FEATURE-Fast climbing biotech Regeneron still has room to grow

Tue May 7, 2013 10:59am EDT

* Shares jump five-fold in two years, market value $26 bln

* Bullish forecasts for eye drug, other treatments in pipeline

* Risks include high valuation, competitive threats

By Ransdell Pierson

TARRYTOWN, N.Y., May 7 (Reuters) - Just two years ago, Regeneron Pharmaceuticals was a relatively obscure biotech company in the village of Tarrytown, a picturesque New York suburb better known for "Rip Van Winkle," "The Legend of Sleepy Hollow," and other creations of hometown author Washington Irving.

The blue jeans, open collars and lively hallway banter among scientists at Regeneron's headquarters suggests a laid-back atmosphere. But the company's ambitions, backed by the deeper pockets of French drugmaker Sanofi, are gigantic.

Regeneron's share price has jumped nearly five-fold to about $260 since its Eylea eye drug was approved in late 2011 to treat macular degeneration, the biggest cause of blindness in the elderly. The company is valued at $26 billion, ranking it among the world's top 10 biotech companies.

Yet most analysts believe the stock can still power higher if a new wave of treatments in the pipeline begin to show promise. They include an injectable treatment for asthma and atopic dermatitis, the most severe form of eczema.

"We would like to be one of the next generational businesses in our industry, and the best examples of that would be Merck and Genentech," Chief Executive Leonard Schleifer said in an interview. "We would like to become one. Stay Tuned."

To invest in Regeneron is not without risk. The lion's share of profit comes from Eylea, competitors are fast on its heels, and the stock is now more expensive than most of its biotech peers. Regeneron trades at 44 times forward 12-month earnings, more than double the forward P/E ratio of about 20 times for the Nasdaq Biotech index.

The high-stakes biotech industry is also as famous for flameouts like Dendreon Corp as it is for successes like Gilead Sciences Inc.

"By definition, when a stock goes up this much, this fast it is vulnerable; there's always the danger of a pullback," said WBB Securities analyst Steve Brozak.

Still, Regeneron is optimistic about its growth prospects, pointing to potential new uses for Eylea and potential approvals for a new cholesterol drug and a promising arthritis treatment now in late-stage trials. On Wednesday, Eylea received a new boost after development of a rival eye drug by Allergan Inc was delayed.

Regeneron is due to release new data on May 21 on a monoclonal antibody called dupilumab, which is aimed at patients with moderate to severe asthma. Limited data released so far from the trial show it reduced the number of asthma flare-ups by 87 percent after 12 weeks of treatment, with side effects similar to those among patients taking placebos.

Regeneron has said dupilumab also showed strong hints of safety and effectiveness in two early-stage trials that involved 67 patients with atopic dermatitis. Larger studies are slated to begin later this year.

"I expect doctors to be excited when the data are presented," said Leerink Swann analyst Joseph Schwartz. He predicts dupilumab will capture peak annual sales of $2.8 billion for asthma and atopic dermatitis. He also forecast Eylea's annual U.S. sales to quadruple to $5.2 billion by 2020.

"In the next five years, a doubling of (Regeneron's) shares is not outside the realm of possibility," Schwartz said.

Atopic dermatitis is inherited and involves patches of highly itchy skin on any part of the body. Patients, many of whom also have asthma and hay fever, have compared the sensation to having unending poison ivy.

The National Eczema Association estimates 10 percent of people at some time in their lives, many of them babies and children, are affected by atopic dermatitis.

"This disease can make the children as well their parents miserable," said Schwartz, who speculated dupilumab's sales for the severe form of eczema will likely outstrip its asthma sales.

BACKED BY SANOFI

Regeneron will split profits from dupilumab with Sanofi, which has provided the biotech company more than $1 billion in research funding since 2007. Sanofi has committed to providing Regeneron $160 million per year through 2017, in return for a 50 percent share of U.S. profits from drugs they develop together.

Sanofi is also Regeneron's biggest shareholder, holding 16.5 percent of its common stock. The French drug maker is not allowed to raise its stake beyond 30 percent until five years after the planned 2017 conclusion of their collaboration.

Regeneron has exclusive rights to Eylea in the United States, where it has stolen market share from Roche Holding AG's 7-year-old Lucentis. Few drugs have ever reached blockbuster status, defined as annual sales of $1 billion or more, so quickly.

"As we were launching Eylea, our first sales forecast was $140 million to $160 million for 2012, but sales turned out to be $838 million," said Michael Aberman, Regeneron's head of strategy. "Our estimates were off. And you always hope that happens again," he quipped.

Regeneron is in the process of taking Eylea to overseas markets, where sales will be shared with partner Bayer AG .

Aberman said Eylea sales can climb if it wins approval for new conditions, especially diabetic macular edema, which some analysts believe could provide sales as big as for treating macular degeneration. But he also noted how that could make Regeneron vulnerable in the case of competitive threats, safety problems or other setbacks.

"A large part of our valuation is hinged on Eylea and certainly if something untoward were to happen with Eylea, that would be a challenge for us and our investors," Aberman acknowledged. "We're doing everything we can to minimize risks by making sure our manufacturing is up to date, making sure we do everything from a regulatory standpoint the right way and from a commercial front."

One risk Regeneron faces is a patent battle in Europe with Genentech, which alleges the active ingredients of Eylea and Regeneron's recently approved Zaltrap colon cancer drug -- which both target a protein called VEGF - infringe Genentech's patent on anti-VEGF technology. Lucentis also works by blocking VEGF.

Moreover, other companies are trying to develop more-sophisticated eye treatments. For instance, last year privately held Ophthotech Corp reported promising results from a mid-stage trial of its drug Fovista, which uses a different mechanism to treat macular degeneration -- by blocking a protein called PDGF.

Starmine, a unit of Thomson Reuters, estimates Regeneron's intrinsic value at around $90, about 65 percent below its current stock price. Starmine's intrinsic value estimates the cumulative annual growth rate in the coming 10 years using a blend of its own models and analyst estimates.

Still, Roth Capital on Monday raised its target price for the stock to $314, while the Royal Bank of Canada raised its target to $286. Eleven analysts recommend investors buy the stock, and eight recommend investors hold it. There are no sell ratings, according to Starmine data.

Regeneron is banking on a broader treatment portfolio as a hedge against any Eylea reversal or other major setbacks.

They include a cholesterol fighter, called alirocumab, that works by blocking a protein called PCSK9, an approach that is also being explored by Amgen and Merck.

Regeneron is also conducting large trials of a treatment for rheumatoid arthritis called sarilumab, which is similar to Actemra, Roche's fast-growing treatment approved in 2010.

Adnan Butt, an analyst with RBC Capital Markets, expects the arthritis drug to become a blockbuster and for alirocumab - which has slashed levels of "bad" LDL cholesterol by up to 70 percent in studies - to be a "massive" product. U.S. profits from the two drugs would also be split with Sanofi.

"Data from all these studies will be the first step toward a potential doubling" of Regeneron's share price, Butt said, noting that findings from the trials will trickle out over the next 18 months.

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