significant Pharmaceutical company, growing revenues from $1.4bn in 2012, to $7.9bn in 2020, is almost entirely down to the success of Eylea, whilst last year's surge to revenues of $15.79bn was underpinned by the surprise success of REGEN-COV.
There is nothing wrong in that, and Regeneron has increased its investment into R&D to fund future product development. Within oncology, besides Libtayo, there are a number of solid tumor bispecifics in development targeting various solid tumors - an intriguing new approach that may work well with Libtayo and is being trailed as such. There are also blood cancer bispecifics, one of which, REGN5458, has a potentially pivotal Phase 2 trial ongoing.
Then there is Regeneron's Genetic Medicines division - the company is working with the RNA-interference specialist Alnylam, and CRISPR gene editing specialist Intellia (NTLA), with a wide range of targets, from non-alcoholic steatohepatitis ("NASH"), to Transthyretin Amyloidosis, to Myasthenia Gravis, with clinical programs underway.
These types of projects are intoxicating thanks to their "one and done" dosing regime, although investors will have to keep the faith and bide their time because the only FDA submission we are likely to see before 2025 will be for Pozelimab, Regeneron/Alnylam's potential long-term Eylea replacement. If the 2 companies pull off an approval, it could secure domination of the WET AMD market for another 15 years, but that is a big "IF".
Regeneron planned FDA submissions to 2024+ (earnings presentation)
As we can see above, upcoming FDA submissions are dominated by label expansion opportunities for already approved drugs, primarily the old guard of Eylea and Dupixent - the drawbacks here being that Eylea may lose some of its patent protections in the next few years, and Sanofi claims the lion's share of Dupixent revenues.
In the shorter term, Regeneron's FY22 guidance is somewhat odd in that it details forecast expenses, not revenues. R&D spending is forecast to increase to $3.49bn - $3.7bn, from ~$3.2bn in FY21, and there will be $620m - $670m of additional capital expenditures, as Regeneron looks to invest up to $1.8bn into a new R&D facility in Tarrytown, New York State.
The reality is that Regeneron revenues are going to fall significantly in FY22 due to the lack of contribution from REGEN-COV, but they ought to exceed $10bn, and reflect >40% growth over 2020 revenues, which is admirable.
Conclusion
If we simply take Regeneron's 6-month revenues earned so far in 2022, and double it, to get a feel for FY22 earnings, we get $11.6bn, which represents strong ex-REGEN-COV growth of 9%, and I would actually expect it to end up a little higher than that given sales are often stronger in the second half of the year.
If we take net income from the first 2 quarters of 2022 - $2.368bn, and double it, we get $4.736bn, or a margin of 42%, which is very strong. That gives us a forward EPS figure of $43, which translates to a forward P/E ratio of ~15x.
Regeneron's P/E ratio in FY21 was ~8x, but that was favorably skewed by the REGEN-COV contribution, and 15x is superior to the average P/E ratio in 2021 of the "Big 8" US Pharmaceuticals companies - namely and in order of market cap valuation Johnson & Johnson ( JNJ ), Eli Lilly ( LLY ), Pfizer ( PFE ), AbbVie ( ABBV ), Merck, Bristol Myers Squibb ( BMY ), Amgen ( AMGN ) and Gilead Sciences ( GILD ).
The average P/E of these companies is slightly skewed upwards by Lilly's high score of 49x, and given Regeneron's long term goal is basically to challenge these companies across the oncology, autoimmune, ophthalmological and other markets, we can say that Regeneron is not in a bad place. Critically, Regeneron is a very cash rich company, with current assets of ~$14bn, and free cash flow of $2.4bn in the first 6 months of 2022.
Regeneron doesn't pay a dividend, unlike the "Big 8" Pharmas, who all do, with yields averaging ~3%, but it does engage in substantial share buyback programs - investing >$8bn in share repurchase schemes since 2019, with another $3bn investment announced in November 2021.
As to whether Regeneron will reward investors or leave them out of pocket over the short term, I think that even though the company is trading at something of a premium at >6x my projected FY22 revenues figure, it is astonishingly profitable and cash rich and so I do think there is a chance the company can challenge highs achieved earlier in the year of >$700.
Over the longer term, however, I do see some issues clouding the upside picture. Eylea's standard of care status cannot last forever and the type of market domination it has achieved is rare, and Regeneron may struggle to repeat it.
There may not be enough in the portfolio and pipeline to offset any lost revenues from Eylea, and even if there were, it may not be arriving soon enough, and although Regeneron's independence from Sanofi is in many ways a positive, the company may find things trickier as it tries to go it alone - much of its pipeline is focused on oncology, where approval chances are far slimmer, and markets more competitive, than probably any other field of medicine.
As such I don't think Regeneron will be turning the Big 8 Pharmas into a "Big 9" any time soon, as the likes of Gilead and Amgen at the lower end of the valuation scale are likely to generate >2.5x more revenues than Regeneron in 2022, while their market cap valuations are <2x greater. Regeneron's growth may plateau in the mid-2020's and its margins potentially decrease if Eylea is successfully challenged by generics.
It may be time for management to begin thinking about a mega-money merger M&A deal that can catapult it closer to where the company and its management likely wants it to be. That may appease shareholders and keep the share price steady, perhaps even growing, over the longer term.
For further details see:
Regeneron: Mixed Q2 2022 Earnings - Short-Term Good, Long-Term FUD