Regeneron Merits a Premium Valuation

03/30/2020 5:00 am EST

Focus: HEALTHCARE

James Kelleher

Director of Research & Senior Analyst: Technology, Argus Research Corporation

The stock of Regeneron Pharmaceuticals (REGN) has performed particularly well in 2020, rising nearly 30% year-to-date while the overall market has fallen, as investors have recognized the company's efforts to respond to the coronavirus, notes Jim Kelleher, a leading analyst with Argus Research.

Using its proprietary VelociSuite platform, the company is working to identify and develop promising antibody candidates.

Having used this platform in the past to respond to outbreaks of MERS-CoV and Ebola, management believes that the discovery and preclinical validation of potential COVID-19 treatments could be completed in 3-6 months, as opposed to years with traditional processes.

By late summer, the company expects to produce hundreds of thousands of doses of prophylactic and therapeutic coronavirus medicine for human testing.

We will be monitoring these developments closely. Given the company's strong balance sheet, pipeline progress, solid prospects for Eylea, and efforts to respond to COVID-19, we believe that REGN merits a premium valuation.

The company's main product is Eylea, which is used for the treatment of age-related macular degeneration (wet AMD), diabetic macular edema (DME), and diabetic retinopathy.

Regeneron has exclusive rights to sales of Eylea in the U.S. and shares rights for the rest of the world with Bayer. In 4Q, U.S. sales of Eylea totaled $1.222 billion, up 13.3% from 4Q18, while Rest of World sales rose 8.0% to $782.5 million.

Based on company's better-than-expected 4Q earnings, strong revenue growth, and pipeline progress, we are reiterating our 2020 EPS forecast of $27.27, representing 10.6% growth, as well as our 2021 forecast of $29.99, which assumes growth of 10%.

We think that REGN shares are attractively valued at current prices. We expect that the stock's next level of resistance will occur near its June 2017 high, around $540 per share.

On a fundamental basis, the shares are trading at 17.3-times our 2020 EPS forecast — near the low end of the company's five-year historical range. They also trade at 6.6-times sales, below the peer average of 8.4 and at the low end of the five-year historical range.

Given the company's strong balance sheet, pipeline progress, solid prospects for Eylea, and efforts to respond to COVID-19, we believe that REGN merits a premium valuation. We are raising our target price to $540.

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