Krause Fund Research Spring 2020 Regeneron Pharmaceuticals (NASDAQ: REGN) April 15, 2020 BUY Healthcare: Biotechnology Stock Rating: Analysts Target Price: $585-595 Andrew Kim Ian Gorkis [email protected] [email protected] Stock Values Investment Thesis DDM $312 We recommend a BUY rating for Regeneron Pharmaceuticals because of DCF/EP $589 their promising antibody focused drug pipeline, continued security in Eylea, Current Price $512 and strong balance sheet. Our target price is $585-590 which represents a Key Statistics 14% upside to the current price. Market Capitalization (MM) 5,464 Drivers of Thesis Shares Outstanding (MM) 108 • Promising drug pipeline progress: Regeneron’s REGN-EB3 was 52 Week Range $271.37-518 granted breakthrough therapy designation for Ebola in November Beta 0.52 2019. Using the same proprietary technology, Regeneron announced P/E Ratio ’20E 25.7x it will be partnering with the U.S. Department of Health and Human Services to develop a treatment for the novel COVID-19. Industry Metrics • Eylea remains successful: Eylea accounts for nearly 60% of total revenue and it has maintained sales growth through innovation and R&D (% of Sales) 36% reliability despite increasing competition. We project that Eylea will ROE ‘20E 15.4% sustain 10-14% sales growth until its 2023 U.S. patent expiration. Drugs in Phase III 17 • Low debt obligations and increasing free cash flow: Regeneron Financial Ratios remains virtually debt-free and can continue allocating resources to R&D without being limited by interest obligations like its competitors. Current Ratio 4.73 Risks to Thesis: Debt-to-Capital Ratio 5% • Heavy reliance on revenues: >80% of Regeneron’s revenue is relied on just two drugs. If more effective alternatives are approved from Company Description the biotech or pharmaceutical competitors, sales could fall greatly. • Failure to gain FDA approval: Although Regeneron has a robust Regeneron is a biopharmaceutical company pipeline, failure to gain FDA approval for these drugs on a timely specializing in antibody treatments for rare basis, or if at all, will adversely affect the company’s sales growth. and serious diseases. The company’s primary product is Eylea, which is a market leader in Earnings Estimates the treatment of a chronic eye disorder called wet macular degeneration. Regeneron currently markets seven products, five of which are sold in collaboration with either Bayer or Sanofi. 12-Month Performance Relative Financial Performance Source: Yahoo Finance17 Source: FactSet.net21 EXECUTIVE SUMMARY and growing elderly population will dramatically increase demand for healthcare products and services. Regeneron Pharmaceuticals (NASDAQ: REGN) is a biotechnology company operating within the healthcare industry. We are U.S. fertility rates are declining and hitting all-time lows since issuing a BUY recommendation for Regeneron which represents a early 2008.3 Over the last decade, the fertility rate has been on a 14-15% upside from the 4/15 close price of $512. With the steady decline, reinforcing the age distribution skew to older current, volatile conditions of the economy, we believe that the aged citizens. As stated previously, a larger proportion of elderly healthcare industry presents an optimal investment opportunity people should increase revenue for healthcare companies. due to its countercyclical nature. Previous discussions of potentially harmful drug pricing reform have abated in light of Government the greater COVID-19 situation which has also presented a profit opportunity for Regeneron. Government regulation plays a crucial role in the healthcare We are optimistic that Regeneron’s two antibody candidates to industry and can cause drastic changes in how the sector cure COVID-19 will see success due to its proprietary research operates. Due to the upcoming Presidential election, the platform and collaboration with experienced partners. government impact on healthcare is up in the air. The largest Furthermore, Regeneron has been successful in diversifying its impact that the government could have on the sector is any revenues amongst its currently marketed products as well as changes made to the Affordable Care Act (ACA). The continuation investing heavily in R&D to develop its pipeline into the lucrative or potential dismantling of the ACA is contingent on who wins oncology market. the election. The potential implications of a win for the Democratic candidate ECONOMIC ANALYSIS would be a continuation of the ACA. Hospitals would continue to save on servicing fewer uninsured patients as the ACA lowers the Demographics uninsured population. There has been speculation around Medicare-for-All (MFA), however we do not foresee this Demographics are one of the most prevalent drivers of growth in materializing in the near future. the healthcare sector. Three major components that are shaping the demographic outlook include Baby Boomers entering their If the Republican candidate wins, we will most likely see further elderly years (65+), upward trending life expectancy, and attempts to dismantle the ACA. This will likely lead to less declining U.S. fertility rates. individuals being covered by insurance and a declining willingness to undergo expensive treatments.4 The most Baby Boomers represent the largest generation in the U.S. and significant impact of the ACA’s dismantlement will be the will enter their elderly years beginning in 2030. Elderly Americans increasing number of uninsured or underinsured individuals. will make up roughly 21% of the population at this point, up from 15% in 2018. Statistically, elderly people tend to be more susceptible to adverse health conditions such as chronic diseases and injuries. This will fuel demand for additional healthcare products and services. Source: kff.org5 Medicare has a large impact on the sector and accounts for approximately 15% of total federal spending. Over the last decade, we have seen a $200 billion increase in Medicare spending and predict that this trend will continue due to the aging population. This could be potentially beneficial for the Source: Statista.com1 companies who receive revenue from patients covered by Medicare. In addition, this trend suggests that hospitals will be Life expectancy is trending upwards due to declining mortality less likely to be left with the bill from uninsured and 2 rates from cancer and declining fatalities from drug overdose. underinsured patients. This means that the elderly population in the U.S. will hold longer The government also has the potential to regulate the healthcare lifespans on average. Consequently, elderly people will require industry through the FDA. There have been recent discussions continued treatments for this extended duration. A longer living from both Republicans and Democrats about the high prices of 2 drugs. We do not predict that there will be any price control for unemployment reached 22 million. The impact of this mass measures taken by the FDA that will drastically impact revenues unemployment will likely continue to ripple through the in the short-term. Our conclusion is supported by the fact that economy. While the market is down about 11% year-to-date, the there is a division between the government arms with the House biotechnology industry is only down 3.92%. Regeneron’s stock controlled by Democrats and the Senate and President being has increased approximately 35% year-to-date. largely Republican. Several biotechnology companies including Gilead Sciences, However, we believe that action to control and reduce drug AbbVie, and Regeneron have been developing a treatment for pricing is probable in the future as we have seen that the medical the novel virus. The potential for an approved treatment is a care index has grown at a drastically higher rate than other strong factor in why markets have felt bullish on Regeneron. If sectors. This means that, in relation to other sectors, people tend Regeneron’s treatment does not earn approval, the market could to spend more on medical care currently. It would be reasonable react harshly to that news. that consumers will no longer stand for this disproportional growth and will demand some form of legislation to curb these INDUSTRY ANALYSIS high prices. This would have adverse effects for many companies in the sector. Regeneron would not be excluded from that group and potential price controls could be detrimental to its revenues. Industry Description This action is a possibility, but it is not probable in the short- term. Regeneron is part of the biotechnology industry, which strives to enhance the quality of human life through the use of proprietary drugs created from natural ingredients. The biotech industry is comprised of four primary markets: agricultural, environmental, industrial, and most notably, the medical market. Biotech companies are characterized by the expensive and risky nature of their drug research and development (R&D) expenses which cost between tens and hundreds of millions of dollars for clinical trials. These drugs can take up to a decade to develop and reach FDA approval to be sold in public markets. It is improbable that a prospective drug will reach approval as 85%-95% of all drug applicants fail to reach approval by the FDA. However, if granted approval, biotechnology companies are able to market their drugs without direct competition due to the patents they acquire Source: fred.stlouisfed.org6 for their treatments. Interest Rates In the current economic environment, U.S. Treasury yields have bottomed out to