Regeneron Pharmaceuticals (REGN) is an integrated biopharmaceutical company focusing on medicines for the treatment of serious medical conditions. Following its annual filing for 2011, the company stated its core business value: “Our core business strategy is to maintain a strong foundation in basic scientific research and discovery-enabling technologies, to combine that foundation with our clinical development and manufacturing capabilities, and to continue to expand our commercialization capabilities in anticipation of possible regulatory approval and launch of one or more of our late-stage product candidates. Our long-term objective is to build a successful, integrated, multi-product biopharmaceutical company that provides patients and medical professionals with innovative options for preventing and treating human diseases.”

For 9 out of 10 years in the past, REGN has consistently making a loss. Operating cash flow and free cash flow were negative most of the time. Like other biopharmaceutical companies, the primary expense has gone into research and development of new medicines. The only thing in the income statement that investors should be positive about is the growth in sales over years. The sales revenue experienced 29% compounded annualized growth. One of the company’s key successes is the ability to introduce new drugs, which are more advantageous over existing ones. The main driver of the company growth was Eylea, wet age-related macular degeneration drug.

USD millions	2002	2003	2004	2005	2006	2007	2008	2009	2010	2011
Revenue	22	57	174	66	63	125	238	379	459	446
Net Income	-124	-107	42	-95	-102	-106	-83	-68	-104	-222
OCF	-111	-6	-17	-30	23	27	-89	-72	96	-142
FCF	-145	-36	-23	-35	20	9	-124	-170	-3	-199

In the past 52 weeks, its share price has grown from $71.2 to $152.45, marking the growth of 114%. Currently it is trading at 24.6x earnings.



Insider trades: In August, insiders have actively sold out REGN share. The CFO, Senior VP in R&D, Controller, Independent Director and VP in Regulatory Development have combined sale value of more than $11.5 million.

My take: Even with its past success with stock performance and its research and development in developing new medicines, I would not touch this stock because of three main reasons:

• It is consistently making loss due to high R&D costs, and creating no operating cash flow.
• High valuation, even compared with industry average (P/B of REGN is 24.6x whereas industry average is 6.1x)
• It can be great if the R&D investments turned into great products, which might bring long-term profits to the company. However, there is no high certainty that it can be successful with its next products.

What Worked in the Stock Market for Long-Term Investors?

Extensive research has found that the companies with predictable revenues and earnings outperform the market average; they also suffer lower probability of loss. As a matter of fact, this kind of companies are exactly what Warren Buffett wants to buy and hold forever. Please read the research about what worked in the stock market:

Part I: What worked in the market from 1998-2008? Part I: Predictability Rank
Part II: Role of Valuations
Part III: Intrinsic Value, Discounted Cash Flow and Margin of Safety

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