REGENERON EARNINGS: Drug uncertainty clouds outlook

(Bloomberg) -- Price hikes, buybacks, dividends, and M&A are time-honored staples of the biopharmaceutical industry. They smooth the inevitable ups and downs of drug development and patent expirations, and soothe (or at least distract) anxious investors.

Regeneron Pharmaceuticals Inc. is unique in disdaining all of the above — a position it largely reiterated during its first-quarter earnings call on Thursday. It's an idiosyncrasy that has benefits. But it also makes Regeneron's stock particularly painful to hold in tough times — 2018 qualifies, with the shares down 43 percent from last year's high.

The company's first-quarter earnings per share beat analysts' expectations. But the bar had been lowered after weak earnings from Sanofi, a key Regeneron partner, and there is a lot of uncertainty surrounding the firm's product lineup. (The shares dipped about 2 percent in response.) 

Regeneron's main drug, Eylea, generated $985.4 million in sales in the first quarter and generates more than 60 percent of the company's revenue. The eye medicine — which treats age-related macular degeneration — sold better than expected in the first few months of the year, which provided a needed boost. But sales growth has tapered off, and Novartis hopes to launch a threatening competitor next year. 

The company's best bet to reduce its Eylea dependence is Dupixent, currently approved to treat eczema. It's a potential blockbuster, but competition looms for eczema patients, and the drug's sales were lighter than expected in the first quarter, plus it's faced problems with reimbursement. If these issues continue, and efforts to expand Dupixent's use to other conditions aren't successful, Regeneron's growth prospects will be harmed. 

Elsewhere, cholesterol drug Praluent has produced such poor sales that Regeneron and Sanofi gave a massive discount to pharmacy benefits manager Express Scripts Holding Co. in an attempt to make the medicine more available. There's no guarantee that this move will produce a major sales boost, but it will definitely hurt margins. 

And Regeneron's issues aren't limited to currently available drugs. The firm's likely next treatment to reach the market will be diving head first into a competitive scrum. It's a so-called PD1/L1 inhibitor, one of a blockbuster class of immune-boosting cancer drugs. Regeneron's medicine will be the sixth such treatment to hit the market, and unless the drug produces stellar results, it may be too late for it to be much more than a niche player. 

Against this daunting backdrop, other pharmaceutical firms would likely turn to M&A to bolster revenue growth or secure a shiny new pipeline project for investors to focus on. Regeneron will most likely keep rolling with its internal research efforts. 

That's not an inherently bad thing. The firm's balance sheet is pristine, and it has developed a research organization with an enviable drug-development track record. It also avoids the karmic and public relations consequences of hiking drug prices — and the tendency of companies to get addicted to them. When times are good, Regeneron commands a hefty valuation. Even now, the firm trades at a premium to big biotech peers. 

But it also means that the company lives and dies by its pipeline, which makes investors nervous. Research takes longer to produce results than M&A and buybacks, and feels riskier.

As long as CEO Leonard Schleifer and Chief Scientific Officer George Yancopoulus are in charge, Regeneron isn't going to change. Investors will have to take the bad with the good. 

To contact the author of this story: Max Nisen at mnisen@bloomberg.net.

To contact the editor responsible for this story: Beth Williams at bewilliams@bloomberg.net.

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