How Did Regeneron Land Such a Premium Valuation?
Will Impressive 1Q16 Earnings for Regeneron Be Enough?
Regeneron’s valuation
On April 25, 2016, Regeneron Pharmaceuticals (REGN) was trading at a multiple of 23.5x its forward earnings. This appears to be a distinct premium when compared with peers Amgen (AMGN), Biogen (BIIB), and Celgene (CELG), which were trading at a forward PE (price-to-earnings) multiples of 13.2x, 13.7x, and 14.3x, respectively, as of the same date.
PE performance
Regeneron’s average PE ratio over the past two-year period was 29x, ranging from 21x–37.5x of its forward earnings. But the company is still in its growth phase, and with growing earnings, the multiple may come down. There were also some headwinds for the stock in the past two or three months.
By comparison, the average forward PE for the biotechnology industry stands at 14.5x, while the median forward PE is ~15x. Regeneron’s higher PE ratio thus suggests that the stock could be a bit overvalued.
Probable reasons for REGN’s premium valuation
Regeneron’s key drug, Eylea, has continued to drive sales growth momentum for the company. Continuous label expansion for the drug would further help Regeneron maintain this momentum, and with recent positive Phase 3 data on Sarilumab, Regeneron’s share price has jumped. (For more details on the market reaction to the news, please refer to “Regeneron’s Stock Reacts to Dupilumab Phase 3 Trials.”)
Notably, Regeneron holds a robust pipeline of 13 innovative drugs, including five late-stage development drugs. We can thus assume that these pipeline prospects are a major reason for Regeneron’s premium valuation. (For more on Regeneron’s pipeline, check out “Regeneron Pharmaceuticals’ Research Pipeline and Analyst Recommendations.”)
Praluent’s launch
The recent launch of Praluent might also prove to be another success driver for Regeneron. Praluent lost its patent infringement litigation with Amgen’s (AMGN) Repatha, however, on March 16, 2016. Even though Regeneron and Sanofi refused to accept the verdict and the damages are not determined yet, we can assume that the drug won’t prove to be a major success for Regeneron.
In any case, investors should be cautious when investing directly in any biotechnology stock, because the industry is typically quite volatile. To avoid such risks of direct exposure, investors can opt for the Vanguard Growth ETF (VUG), which has 0.35% of its total holdings in Regeneron.
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