Regeneron Pharmaceuticals (REGN)

A Deep Dive

Notes From The Beauty Contest is a new investment blog that views current market dynamics through Keynes' newspaper beauty contest analogy. At NFTBC we will share deep dives on stocks, emphasizing a philosophy of "faithfulness" rather than trying to play the game.

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Introduction

Welcome to the first deep dive at NFTBC - it’s about Regeneron Pharmaceuticals REGN 0.00%↑. For some context about this substack and what I intend to write about, I would suggest reading my NFTBC introduction: here. This is not intended to be advice or a recommendation - I’m just writing about stocks that I’m interested in, for the hell of it and through my own lens. Full disclosure: I own shares in REGN, amounting to a significant proportion of my portfolio (more than 10%) and I’ve been buying more recently. With that out of the way, let’s get to it.

I have owned REGN for years. I‘ve added opportunistically numerous times and also made one or two sales when I needed the funds. When you own shares in a company for a long time, you get to know it pretty well through the up and downs. At the time of writing, the shares are more than 40% lower than highs set five months ago and it seems to me that we’re now presented with one of the best buying opportunities since October 2019, which was itself an exceptional opportunity. Back in 2019 a new competitor to REGN’s biggest drug, Eylea, was about to hit the market and the feeling was one of uncertainty mixed with panic. Five years later and with earnings more than 100% higher, investors are still focused on Eylea, to the exclusion of all else - but this time, it’s the entry of a biosimilar competitor feeding fears. In 2019 shares offered a brief window of a forward unlevered P/E of 9-ish, whereas today it’s more like 12 - not quite as exceptional, but exciting nevertheless. That said, perhaps we’ll end up at 9x this time too - who knows? The point is, you could have missed the bottom, buying at 12x shortly before or after the October, and still done extremely well.

REGN is not blessed with a loyal institutional shareholder base that will stick with it through slower years - such as you see at certain life science tools bluechips for example. REGN shareholders are much more flighty, and coming into 2025, the company faces the perceived threat of a slower year. I can’t tell you what total Eylea sales will be this year or the year after - I have some ideas, but they’re probably irrelevant. What I can tell you is that from the very beginning, REGN’s founders set out to build repeatable systems. They’ve built a “machine that produces a pipeline and cranks things out” today, tomorrow and fifteen years hence. Yes, Eylea accounts for more than 40% of REGN’s revenue - it’s a scary proportion for a drug in decline. But here’s something that people miss - it’s arguably just about accounting. Specifically, REGN has an even bigger drug called Dupixent but for historic reasons this revenue gets recognised by Sanofi, before Sanofi hands 50% of the profits back over to REGN. If this merely worked the other way round, then Eylea would be ~25% of revenue and people would freak out a lot less I suspect. Moreover, Dupixent is a massive growth driver and will be increasingly more profitable. There are other growth drivers too and a spate of launches coming up in the years ahead - we’ll get into this more later. The point is, perennial fears over what comes next seem a bit less relevant to me than at most other biopharma businesses.

To give credit to specialist investors, and in particular those who have been studying REGN a while, there are many who really do appreciate some of these standout qualities. But frequently this information is not acted on, with ‘beauty contest’ rules coming to the fore instead. This explains the volatility. For example, in early January REGN announced its US Eylea sales for the prior year (as it always does at JP Morgan’s January conference) and on this occasion it actually took a few days for investors to conclude that the announcement was “bad”. The fact that REGN has a newer improved version of Eylea on the market, means two sets of numbers now - one for the large but declining older drug and one for the smaller but rapidly accelerating newer drug. The result is second- and triple-order guessing as to which of the numbers investors think the market believes to be the most important. Readers of the NFTBC Introduction will know I make no attempt to play these games.

The nub of my thesis is that REGN’s management are unusually credible when it comes to statements about their technology and pipeline. I’m certainly not arguing for blind faith in everything they say, but I am saying that contained within their communications are powerful sources of signal. Why? To boil it down as much as I can: first you have teams of people who have been working together for years (decades in many cases) and they have repeatedly invented drugs and brought them to market - of itself, this is highly atypical and the result is an unusual degree of valuable institutional knowledge and insight. Second, you have a company that has invented whole suites of technologies for discovering and validating novel targets and inventing and testing new drugs and modalities pre-clinically - when REGN bring something to the clinic, they have a better understanding than most whether or not it’s going to work. Last, I do believe that the people running the company are fundamentally and intellectually honest (more so than most) and motivated by improving patient outcomes - some might be more cynical, but I do think this is important. I’ll get further into the weeds later, but the practical application is this: if you err on the side of management’s ambitions rather than whatever sell-side analysts plug into their models, you’ll end up nearer to the real world. It sounds simplistic, but over the longer-term, the consensus numbers are always too low on a five-year view - have a look. All of REGN’s current four blockbuster drugs were modelled too low by the sell-side, and at least two of them were off by many billions. And they were off by billions, not because REGN raised prices (they didn’t) but because investors had fundamentally underestimated the differentiation and opportunity. Management have big ambitions for what’s coming next, and I see no reason to believe that this time is different:

I, as perhaps the longest serving CEO in the biotechnology industry and along with George, part of the longest serving management team in the biotechnology industry, I've been speaking in this conference for more than three decades. And while many things have changed, there have been different themes. Is it a platform? Is it small molecules? Is it RNA? Is it vaccines? Is it biologics? That rotates and changes. There's one constant. And the constant is investors always want to know what is that one thing that your company has that should make us want to invest….

… But here we are again in 2025, lots of technological breakthroughs, more than 10 approved drugs yet same question. What is that one thing? What is that one thing that why should we invest? What is it that people are missing so on and so forth?

And we have an answer. I am going to tell you... The answer is it's the pipeline. That's what people are missing and that's where we want to spend most of our time today. So, what I'm going to do is I'm going to rip through some of the stuff that normally a company would talk about, our marketed products. We do have four marketed blockbuster products, EYLEA, EYLEA HD, Dupixent and Libtayo now. These can drive our near-term market success, but advancing our differentiated pipeline is really, really where we think we're going to make the big hay for the future.

Len Schleifer, Regeneron CEO & co-founder speaking at JP Morgan Healthcare Conference, January 2025

Unlike most biopharma-related notes, this one won’t be especially technical. Neither do I intend to dive into clinical trials. These things are not needed for what I’m trying to convey. There’s plenty of thoughtful material of that sort out there and I have little to add to it. But at the same time, my note does assume a base level of knowledge - I don’t intend therefore to explain any terms, but it’s easy enough to get an explanation these days if you need one. Neither will there be many financial numbers here, but there will be some where required to make my point. Naturally all diligent investors should carry out a detailed financial analysis, but this isn’t intended to be one. Last, you won’t find a great deal of Eylea discussion here. While Eylea is certainly important, it has become a distraction, a fixation even. I would encourage investors to gaze beyond Eylea towards the company’s future rather than at its past.

Doubtless I’ll make some mistakes - so please let me know if I have. Also, happy to hear if you think I’m wrong or simply wish to engage.