Biotechnology company valuation depends on two main factors: the commercial potential of its existing drug portfolio as well as the potential of its drug pipeline. Regeneron has consistently traded at higher valuation multiples compared to its peers in the biotechnology industry.
The above graph shows the current price to earnings ratio (or PE) of Regeneron (REGN) compared to leading biotechnology players such as Gilead Sciences (GILD), Amgen (AMGN), Biogen, and Celgene (CELG).
Relative valuation using PE multiples helps us understand the value attributed by the market to the overall company in relation to its net income. Unlike other mature industries, the biotechnology industry is riskier and can experience high profits or high losses. Hence, behavioral biases can either propel or crash company valuations.
Thus, relative valuation is not preferred by analysts who instead rely on discounted cash flow valuation (or DCF) and real option valuation to assess the value of a biotechnology company. However, both methods depend on projections of future revenues from existing and new drugs. If these inputs are wrongly estimated, it can result in returning erroneous company values. Hence, the easier relative valuation technique is generally used for comparing and choosing biotechnology stocks.
Regeneron is an innovation-based company, with the blockbuster drug Eylea in its portfolio. Studies have proved the clinical superiority of the drug over its peers for treating eye conditions such as diabetic macular edema (or DME). Additionally, with a low level of competition and large market opportunity, Eylea can continue to earn substantial profits for several years. Eylea has also continued to receive FDA approvals for several expanded indications, further strengthening its position in the eye disease segment.
Praluent, targeting high cholesterol patients and co-marketed by Regeneron and Sanofi-Aventis, was approved by the FDA in July 2015. This is the first drug to be approved in the PCSK9 inhibitor category, and it has been proved to be superior to the convention statin-based cholesterol therapies. With analysts projecting about $2 billion–$3 billion as peak sales for Praluent, the company is expected to significantly benefit from the drug. However, controversies regarding the high pricing of Praluent may subdue the company’s margins.
While Regeneron’s high valuations can be supported by its strong drugs and the greater earnings per share (or EPS) boost arising from the smaller share base, risks such as overreliance on few drugs and history of research and development (or R&D), failures cannot be ignored.
Investors can limit their exposure to Regeneron at these high valuation levels by investing in the iShares NASDAQ Biotechnology ETF (IBB). IBB holds 7.34% of its total holdings in Regeneron.