3 Reasons Regeneron Can Keep Rising in 2014

Large cap biotech Regeneron (NASDAQ: REGN  ) has had a spectacular past twelve months, rallying more than 70% thanks to robust top and bottom line growth, soaring sales of its top drug Eylea, and promising partnerships with Sanofi (NYSE: SNY  ) and other major pharmaceutical companies.

Can Regeneron keep rising in 2014? Let's take a closer look at three key things to pay attention to in the coming year, and how companies like Bayer (NASDAQOTH: BAYRY  ) , Novartis (NYSE: NVS  ) , Roche (NASDAQOTH: RHHBY  ) , and Sanofi will affect its future.

REGN Chart

Source: Ycharts.

1. Strong revenue growth and attractive valuations

First and foremost, let's take a closer look at Regeneron's revenue growth over the past three quarters.

 

Revenue

Sequential growth

YOY growth

1Q 2013

$440 million

6%

90%

2Q 2013

$458 million

4%

50%

3Q 2013

$597 million

30%

40%

Source:  Nasdaq.

Although Regeneron's year-over-year growth has slowed down, its sequential growth remains impressive. Meanwhile, Regeneron remains competitively valued against its larger biotech peers Amgen and Celgene, based on top line growth expectations:

 

Market Cap

Forward P/E

5-year PEG

Price to Sales

Revenue growth YOY

Earnings growth YOY

Regeneron

$28.53 billion

53.10

2.35

14.79

39.6%

(26.2%)

Amgen

$89.76 billion

14.53

1.78

4.94

9.9%

23.60%

Celgene

$69.06 billion

23.05

1.18

11.02

18%

(12.2%)

Highest growth expectations

 

Regeneron

Celgene

Regeneron

Regeneron

Amgen

Source: Yahoo Finance, Jan. 17.

Unfortunately, Regeneron is also weighed down by negative bottom line growth and weak earnings growth potential, based on its 5-year PEG ratio.

That bottom line weakness has been attributed to higher expenses involved in developing its pipeline -- which is necessary to expand its portfolio beyond its core revenue driver Eylea.

Therefore, Regeneron's overall strength as an investment is better measured by its revenue growth.

2. The rise of Eylea

Eylea, its eye treatment co-developed with Bayer, generated $363 million in sales last quarter, accounting for 61% of Regeneron's total revenue and growing 67% year-over-year.

Regeneron is responsible for the U.S. sales, and shares half of the profits and losses with Bayer for international sales, except for those from Japan, where it receives a royalty on net sales.

Eylea is approved to treat two indications in the U.S. and Europe -- Wet AMD (age-related macular degeneration) and macular edema following CRVO (central retinal vein occlusion).

It is currently in phase 3 trials for DME (diabetic macular edema), macular edema following BRVO (branch retinal vein occlusion), and CNV (chronic neovascularization) secondary to pathologic myopia.

Eylea's primary competitor, Novartis' Lucentis, is approved for five indications -- Wet AMD, DME, CRVO, BRVO in the U.S. and Europe, and for the CNV indication in Europe. Last quarter, Lucentis generated $581 million in sales for Novartis -- a 1% decline from the prior year quarter.

Although Eylea's sales growth shows that it can definitely catch up to Lucentis, both drugs face an off-label threat from Roche's Avastin, a multi-use cancer drug which is commonly used as an off-label treatment of Wet AMD and DME.

The reason is the price -- Avastin only costs $50 per injection, while Eylea and Lucentis cost nearly $2,000 per dose. The mechanism for all three drugs is also similar -- they all inhibit the growth of new blood vessels.

Despite competition from Lucentis and Avastin, Regeneron recently forecast $400 million in sales for the fourth quarter, bringing its total sales for 2013 up to $1.4 billion.

Moreover, its best days could still be ahead -- analysts still expect the drug to hit peak sales of $4 billion.

3. A very attractive pipeline

Meanwhile, Regeneron's partnership with Sanofi could produce additional blockbusters.

Sanofi, which already owns 16% of Regeneron with a right to boost its stake to 30%, has two major collaborative projects that are worth watching.

The first one is sarilumab, a fully human monoclonal antibody which is intended to treat rheumatoid arthritis and other inflammatory conditions. If approved, it could compete against blockbuster biologic arthritis treatments such as Johnson & Johnson and Merck's Remicade, AbbVie's Humira, and Amgen's Enbrel. Of these three biologic treatments, only Humira is a fully human monoclonal antibody, which is considered superior to the chimeric (mouse/human) monoclonal antibody in Remicade.

The second one is alirocumab, another fully human monoclonal antibody which could become a blockbuster cholesterol treatment. Traditional LDL ("bad") cholesterol drugs like statins generally inhibit LDL production by targeting a liver enzyme known as HMG-CoA. The drawback is that statins can also stimulate the production of another enzyme, PCSK9, which degrades the performance of the LDL receptors responsible for maintaining LDL levels. Alirocumab directly inhibits the production of PCSK9 instead.

Both sarilumab and alirocumab are in phase 3 trials, and could be approved long before sales of Eylea hit their peak.

Last but not least, investors should keep an eye on a new wet AMD treatment being developed by Regeneron and Bayer. The new treatment, which combines a new antibody with the Platelet Derived Growth Factor Receptor Beta (PDGFR-beta), could eventually yield a combination therapy with Eylea that is more effective that Eylea alone.

The first human clinical studies for the drug are scheduled for early 2014, which means that an eventual approval is far off, but a combination treatment for Eylea could help it break away from Lucentis and Avastin as a superior treatment and boost its long-term sales potential.

The Foolish takeaway

In closing, these are the key reasons to believe in Regeneron -- strong revenue growth, robust valuations, a top-selling blockbuster drug, and a pipeline full of promising new treatments.

Regeneron is one of those companies that have struck a responsible balance between maintaining growth and clearly outlining its plans for the future. Therefore, I believe that Regeneron still has plenty of room to run in 2014.

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