In recent years, the biotech industry has experienced significant innovation and breakthroughs, resulting in longer market share protection for successful biotech companies compared to generic drugs in the pharmaceutical industry. Regeneron Pharmaceuticals (REGN) has established itself as a stable player in the industry, with a portfolio of approved blockbuster drugs such as Eylea and Dupixent, and a focus on innovation, including the use of genetically engineered mice. Despite consistently achieving a strong Uniform return on assets (ROA) of over 20% for the past decade, Regeneron is viewed by rating agencies as risky due to industry bias, receiving a “BBB+” rating that is barely investment-grade. In today’s FA Alpha Daily, we’ll utilize Uniform Accounting to fully understand Regeneron Pharmaceuticals’ credit risk profile and true profitability.
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Biotech innovation has been thriving in recent years, with new breakthroughs and discoveries being made every day.
One of the key advantages of being a successful biotech company is that it takes longer for biosimilars to disrupt market share than it does for generic drugs in the pharmaceutical industry.
This is because biosimilars, which are similar but not identical to the original biologic drug, face more regulatory hurdles and are more difficult to develop than generic drugs.
For companies like Regeneron Pharmaceuticals (REGN), which has several blockbuster drugs in its portfolio, this is excellent news.
Blockbuster drugs are those that generate over $1 billion in annual revenue and are key to maintaining a profitable business in the biotech industry.
Regeneron has several such drugs in its portfolio, including Eylea and Dupixent, which have been approved for the treatment of age-related macular degeneration and atopic dermatitis, respectively.
Furthermore, the $89 billion company has a unique approach to drug development. In its research and development processes, the company heavily uses genetically engineered mice, which has helped it stand out from its competitors.
The focus on innovation and a successful portfolio of drugs helped the company gain a level of stability that is rarely seen in the biotech industry.
During the last decade, the company’s Uniform return on assets (ROA) has consistently exceeded 20%.
However, the company became the new victim of industry generalization and bias by rating agencies. They think that Regeneron is riskier than it is just because of the industry it’s in.
S&P rates the company “BBB+” which is barely investment-grade.
The issue here is Regeneron is being treated like a startup biotech company that isn’t making any money. It’s true that a lot of biotech companies are risky. Many never get a drug developed, and they lose money forever.
We can figure out if there is a real risk for this company by leveraging the Credit Cash Flow Prime (“CCFP”) to understand how the company’s obligations match against its cash and cash flows.
In the chart below, the stacked bars represent the firm’s obligations each year for the next five years. These obligations are then compared to the firm’s cash flow (blue line) as well as the cash on hand available at the beginning of each period (blue dots) and available cash and undrawn revolver (blue triangles).
The CCFP chart clearly shows that Regeneron Pharmaceuticals’ cash flows are more than enough to cover all of its obligations going forward.
The chart shows the company does not have any debt maturities in the near future. In fact, it doesn’t have any debt maturing before 2030.
Regeneron’s gross earnings alone is enough to serve all of its obligations in the next 5 years. Also, its operating obligations are composed mostly of R&D spending, which aims to help the company to be more innovative and become more profitable.
Additionally, the company has tons of cash on hand and a massive spread of cash flows over its obligations.
It can be clearly seen that the company does not face any credit risk that could be concerning for rating agencies.
Because of these factors, at Valens, we think that Regeneron Pharmaceuticals does not deserve to be treated like it’s risky. That is why we are giving a rating of “IG2+” to the company.
This rating ensures that the company has no overstated credit risk and is placed in the upper tranches of investment-grade ratings.
It is our goal to bring forward the real creditworthiness of companies, built on the back of better Uniform Accounting.
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SUMMARY and Regeneron Pharmaceuticals (REGN:USA) Tearsheet
As the Uniform Accounting tearsheet for Regeneron Pharmaceuticals (REGN:USA) highlights, the Uniform P/E trades at 15.8x, which is below the global corporate average of 18.4x but above its historical P/E of 10.9x.
Low P/Es require low EPS growth to sustain them. In the case of Regeneron, the company has recently shown a 31% Uniform EPS shrinkage.
Wall Street analysts provide stock and valuation recommendations, that in general, provide very poor guidance or insight. However, Wall Street analysts’ near-term earnings forecasts tend to have relevant information.
We take Wall Street forecasts for GAAP earnings and convert them to Uniform earnings forecasts. When we do this, Regeneron’s Wall Street analyst-driven forecast is for a -15% and 7% EPS growth in 2023 and 2024, respectively.
Based on the current stock market valuations, we can use earnings growth valuation metrics to back into the required growth rate to justify Regeneron’s $829 stock price. These are often referred to as market-embedded expectations.
Furthermore, the company’s earning power in 2022 was 4x the long-run corporate average. Moreover, cash flows and cash on hand are 6x of its total obligations—including debt maturities and capex maintenance. The company also has an intrinsic credit risk that is 50bps above the risk-free rate.
Overall, this signals a low credit risk.
Lastly, Regeneron’s Uniform earnings growth is in line with its peer averages and is trading in line with its average peer valuations.
Joel Litman & Rob Spivey
Chief Investment Strategist &
Director of Research
at Valens Research
This analysis of Regeneron Pharmaceuticals’ (REGN) credit outlook is the same type of analysis that powers our macro research detailed in the member-exclusive FA Alpha Pulse.