Can Regeneron Keep Churning Out Blockbusters?

Developing a great drug is hard enough, but developing an R&D platform that reliably churns out new high-quality experimental compounds is a rare feat in biotech. That Regeneron (NASDAQ: REGN  ) has managed to create one of the strongest platforms in antibodies is both a credit to its leadership and IP, as well as a strong generator of long-term value for shareholders. Regeneron's shares do not look particularly cheap today, but upside from products like Eylea and alirocumab and de-risking of the pipeline give shareholders some reason to stay engaged.

Eylea – A three-bagger from here?
Eylea, Regeneron's anti-VEGF fusion protein for eye diseases like wet AMD and CRVO, continues to be a strong performer. Based on the reported performance of Roche's competing drug Lucentis (as well as Avastin), Eylea likely has around half of the branded anti-VEGF market in wet AMD. Combined with the overseas sales generated by partner Bayer, Eylea is already a nearly $2 billion drug.

Even with that strong performance, more could be on the way. Eylea is likely to get FDA approval in diabetic macular edema, an under-penetrated market that could prove to be nearly as large as wet AMD (though some analysts believe it will take longer to develop). Competition from companies like Allergan and Ophthotech shouldn't be dismissed out of hand, but ongoing label extension and marketing efforts could double Eylea's revenue by 2017 and triple it before the end of the next 10 years.

Alirocumab looks like a blockbuster in the making
Investors are rightly excited about the potential for PCKS9 inhibitors to become the next mass-market blockbuster opportunity in biotech/pharmaceuticals. As many as 20 million Americans could benefit from further intervention to lower their LDL-C levels, and alirocumab (as well as Amgen's (NASDAQ: AMGN  ) evolocumab) has been shown to lead to strong reductions in cholesterol levels with a relatively clean side effect profile.

Studies of alirocumab (with and without statins) have shown cholesterol reductions ranging from over 40% to nearly 70%. A recent FDA request to monitor for neurocognitiive side effects seems more like caution than a response to specific problems, and it does not appear as though there will be particularly problematic restrictions on use.

One of the challenges for Regeneron and its marketing partner Sanofi (NYSE: SNY  ) could be in establishing the supremacy of alirocumab. The clinical data seen so far from Regeneron and Amgen in Phase II studies have been pretty consistent, with neither drug showing an obvious clinical edge. With that, competition could come down to administration (auto-injectors), sales detailing/marketing, and so on.

Investors would also do well to keep an eye on outcomes data. Regeneron, Amgen, and Pfizer are all conducting large outcomes studies that are designed to determine whether PCSK9 inhibitors lead to clinically relevant benefits like reductions in heart attacks, strokes, and death. The FDA is not likely to demand final data from these studies as a condition for approval (most of these studies won't have final data until 2017 and beyond), but the results could go a long way toward determining pricing and market adoption.

I would also note that PCSK9 inhibition is a popular target now. Amgen and Pfizer are both in Phase III testing with their drugs, while Novartis and Roche are further behind in clinical testing and Alnylam Pharmaceuticals and The Medicines Company have partnered on siRNA-based PCKS9 inhibition. If the potential market of 20 million people proves accurate there will be plenty of revenue to go around, but strong marketing will be important.

A strong mid-stage pipeline
Regeneron has a strong pipeline behind alirocumab, due both to its antibody discovery partnership with Sanofi and its own proprietary efforts to develop new immuno-oncology therapies. The antibody dupliumab, which inhibits both IL-4 and IL-13, has shown impressive efficacy in atopic dermatitis and could generate more than $1 billion in this indication, not to mention challenge other IL-13 antibodies in development like Roche's lebrikuzumab and AstraZeneca's tralokinumab. Likewise, solid Phase III results from sarilumab in rheumatoid arthritis should make it a credible threat to Roche's Actemra.

Further back, Regeneron has numerous antibodies in development for oncology targeting pathways like DLL4 and Ang2. Regeneron is also establishing a new genomics center and developing a biospecific antibody platform that offers a new twist on immuno-oncology. Regeneron has yet to validate the platform (a CD20-CD3 drug is first in the queue), but this could be a high-potential opportunity down the road.

The bottom line
It's hard to fault Regeneron management for all that much. The company continues to broaden its technology base (including the relatively new biospecific antibody efforts) and has started transferring IP assets to an Irish subsidiary to improve its tax situation down the road. Regeneron has also done a good job of managing its relationship with Sanofi – leveraging Sanofi's marketing capabilities and R&D funding while maintaining its independence.

Valuation may be the only significant fly in the ointment. Even with growth expectations on par with Alexion or Gilead (revenue growth in the mid teens, FCF growth in the 20%'s), the shares do not look cheap today. There are certainly opportunities for those estimated growth rates to improve, particularly as further clinical advances improve the risk-weighted estimates for future years, but a lot of optimism is already built into these shares today.

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