Why the Risk/Reward Ratio Looks Great for Regeneron Pharmaceuticals Inc.

There’s risk, but there could be vast rewards for Regeneron Pharmaceuticals Inc.

Jan 8, 2014 at 7:25PM

The pharmaceutical sector inevitably serves up companies at different stages in their development.

For instance, take GlaxoSmithKline (NYSE:GSK). It is a well-established pharmaceutical player that has developed a diverse range of drugs and treatments over the years. Although a large proportion of its revenue depends on the success of a relatively small number of drugs, it does enjoy a degree of diversity.

Then there's stable mate Allergan (NYSE:AGN), which focuses on a smaller number of products but attempts to gain approval for those products to be used in a wider range of conditions. For instance, botox is used for facial aesthetics but also for upper limb spasticity, as well as a conditions such as severe underarm sweating. Allergan is seeking approval for further uses, too.

Meanwhile, Regeneron (NASDAQ:REGN) has yet another different set of circumstances, with its first product coming to market in 2008. This makes it a relatively young business, and since then, it has had two further drugs approved by the FDA, one being a partnership with Sanofi.

This means Regeneron could be viewed as risky, since it has a smaller and less diversified stable of products than many of its peers. However, while this could mean greater risk on the one hand, it could also lead to greater reward.

Indeed, Regeneron made a net profit last year for the first time ever, with the company's being able to deliver a bottom line of $750 million in 2012.

Furthermore, 2013 is set to be another profitable year, although earnings are set to dip slightly, by 1%. However, 2014 and 2015 look set to be strong years, with earnings per share forecast to grow by 23% in 2014 and 15% in 2015. This equates to an annualized growth rate of just under 19% in 2014 and 2015: very impressive numbers indeed.

However, the really fascinating thing about Regeneron is not necessarily its products or even its growth in profitability. Rather, it is the potential for how it could perform if the wider market continues to reach higher highs.

This is because Regeneron is a high-beta stock, meaning its shares should outperform the index during a bull run and underperform during a bear phase. For instance, since Regeneron's beta is 1.97, it should (in theory) go up by 1.97% for every 1% gain in the wider market, while the same will (in theory) be true if the wider market falls by 1% -- Regeneron should fall by 1.97%.

Compare this with other pharmaceutical stocks such as GlaxoSmithKline and Allergan, which have betas of 0.54 and 1.15, respectively, and it's clear that Regeneron is a different beast in terms of its risk/reward profile.

This, of course, increases the risk to investors in Regeneron but also means that there are greater potential rewards on offer. Coupled with a growing pipeline of potential drugs, the scope for further FDA approvals, and impressive EPS growth prospects, and, suddenly, the risk/reward ratio for Regeneron looks very appealing.

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Fool contributor Peter Stephens owns shares of GlaxoSmithKline. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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