Regeneron: Q2 Results & Eylea Data Support the Long-Term Thesis

Regeneron Pharmaceuticals (REGN), due in large part to the continued growth of Eylea, has become the world’s 5^th largest biotechnology company by market capitalization. Regeneron, via both its commercial franchise and diverse pipeline, is transitioning into a core biotechnology holding, and we believe that the company’s Q2 2013 results, as well as the clinical data announced alongside, continue to support long-term positions in Regeneron.

Does Raised Guidance Excuse an Apparent Miss?

For Q2 2013, Regeneron posted pro forma EPS of $1.73 (up 92.22% year-over-year), matching estimates. However, revenues of $457.642 million (up 50.34% year-over-year), missed consensus estimates by almost $13 million, due in part to below consensus domestic Eylea sales ($330 million vs. a consensus of $333 million). It would appear that Eylea growth is slowing; on a sequential basis, sales inched up 5% in Q2, versus 14% in Q1 2013, and 13% in Q4 2012.

However, Regeneron once again raised its full-year sales forecast, calling for Eylea sales of $1.325 billion versus a prior midpoint of $1.2875 billion. International Eylea sales, which commenced in Q4 2012, were $95.6 million during the quarter, representing sequential growth of 47.5%

For Regeneron, a miss relative to consensus estimates is not a usual occurrence. However, Regeneron appears to be taking the longer view. The company once again raised its full-year forecast, which we believe is more important than the results of any single quarter (as a large-cap, the results of any one quarter are not as relevant to the Regeneron “story” as they would be if the company were still a small-cap company with a newly approved product). But it’s important to note where the miss could have originated. The answer lies in changes to Eylea dosing. During the quarter, dosing intervals slowed to 7.2 weeks (versus 5.4 weeks for Avastin, and 5.9 for Lucentis), nearing the 8-week ceiling imposed by Eylea’s label. Importantly, Eylea continues to capture market share from its macular competitors in both wet AMD and CRVO, its other approved indication. In wet AMD, Eylea has now captured 50% of the branded market, and 25% of the consolidated market (the differential is due to the use of Avastin, which holds 50% of the consolidated market). And in CRVO, Eylea has now captured slightly less than 40% of the branded market, despite less than a year of sales, and 18% of the consolidated market, where Avastin once again is the dominant player with 55% market share.

Internationally, Eylea is securing a leading position. In Japan, where Eylea was approved in September 2012 for the treatment of wet AMD, it now holds 56% of the market. Eylea also holds 48% market share in Australia and 22% of the market in Germany. In CRVO, Regeneron’s market research has concluded that Eylea has now captured 40% of the anti-VEGF segment, which represents 45% of overall CRVO treatment options.

It would appear that Eylea is continuing to show success, both here in the United States and internationally. Its market share is increasing, and Regeneron has yet again raised its full-year sales forecast.

But does that excuse what appears to be a miss on revenues, particularly domestic Eylea sales?

We believe that in the end, it does, particularly in light of slight inventory shifts that appear to have driven part of the company’s miss. Regeneron executives noted that there was a “slight reduction” in Eylea inventory across Regeneron’s distributor base, but that it remains within the company’s 1-2 week target range. As noted by Credit Suisse, a half-week reduction in inventory would have trimmed Eylea sales by $12 million, nearly enough to wipe away the company’s top-line miss and push domestic Eylea sales above consensus [the remainder of Regeneron’s revenue, which is tied to its collaboration agreements with Bayer and Sanofi (SNY), is much more volatile and can shift from quarter to quarter]. Assuming that this half-week inventory shift can in fact trim sales by $12 million, it would take a shift of less than a day ($3.43 million in inventory shift per day) to account for the domestic Eylea sales miss.

Eylea in DME: A Year Ahead of Schedule

In conjunction with its Q2 results, Regeneron and Bayer reported new Phase III data for Eylea in the treatment of diabetic macular edema, also known as DME. In the VIVID-DME Phase III trial, patients in the Eylea arm received a monthly 2 mg dose and saw an average change in BCVA (best-corrected visual acuity) of 10.5 letters (p<0.0001). Patients who took a 2 mg dose of Eylea every other month saw a mean change in BCVA of 10.7 letters (p<0.0001), with both arms compared to traditional laser photocoagulation, which resulted in a mean change of 1.2 letters.

The VISTA-DME trial also provided statistically significant efficacy data; patients in that trial that received a 2 mg monthly dose of Eylea saw a mean BCVA change of 12.5 letters (p<0.0001), and patients who received a 2 mg dose of Eylea every other month saw a mean BCVA change of 10.7 letters, suggesting strong efficacy for this potentially superior dosing option. By comparison, patients receiving laser photocoagulation had a mean change of 0.2 letters. Clinical efficacy is summarized in the table below.

Eylea in DME, Phase III Efficacy (Mean Change in BCVA)

Eylea’s safety profile was also acceptable, and the company said that the overall profile of adverse events was similar across the Eylea and control arms. The most common adverse events were conjunctival hemorrhage, vitreous floaters, and eye pain, as well as hypertension and nasopharangytis. It is important to note that although there were several deaths within the Eylea arms of these trials, the rate was similar to the control group, and the FDA has been made aware of these deaths. Based on feedback, we do not believe that the issue is material enough to derail Regeneron’s DME prospects.

Based on “extensive discussions” with the FDA, Regeneron will be filing for FDA approval of Eylea in DME a year ahead of schedule, using 1-year clinical data instead of the anticipated two, with a filing expected before the end of 2013 (Bayer will also be filing for approval in Europe by the end of the year).

Full 1-year clinical data will be presented at upcoming medical conference, most likely at either the European Society of Retina Specialists’ annual congress in late September (26^th-29^th), or the American Academy of Ophthalmology’s annual meeting, which will take place from November 16^th-19^th. We note that both VISTA-DME and VIVID-DME have not been terminated, and will continue until the full 2-year data set is complete.

Regeneron believes that the global market opportunity for AMD is, at a minimum, equivalent to DME. Several factors underlie this assumption, chief among them the fact that Eylea’s primary competitors in DME will once again be Lucentis and Avastin, as well as a decades old standard of care. It’s believed that there are currently 570,000 patients with DME in the United States alone (Roche has estimated that 750,000 new cases develop each year), and Regeneron’s research has shown that only 40% of these patients are treated with an anti-VEGF compound (such as Lucentis, which was approved for DME by the FDA in August 2012). Aside from drugs such as Lucentis, laser photocoagulation is the current standard of care in DME. However, this method of treatment first emerged in the 1980’s, when a key clinical trial, known as the Early Treatment of Diabetic Retinopathy Study, concluded that quick laser treatment reduced the risk of blindness by up to 50%. However, as Lucentis’ own Phase III trials showed, the addition of an anti-VEGF compound can lead to statistically significant clinical improvement. After one year of study, 50% of patients in the Lucentis arm (in addition to laser therapy) saw “substantial” improvement in reading ability (defined as reading two lines smaller compared to pre-trial reading ability), whereas only 30% of patients in the control arm (laser therapy with or without steroids) saw such an improvement. Given that the current standard of care for DME remains traditional laser photocoagulation (Lucentis is said to hold around 20% of the DME market), Eylea’s path to meaningful market share should be fairly clear. As CEO Leonard Schleifer noted on Regeneron’s earnings call, there were cases of patients switching from other anti-VEGF agents (as in wet AMD, Avastin is also used in DME, with a 67% share of the intravitreal treatment market; standard laser photocoagulation is estimated to hold about a third of the DME market). Furthermore, reports indicate that Eylea itself already holds between 5% and 8% of the intravitreal DME market. Based on Eylea’s share trajectory in wet AMD, we suspect that if and when it secures approval in DME, Eylea will capture meaningful market share, just as it has done in wet AMD.

On the surface, Eylea’s pricing advantage in wet AMD does not translate to DME. However, this does not take into account that the Eylea regimen shifts to every other month dosing after the first 5 months. Therefore, after two years, the dosing advantage shifts to Eylea. In DME, Lucentis is dosed at a monthly dose of 0.3 mg (Lucentis has been tested in DME at both a 0.5 and 0.3 mg dose, but its prescribing information calls for a dose of 0.3 mg in DME, versus the 0.5 mg dose in wet AMD), and Eylea is dosed at 2 mg per month (the same as in wet AMD). Over the course of 24 months, patients on Lucentis will receive a total of 7.2 mg of Lucentis, which when adjusted for standard dosing is equivalent to 14.4 0.5 mg doses. Eylea patients, however, will receive a total of 14 doses over the course of those two years (5 monthly doses, then one dose every other month). Eylea’s dosing advantage becomes clearer in the long-term, and assuming pricing is consistent, we believe that Eylea will be able to overcome entrenched competition in DME, just as it has done in wet AMD. We note that peak sales estimates for Eylea (covering currently feasible indications) range from $3.5-$4 billion, and with 2013 sales estimated to reach $1.325 billion, there’s room for further growth.

Alirocumab: Well Positioned in the PCSK9 Race

As we have noted in our prior coverage of Regeneron, one of the company’s lead pipeline assets is alirocumab, formerly known as REGN-727, currently in Phase III trials for the treatment of cholesterol. Alirocumab is a PCSK9 antibody, and the drug is one of the most advanced in this new class of cholesterol fighting compounds, the other being Amgen’s (AMGN) AMG-145, also in Phase III trials.

Amgen has indicated that Phase III data for AMG-145 will be available in 2014 at the earliest, and Regeneron will report the first set of Phase III ODYSSEY MONO clinical data before the end of the year. This set of clinical data will cover 100 patients, allowing investors an early look at alirocumab’s clinical profile, with the majority of ODYSSEY data to be released in 2014 as well. In addition to reaffirming the timeline for ODYSSEY data, Regeneron also announced that is it beginning a new trial arm for alirocumab that will test monthly dosing (alongside the existing alternative-week programs), which Amgen has already incorporated into AMG-145’s Phase III trials. Analysts are split as to whether or not monthly dosing is truly a game-changer in this particular market. RBC, for example, has argued that Regeneron’s decision to begin trials of monthly dosing is effectively an endorsement of Amgen’s strategy. Credit Suisse, meanwhile, has argued that the issue is largely irrelevant, as the inclusion of a monthly dosing arm will mute the competitive threat from AMG-145, as well as other PCSK9 assets from Pfizer (PFE), Roche, and Novartis (NVS) that may attempt to differentiate via monthly dosing. As Regeneron noted on its Q2 earnings call, the monthly dosing arm(s) will be Phase III programs as well. Furthermore, Regeneron believes that 2-week dosing will the preferred choice for PCSK9 inhibitors due the fact that monthly dosing has been shown to lead to a modest loss in efficacy, and requires two separate injections. We note that peak sales estimates for alirocumab have reached $3.5 billion, with broader estimates for the global PCSK9 market ranging from $8 billion to as high as $25 billion.

Conclusions

With Eylea positioned to capture a large portion of the DME market, we’re maintaining our exposure to Regeneron for the long-run. Phase III alirocumab data will be available by the end of the year, and initial Phase III data from sarilumab, the company’s other Phase III asset, will be available in early 2014. Regeneron’s Eylea franchise is positioned for long-term growth, and its pipeline, anchored by alirocumab, holds billions of dollars in future sales, with the company’s two most advanced assets set to release clinical data over the next 6-8 months (sarilumab’s Phase III RA-MOBILITY trial has a primary completion date of October 2013). Eylea is continuing to gain share across various ocular indications, and Regeneron’s lead pipeline asset is one of the leading candidates in a new class of medicines poised to generate significant sales. This, combined with a compelling collaboration with Sanofi (which we’ve covered in detail before) and a diverse pipeline of ten different clinical compounds, has created what we believe to be a core biotechnology holding.

In connection with REGN, PropThink has taken a long position.