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Morningstar | Following Strong 2Q, Regeneron Shares Overvalued as Competitive Threats Linger

Regeneron shares have risen dramatically in the past quarter, but we don't expect any significant changes to our valuation following a strong second quarter. We think shares look overvalued, as we remain skeptical of the firm's ability to generate and maintain differentiated drugs in its portfolio. Regeneron faces ongoing or near-term competitive threats for all of its key marketed franchises, safety issues for pain drug fasinumab, and an uncertain strategy in immuno-oncology. We think significant pressure rests on early-stage oncology programs, such as bispecific antibodies targeting CD20 (entering Phase 2), MUC16, and BCMA (both just entering development), to improve the firm's long-term prospects. That said, Regeneron's Eylea franchise and blockbuster potential for cardiology drug Praluent and immunology drug Dupixent continue to support a narrow moat.

U.S. Eylea sales growth dipped to 8% in the second quarter, and we're assuming similar sales growth numbers for the remainder of the year as increased marketing spend (to gain market share in diabetic eye indications) and increased demand with approval of 12-week dosing in wet AMD in August are countered by higher discounting (beginning in June) and the prospect of less frequent (and therefore less expensive) treatment. Outside the U.S., Eylea sales increased 23%, and partner Bayer recently received approval for the 12-week dosing administration in wet AMD. Regeneron has filed for approval of Eylea in non-proliferative diabetic retinopathy, which should begin to boost growth in 2019 just as Novartis’ brolucizumab enters the market in wet AMD. Regeneron is pushing a high-dose version of Eylea into the clinic in 2019, but it's unclear how frequently it would be administered; the degenerative eye disease competitive landscape could grow tougher beyond brolucizumab, as Roche's port delivery system for Lucentis (dosing every six months) and bispecific antibody RG7716 are both moving into phase 3 later this year.

Regeneron’s partnership with Sanofi turned into a top-line tailwind in the second quarter, even though discovery support from Sanofi as part of their research agreement ended in 2017; while the collaboration is still generating significant losses, these losses shrank in the second quarter as Dupixent's U.S. launch in atopic dermatitis has become profitable. That said, we expect significant marketing expenses for Kevzara and Praluent and the potential launch of Dupixent in asthma (U.S. approval expected in October) should weigh on profitability of the collaboration in the second half. Dupixent is also being studied in other allergic indications (phase 3 data coming later this year in nasal polyps, and phase 2 trials are starting for peanut and grass allergies), but we think that oral competition (AbbVie’s upadacitinib is entering phase 3 this year) will weigh on the drug's long-term growth. Kevzara has gained insurer coverage, but still faces Roche's established first-mover Actemra, and long-term potential looks more limited. For Praluent, we expect sales should begin to swing higher in the second half of the year, as we model a significant increase in patient access given the exclusive agreement with Express Scripts (albeit at a lower price), and positive recent cardiovascular outcomes data should also be added to the drug’s label in 2019. In the pipeline, Sanofi and Regeneron expect approval of their immuno-oncology drug cemiplimab in October in cutaneous squamous cell carcinoma, a niche indication that the firms hope will allow the drug to gain traction, with ongoing trials poised to move the drug into larger indications such as lung cancer. We're still skeptical of the firm's strategy, given its late-to-market position and uncertainty surrounding the potential of their combination regimens.

Beyond the Sanofi agreement, we’re also concerned about prospects for osteoarthritis/back pain drug fasinumab (partnered with Teva), as high doses of the drug in ongoing phase 3 studies were halted due to an independent review of the risk-benefit profile. That said, initial phase 3 data in osteoarthritis for fasinumab is expected later this year, and recent initial phase 3 data for a competing drug, Pfizer/Lilly’s tanezumab, was positive; we expect long-term safety data for both medicines to be key to this opportunity, and continue to assume a 55% probability of approval for both drugs.