Why Is Regeneron Pharmaceuticals, Inc. Bucking the Downtrend?

Biotech stocks are awash in a sea of red for the most part right now. Turning to the gory details, 89% of biotechs finished in negative territory last week -- with the vast majority falling by double digits. Although this downturn is certainly impressive in its voracity, we might be better served by taking a closer look at the few companies that were able to tread water in this tumultuous market, to see if there are any lessons that can be applied going forward. With that in mind, let's dig into why Regeneron Pharmaceuticals (NASDAQ: REGN  ) was able to eke out a modest 1% gain last week in the wake of the general biotech downturn. 

Regeneron's tremendous top-line growth
Regeneron has three commercially available products, namely Eylea, Zaltrap, and Arcalyst. Eylea is by far the company's most significant revenue generator, however, making up 66% of the company's total revenues of $2.1 billion in 2013. Eylea is a drug approved by the Food and Drug Administration for age-related macular degeneration (wet AMD) and macular edema following central retinal vein occlusion. It is marketed by Bayer Healthcare  (NASDAQOTH: BAYRY  )  in ex-U.S. markets, which generated $70 million in milestone payments for Regeneron last year. What's key to understand is that Eylea has been the company's primary growth driver of late, contributing substantially to the overall top-line growth of 53% year over year.

Source: www.drugdiscovery.com.

Looking ahead, the company is hoping to expand the drug's label with potential approvals for diabetic macular edema and macular edema following branch retinal vein occlusion this year. Indeed, Wall Street analysts have already begun to bank on these additional approvals, suggesting that earnings could grow another 57% next year.

To show the importance of Eylea to Regeneron's top-line growth, you need to understand that Zaltrap's worldwide sales came in at roughly $70 million in 2013 as a treatment for metastatic colorectal cancer, with a significant share of this revenue going to Sanofi (NYSE: SNY  ) per their development agreement. And Arcalyst only generated $17 million in full-year sales for 2013 as a treatment for a host of rare auto-immune disorders.

All told, the lion's share of the Regeneron's remaining income for 2013 came through its research agreements with Sanofi for a host of monoclonal antibodies and with Bayer for additional indications for Eylea.  

A peek into Regeneron's clinical pipeline
Regeneron has a particularly active clinical program with 14 monoclonal antibodies in development and a human genetics initiative launched last January to more fully explore the genetic underpinnings of a diversity of diseases. Among these clinical activities, however, all eyes are on the company's late-stage experimental cholesterol treatment called alirocumab (which is being developed in partnership with Sanofi). Investors are excited about the drug's prospects because it was shown to be clinically superior to Pfizer's (NYSE: PFE  ) megablockbuster Lipitor in early-stage testing and is expected to become a blockbuster in its own right. The next peek at the late-stage data for alirocumab is expected by mid-year 2014.   

That said, Amgen (NASDAQ: AMGN  ) and Pfizer are also developing similar cholesterol-lowering drugs, also known as PCSK9 inhibitors. Amgen's PCSK9 inhibitor, called evolocumab, could be under regulatory review with the FDA before year's end and Pfizer's rival named bococizumab recently reported particularly encouraging results in a mid-stage trial. In sum, alirocumab probably won't be the first PCSK9 blocker on the market and will have to compete against some of the industry's biggest players, if it's approved. Of course, there is also the potential issue of adverse neurocognitive side effects for the entire PCSK9 class, which the FDA is looking into (and which could have a material effect on potential approval).

Foolish wrap-up
Regeneron is a curious case because it is showing some strength in the face of the overall weakness among biotechs. I find this particularly surprising given that Regeneron shares are currently trading at more than 13 times annual sales and a forward price-to-earnings ratio of 42 -- that assumes Eylea will continue to grow sales at a breakneck pace over the next year. In other words, this already high forward P/E ratio may still turn out to be overly optimistic. 

In light of Regeneron's comparatively high valuation at the present time, I suspect that the company's continued strength is due to the upcoming data release of alirocumab. Put simply, the market appears to be baking in some of alirocumab's potential future revenue into Regeneron's present valuation. The problem is that Amgen is close to a regulatory filing for evolocumab and Pfizer's bocoizumab is also rapidly advancing in clinical trials. As such, I am doubtful that a single cholesterol-lowering drug will be able to overcome this competition to generate sky-high sales like those of Lipitor in its heyday. In short, you might want to be cautious with Regeneron moving forward, especially in a difficult market environment such as this one.

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Editor's Note: A previous version of this article incorrectly referred to Eylea as a vaccine. The Fool regrets the error.


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