This article was written by Grant Goldstein, a Financial Analyst at I Know First

“Price is what you pay. Value is what you get.”- Warren Buffet

Highlights:

• Regeneron has Varied Q1 Financials
• REGN is Substantially Undervalued
• I Know First Algorithm Bullish Forecast for REGN

Regeneron Pharmaceuticals, Inc. is a biopharmaceutical company tasked with discovering, inventing, developing, manufacturing, and commercializing medicine for serious medical conditions. Incorporated on January 11th, 1988, the company commercializes medicine for eye disease, high low-density lipoprotein cholesterol, and inflammatory conditions. The company has products available in the United States, European Union, Japan, and more.

Q1 Financials

Regeneron Pharmaceuticals had mixed Q1 financial results. YoY, net income increased by 92.01% to $477.98 million, cash increased by 25.20% to $1.032 billion, EBIT increased by 34.57% to $585,398, and EPS by 92.59% to $4.67. Regeneron beat earning expectations by 7.36%. However, revenue did miss Zacks Consensus estimate of 1.53 billion, although growing 15% YoY. The company also saw an outstanding gross profit margin of 92.40% and profit margin of 31.62%.

Earnings Estimate vs. Actual (Source: Yahoo Finance)

REGN Financials (Source: YCharts)

The most prosperous part of Regeneron’s Q1 was the sale of its drug EYLEA which combats vision threatening retina diseases. During 2018, EYLEA had net sales of $1.6 billion. The company is confident that this number will continue to grow since there is no company in late stage development that competes with the drug. Also, with the aging population and the increase of diabetes, the company is confident that EYLEA will treat more diabetic eye diseases as time progresses. 

Regeneron’s ROE, at 21.74%, beat the industry average of 18.07%. It also has a debt to equity ratio of 10.73%, indicated that the ROE is from the company’s ability to increase profit without building up debt, a positive sign for the company.

Regeneron Is Undervalued

Zacks currently gives Regeneron a growth score of “A” and YCharts has a price target of $371.80.

Regeneron’s quarterly price to book ratio of 5.372 is way below it’s 12.49 average. This is the first indicator that the stock is undervalued.

The company’s PE ratio is significantly below it’s 76.01 average, currently at 26.55. Also, this is significantly lower than the healthcare product sectors PE of 161.11. The company’s PEG is currently 0.5502, which is lower than the healthcare sectors 3.7 and lower than it’s competitor, Vertex, with a PEG of 7.325. 

Since the PE and PEG is lower than the healthcare sectors, it shows that the stock is mispriced.

The company’s free cash flow for Q1 was phenomenal. Regeneron’s average FCF is $198.74 million, but they exceeded that substantially this past quarter as it is now $529.37 million. Since the stock price is low and free cash flow is rising, this can indicate that future earnings and the value of the company will soon be rising as well. Regeneron’s FCF is also much higher than its competitors: Vertex with $223.38M, Alnylam with -$176.92m, and Ionis Pharmaceuticals at $10.08m.

Free Cash Flow (Source: YCharts)

Furthermore, REGN’s EV to EBITDA is extremely low at 14.03 compared to its average of 34.34 and the industry average of 18.97. Being that the EV/EBITDA is below the healthcare industry average, it shows that REGN is cheaper than other related companies and that it is a possible candidate for a takeover.

There has been a lot of speculation over a possible takeover of Regeneron Pharmaceuticals. Companies such as Pfizer, Novartis AG, and Sanofi have a lot of cash and with tax cuts, along with the AT&T Time Warner merger, acquisitions are becoming more and more of a possibility. With such a low evaluation, it would be a great time for a big pharma company to snatch REGN.

Currently, price is above both the 50 day (short term) and 200 day (long term) moving average (MA), a bullish sign. Also, the long term MA is below the short term MA, another bullish sign.

Moving Average (Source: Trading View)

Regeneron Future Expenditures

Regeneron’s pivotal dermatology drug, Dupixent, experienced positive Phase 3 testing for asthma. The New England Journal of Medicine has published that Dupinex improved moderate to severe asthma in conducted tests. Effectively, the drug reduced the risk of asthma, improved lung function, and reduced OCS. Only 18% of drugs progress from Phase 2 to 3, so this is a fundamental step in getting this drug FDA approved, which the company believes will happen before the end of the year.  Over 25 million people have asthma, so if approved by the FDA, the drug would be in the hands of millions.  The company has many other drugs in the workings, including for the treatment of diseases caused by Type 2 inflammation. 

In total, Regeneron has 17 products in clinical development. Imperatively, the company is in Phase 3 for EYLEA diabetic retinopathy studies. The company is confident that the drug will pass regulatory submission by the end of this year. If approved, EYLEA would be able to treat every patient with diabetic eye diseases, allowing the company to control a huge market. 

On June 4th, the New England Journal of Medicine published positive results for treatment of the deadliest non-melanoma skin cancer, cutaneous squamous cell carcinoma. The Head of The University of Texas MD Anderson Cancer Center stated, “The strong results seen with cemiplimab are noteworthy given that advanced CSCC is a very serious condition that currently has no approved treatments once surgery is no longer an option”.

On June 6th, Regeneron partnered with Zoetis to research antibody therapies for animal health use. Executive Vice President of Zoetis said, “Regeneron and Zoetis share a similar passion for translating scientific insights into groundbreaking medicines”. Success of the research would lead to groundbreaking treatment for animals with immune related conditions, pain, inflammatory disease, and cancer. 

Sanofi, partners of Regeneron, stated that they have a promising 10 new cancer medicines. Out of those 10, one is in the process of being reviewed by the United States and the European Union. If approved, it would bring in substantial revenue for Regeneron. Stock price rose on the 13th following the news.

REGN Price (Source: YCharts)

Analyst Recommendation 

On June 27th, Oppenheimer upgraded Regeneron to outperform the market rating. Their analyst Hartaj Singh expressed that the company will have impressive sales growth in the upcoming year. He cited the strength of EYLEA and believes it will grow as more patients use it. He also believes that the company will pass FDA approval for Dupixent before the end of the year.

Currently I Know First Algorithm Is With Bullish REGN Forecast

I Know First Algorithm forecasts a bullish one year for REGN. The algorithm gives FOXA a robust predictability of 0.45  and a signal of 94.17.

Here is the explanation for how to read the I Know First Forecast and Heatmap.

Conclusion

I give REGN a bullish 1 year forecast. The signs are incredibly forceful for this stock being a great long term investment. For starters, it’s incredibly undervalued. Looking at the financial ratios and comparing them to Regeneron, competitors, and industry averages, it’s evident the stock is under priced and is expected to rise in the future. REGN has a solid expected growth rate and 2nd quarter earnings are speculated to be greater than any quarter of the past fiscal year. The company also has a lot of promising drug treatments on the table, which, if they were to be successfully FDA approved, would be very lucrative. Getting a drug to pass FDA approval is something investors rally behind, and the company is certain they will get Dupixent FDA approved by the end of the year.  Finally, if the process of an acquisition took place, which is seeming likely, stock price would sky rocket.  

I Know First Algorithm is in agreement with my bullish 1 year forecast.  

Past I Know First Success With REGN

On June 12, I Know First Algorithm gave REGN a 7 day bullish forecast with a predictability of 0.14 and signal of 17.09. REGN returned 4.85% during that window.

This bullish prediction was sent to the current I Know First Subscribers on June 12th, 2018

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