Regeneron Pharmaceuticals Inc (NASDAQ:REGN) peaked on May 14 with a price of $283.99, and has since pulled back to its current price of $260. The drugmaker has been one of the best-performing stocks of the last few years, trading higher regardless of market trend. After many years of gains, some are wondering whether now’s the time to take profits. Here’s why I think it’s not.
A Great Company With a Lot of Promise
Regeneron Pharmaceuticals Inc (NASDAQ:REGN) is valued on its pipeline, and on the potential of its eye drug EYLEA. This treatment and its two other marketed drugs have produced revenue of $1.59 billion over the last 12 months, including almost $1 billion from EYLEA alone. Regeneron’s newly launched drug ZALTRAP, for colorectal cancer, has booked sales of $31 million during its first four months on sale.
Beyond these products, Regeneron Pharmaceuticals Inc (NASDAQ:REGN) also has a large pipeline and a developmental partnership with Sanofi. One of its more promising products, alirocumab/REGN727, is being developed to manage LDL cholesterol. It is believed to have blockbuster potential, with peak sales in the multibillions. Therefore, it is easy to see why this drugmaker has become an investor favorite over the last several years.
How Fundamentally Large Can This Company Become?
It doesn’t take a genius to look at Regeneron Pharmaceuticals Inc (NASDAQ:REGN) and its $25.5 billion market cap, compared to its $1.59 billion in revenue, to see that it’s pricey. Thus the company is expected to produce significant growth over a long period of time; as higher fundamentals/valuation ratios are typically awarded to companies with high growth rates.
In terms of expectations, the company’s blockbuster eye drug EYLEA has peak sales expectations of $4 billion. ZALTRAP is estimated to have peak sales of $500 million. Finally, ARCALYST rounds out its current offerings with a smaller $100 million in projected peak sales.
Is There Upside After Such Large Multi-Year Gains?
When you combine the sales potential of its current products with its two most advanced clinical products, you can see how Regeneron Pharmaceuticals Inc (NASDAQ:REGN) has significant revenue potential. Moreover, the company is classified as an orphan drug company, meaning it develops drugs to treat rare conditions. Orphan drugs enjoy longer exclusivity periods before other companies can sell generic versions of them.
When you consider its potential to generate at least $10 billion in sales from future products, Regeneron Pharmaceuticals Inc (NASDAQ:REGN) looks cheap. Sure, it’s expensive now, but the drugmaker still compares favorably to other high-profile companies in the sector with orphan drug classifications.
Alexion Pharmaceuticals, Inc. (NASDAQ:ALXN) makes the easiest comparison. Like Regeneron Pharmaceuticals Inc (NASDAQ:REGN), it owes its market cap of more than $20 billion to the success of one key product. Yet while Regeneron has three products that are FDA-approved (including one blockbuster), Alexion Pharmaceuticals has just one marketed orphan drug, Soliris. It treats paroxysmal nocturnal hemoglobinuria (PNH), a debilitating, ultra-rare and life-threatening blood disorder, but beyond its FDA-approved label, it’s also used to treat atypical hemolytic uremic syndrome (aHUS), and other rare genetic and blood-related diseases.
Alexion is expecting total sales from Soliris to reach $1.51 billion in 2013. The company does not have a large pipeline, so it’s basing all of its upside on the further development of this one product, which carries peak sales potential of $5 billion.
Alexion has one product with multiple uses, and is valued at 16.31 times that one product. Regeneron Pharmaceuticals Inc (NASDAQ:REGN) has an equally impressive blockbuster product, but trades at 15.88 times total sales. The only difference is that Regeneron has higher upside based on a diversified pipeline; Alexion does not. The two companies are valued very similarly, yet I believe that Regeneron is worth a far greater premium and will become the better investment long-term.
Conclusion
Biotechnology in particular trades with its own rules, based largely on speculation. Therefore, despite the fact that Regeneron is expensive by normal market standards, it is a hyper-growth company with an incredibly bright future that outshines its closest peers. After its recent pullback, now’s the time to buy Regeneron Pharmaceuticals Inc (NASDAQ:REGN), not sell it.
Brian Nichols is long REGN. The Motley Fool has no position in any of the stocks mentioned.
The article Is This Momentum Stock’s Rally Over? originally appeared on Fool.com.
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