Regeneron is a good relative value pharma play
admin | April 30, 2021
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
Regeneron Pharmaceuticals Inc. (REGN, Baa3/BBB+) may have a smaller capital structure versus peers but the credit is a good relative value play in the pharmaceutical sector. REGN’s very conservative balance sheet and strong growth profile could likely lead to higher ratings over time. While the company suffers from some product concentration, it has successfully found multiple applications for core drugs and is entering into a phase of new launches this year. They also maintain a broad and diverse pipeline with approximately 30 therapeutic candidates in clinical development. The company’s REGN 2.8% 2050 bonds relative to Takeda Pharmaceutical (TACHEM – Baa2/BBB+) 3.175% 2050 bonds trade roughly 10 bp behind, despite having leverage that is over three turns lower and EBITDA margins that are roughly 10 points higher. The trading relationship between the two credits should not only collapse, but REGN could be trading roughly 10 bp or more through TACHEM.
Exhibit 1. Pharmaceutical 30-year BBB curve Source: Bloomberg TRACE; Amherst Pierpont Securities
REGN witnessed strong double-digit growth in 2020 with revenues up nearly 30% year-over-year and EPS up roughly 28%. Across its drug portfolio, REGN saw Eylea, its largest drug by revenue contribution, witness 5% growth from the year ago period. Eylea is used to treat diabetic retinopathy, with over 30 million doses administered since launch. Dupixent, its second largest revenue contributor and used to treat inflammatory diseases, witnessed very strong growth of 75% year-over-year. Management noted that despite more than one million prescriptions written in the US alone for Dupixent, only 6% of eligible US patients have been treated with the drug, leaving room for further significant growth in 2021. REGN also competes in the oncology realm with Libtayo which remains the number one treatment for cutaneous squamous cell carcinoma. Global sales in 2020 were up 80% year-over-year, benefitting from increased penetration in the US coupled with launches globally. Lastly, REGN made significant progress last year in the fight against COVID with the discovery and development of a new antibody cocktail known as REGN-COV. REGN was awarded emergency use authorization for REGN-COV in the US as the data suggested that the cocktail not only reduced transmission of the virus but prevented infections in patients at high risk of contracting the virus. REGN signed a new supply agreement with the US government for 1.25 million doses for 42.6 billion.
Large Cash Position Likely to Grow Further
REGN’s strong balance sheet is underscored by its large cash position which stood at $6.7 billion as of 12/31/20, relative to total debt of $2.7 billion. This translates to a net cash position of $4.0 billion. Total leverage stood just below a turn, at 0.7x, as the company generated $3.8 billion of EBITDA last year. REGN has long maintained a sizeable net cash position which has been above $1.0 billion since FY15. Its cash position has been driven by stable and growing free cash flow, as free cash flow/sales is nearly 25%. We expect REGN’s cash position to continue to grow as its estimated that free cash flow for fiscal 2021 will nearly double from the $2.0 billion generated in 2020. While REGN does not pay a dividend, it completed its inaugural $1.0 billion share repurchase program in 4Q20 and put a new $1.5 billion repurchase program in place. Management noted that its capital allocation priorities remain funding its broad R&D pipeline and synergizing R&D development opportunities. REGN will only look to be opportunistic buyers of its stock when it sees dislocation between the price and its intrinsic value. Even if REGN were to exhaust its new $1.5 billion share repurchase authorization in 2021, the company’s cash position is likely to grow by over $2.0 billion this year.
Exhibit 2. REGN Net Cash Position (2015-2020)
Revenue Concentration Should Benefit from Strong Pipeline
REGN’s largest business risk remains the company’s high revenue concentration from its core drug portfolio. Over 90% of the company’s revenues in 2020 were generated from Eylea and Dupixent. However, Libtayo is expected to expand its oncology reach with important launches this year in lung and basal cell cancers. Additionally, REGN believes there remains a significant opportunity to enhance and extend the use of Libtayo into a vast majority of other prevalent cancer types (such as cervical cancer) that are desperate for new treatments. With respect to the pipeline, REGN currently has over 30 therapeutic candidates in various phases of clinical testing across a wide set of diseases. With current treatments focused on diabetic eye diseases, inflammatory diseases, oncology and infectious diseases, REGN ‘s pipeline is moving to expand into the treatment of cardiovascular diseases, rare diseases and pain management.
Exhibit 3. REGN Current Pipeline (Phase 1 through Phase 3)