Regeneron's Vision for the Future
Jonathan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
"Great company, but not at that price" is a line I use a lot these days. It sure can be tempting to deviate from a value-focused strategy, especially when all sorts of glamorous growth stories are commanding billion-dollar valuations and your Benjamin Graham cigarette-butt stocks aren’t featured on CNBC every day and aren’t sending you glossy annual reports full of exciting news. But I’m managing to stick by my guns, even when it comes to Regeneron Pharmaceuticals (NASDAQ: REGN), a company I love for its ophthalmologic research. This company has great products with great potential, but I’m not convinced it has the fundamentals to support a $13 billion market cap; which is 17 times sales, 32 times forward earnings (the company’s losing money right now), and 153% more than the market cap 52 weeks ago. Consider that Regeneron has only three products to market, one of which is only approved to treat a rare condition that affects one in 1,000,000 people [ARCALYST for Cryopyrin-Associated Periodic Syndromes (CAPS)], and two of them (EYLEA and ZALTRAP) are versions of the same compound.
As far back as biblical times, restoring sight to the blind has always been among the noblest of goals. Today, the ophthalmologic community has made considerable progress towards this end with some help from Regeneron’s recently-approved flagship, the drug called EYLEA. There are finally glimmers of hope for some patients with age-related macular degeneration (AMD), a leading cause of vision loss that occurs in “dry” and “wet” forms. Just a little background; dry AMD is characterized by progressive atrophy of cells in the back of the eye. It’s the less serious form, but it is not treatable directly; its progression to the wet form can only be slowed using dietary supplements. In comparison, the less common but more devastating wet form is characterized by the formation of abnormal blood vessels that leak blood or other fluids, causing vision loss. The good news is that it’s treatable.
In recent years, the related injectable antibodies Lucentis and Avastin have reigned supreme in the market for wet AMD treatment, taking the place of Astellas Pharma’s (NASDAQOTH: ALPMY.PK) Macugen, slowing the progression of wet AMD in millions of patients, and generating billions each year for their maker, Genentech, a subsidiary of Roche (NASDAQOTH: RHHBY) since 2009. The two are very similar (Lucentis is a fragment of the Avastin antibody) and were deemed equivalent by the National Institutes of Health in April. The newer Lucentis was developed expressly for ophthalmologic use, but at roughly $2,000 per injection, or up to 40 times more than Avastin, it has been the center of controversy in the medical community. Nevertheless, it generated about $1.5-1.8 billion in sales last year.
Lucentis and Avastin were paradigm shifters in AMD, but they may soon be supplanted to some extent by EYLEA. Regeneron has full U.S. rights for this drug, but it will split profits from international sales 50-50 with marketing partner Bayer AG (NASDAQOTH: BAYRY.PK). EYLEA is pricey, but not as much as Lucentis, and it only needs to be administered by an ophthalmologist once every three months, as opposed to every month for Lucentis and Avastin. (Note that many ophthalmologists choose to administer Lucentis and Avastin as needed rather than monthly.) And there’s more. The good news does not end here. EYLEA is the same type of drug as its competitors. Known as a VEGF trap, it blocks the receptor for vascular endothelial growth factor (VEGF), a protein linked to tumor growth. It does so by acting as a soluble decoy receptor, binding VEGF and preventing VEGF from binding to cell surface receptors. A modified form of EYLEA, marketed by Regeneron and partner Sanofi (NYSE: SNY) as ZALTRAP, was just approved by the FDA for treatment of colorectal cancer – the disease Avastin was developed to treat and for which Avastin is widely prescribed.
Regeneron is one hot biotech. It is run by impressive scientists (the board of directors includes two Nobel Prize winners), it has substantial growth potential from EYLEA, and it will provide you with plenty of fodder for cocktail parties. You could do a lot worse if you are looking to add some sizzle to your portfolio. Indeed, if you're playing with money you can afford to lose, you may want to bet on continued good news from REGN and buy it for momentum. I’m not, so I’m going to stick to buy-and-hold value investing.
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