We are maintaining our Neutral recommendation on Regeneron Pharmaceuticals Inc. (REGN) with a target price of $30.00.
Regeneron, a biopharmaceutical company, focuses on the discovery, development, and commercialization of pharmaceutical products for the treatment of serious medical conditions. The company, founded in 1988, is based in Tarrytown, New York. Regeneron also operates a large-scale biologics pharmaceutical manufacturing facility in Rensselaer, New York and a satellite office in Bridgewater, New Jersey.
In October 2010, the company came out with disappointing third quarter 2010 results. Net loss of 41 cents per share was wider than the Zacks Consensus Estimate of a net loss of 34 cents. The company suffered a loss of 1 cent per share in the year-ago quarter. The wider loss was attributable to lower revenues and higher expenses incurred in the reported quarter.
(Read our full coverage on this earnings report: Loss at REGN Wider than Expected)
Currently, the company’s only marketed product is Arcalyst (rilonacept). In February 2008, the US Food and Drug Administration (FDA) approved the injection for subcutaneous use for treating CAPS, a group of rare genetic inflammatory conditions, including familial cold auto-inflammatory syndrome and Muckle-Wells Syndrome. The FDA has approved the drug for treating adults and children of 12 years and above.
We believe the approval and launch is important to Regeneron as the experience gained from marketing Arcalyst should facilitate future product launches. Moreover, Regeneron’s efforts to develop Arcalyst for gout, currently in late-stage development, are encouraging as the market has a huge unmet need.
Furthermore, Regeneron’s unique proprietary trap technology is a new way to develop targeted therapy and has broad applications in drug development. The company is developing the VEGF (Vascular Endothelial Growth Factor) -trap and IL-1 (Interleukin-1) trap for various cancers, eye diseases, and inflammatory diseases.
The late stage candidates, being developed with the trap technology, should add significantly to the company’s revenues on approval. Moreover, Regeneron’s associations with major players like Bayer (BAYRY) and Sanofi-Aventis (SNY) have helped not only to bring in funds in the form of upfront and milestone payments but also to validate the company’s trap technology.
However, the low incidence of CAPS leads us to believe that Arcalyst will only contribute a small portion to total revenue and will never be a top growth driver at Regeneron. We are also concerned about the potential competition awaiting Regeneron’s pipeline candidates. Regeneron’s only marketed candidate Arcalyst is facing competition from Novartis’ (NVS) Ilaris (canakinumab), which received FDA approval last year, for CAPS.
Furthermore, the pipeline setback faced by Regeneron with the late-stage development of aflibercept for metastatic pancreatic cancer is also a cause of concern. The setback had a negative impact on the company’s stock price and any such pipeline failure in the future will also weigh heavily on Regeneron’s shares.
Given these headwinds, we believe that Regeneron’s current valuation adequately reflects its fairly balanced risk/reward profile. We see limited upside from current levels and maintain our long-term Neutral stance on the stock. The stance is supported by the Zacks #3 Rank (Short-term Hold rating) currently assigned to the company.
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