Regeneron (REGN 0.32%) got a big boost last year due to COVID-19. But with demand for its antibody cocktail now declining, the company suffered a big drop in quarter-over-quarter sales. But it wasn't only Regeneron's COVID product that saw a slide in demand; other headlining products declined as well.
What does all this mean for the company's future? Let's take a closer look to see if Regeneron's stock is in trouble after underwhelming first-quarter results and determine if this healthcare company is a good buy.
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Product sales decline across the board
During the first three months of 2022, Regeneron's sales totaled just under $3 billion, representing a 17% year-over-year increase. But, compared to the previous period (fourth quarter 2021), sales decreased by nearly 40%, or about $2 billion.
Unfortunately, as investors will note in the chart below, it wasn't only the company's antibody COVID-19 treatment, REGN-COV, that contributed to the declines:
Source: Company filings. Chart by author.
While Regeneron's COVID-19 treatment is undoubtedly responsible for the largest drop in sales, even the company's flagship eye medication, Eylea, declined by 2%. In the first quarter of this year, Eylea's sales outpaced that of the year-ago quarter by 13%. But, this growth rate looks less impressive when compared to the prior period: Q4 2021 sales of Eylea saw a 15% year-over-year increase, making the treatment's first quarter results look much less rosy.
The same pattern can be seen when looking at the cancer drug Libtayo, which is one of Regeneron's most promising products. First quarter 2022 revenue improved from the year-ago period by 24%, bringing in $78.9 million in the most recent quarter compared to $45.8 million in Q1 2021. But, when lined up against the product's fourth quarter 2021 revenue of $81 million, this year seems to be off to a drearier start.
When looking at a year-over-year basis, the numbers appear to be growing. But by looking at those numbers alone, investors miss a more immediate trend. In Regeneron's case, that trend isn't a good one, as it shows that sales growth has been lackluster. That can trickle down and impact the bottom line as well.
Profits get cut in half
In the fourth quarter of last year, Regeneron reported a net income of $2.2 billion, which was 45% of revenue. In the first quarter of this year, though, net income came in at $973.4 million, representing just 33% of sales. Even on a percentage basis, the company is collecting less in profit than it did in the previous quarter. And, when you shift your angle slightly, the metrics don't look much better. This year's first quarter net income was 13% less than what the company brought in during the same period a year ago.
However, this year, Regeneron does expect that its gross margin will remain between 89% to 91% of revenue. That's encouraging and means that around 90 cents of every dollar of sales will go to cover operating expenses and other overhead. For investors, a high-margin business can be valuable because it often ensures that the company is in a good position to turn a profit. Despite the drop in revenue, there's little reason to be concerned about Regeneron's ability to stay in the black.
The bigger question, however, is whether its current valuation makes sense.
Is Regeneron a cheap buy?
The problem with Regeneron is that both its top and bottom lines have benefited greatly from COVID-19 revenue; therefore, its earnings multiples come with a bit of an asterisk. Looking at its price-to-earnings (P/E) multiple of less than 9, Regeneron looks dirt-cheap given that healthcare stocks in the Health Care Select Sector SPDR Fund average a multiple of 21. Investors are paying a discount on Regeneron's earnings because its COVID-19 revenue will drop off.
But just because something might be trading at a sale doesn't mean it's automatically a good buy. So, how to contextualize Regeneron's P/E ratio? Another way to look at its valuation is to consider analyst expectations. For both 2022 and 2023, analysts expect Regeneron's earnings per share to come in around $44. That would put the stock's forward P/E multiple at less than 14,which is slightly lower than the Health Care Select Sector's future earnings multiple of 15. Taking all these factors together, I wouldn't say Regeneron's stock is cheap, but rather that it is fairly priced in respect to other healthcare stocks.
Should you invest in Regeneron?
Regeneron's falling sales are a bit of a concern, but its strong margins should offset investors' worries. The company's pipeline has many projects that are in late-stage trials, so there isn't an immediate concern that suddenly the growth will come to a stall.
Considering its reasonable earnings multiple and great margins, Regeneron makes for a promising long-term investment.
