As I was browsing through Dodge & Cox's Global Stock Fund annual letter for 2021 (published in February 2022), I came across the asset management company's commentary on Regeneron Pharmaceuticals Inc. (REGN, Financial):
“The company is still led by its founding duo, CEO Len Schleifer and CSO George Yancopoulos, who are significant shareholders. Both are MD/PhDs and their strategy to focus on long-term value creation through innovation has proven highly successful. We think Regeneron offers an opportunity to increase the Fund’s exposure to innovation at an attractive price.”
According to the team at Dodge & Cox, Regeneron has a “highly successful” strategy. Intrigued, I took a closer look at this company and found that its financial statements show excellent fundamentals. However, those high marks for strategy and fundamentals are not reflected in the share price, as the stock is signficantly undervalued based on the GF Value chart:
Regeneron describes itself as follows in its 10-K for 2021:
“Regeneron Pharmaceuticals, Inc. is a fully integrated biotechnology company that discovers, invents, develops, manufactures, and commercializes medicines for serious diseases. Our commercialized medicines and product candidates in development are designed to help patients with eye diseases, allergic and inflammatory diseases, cancer, cardiovascular and metabolic diseases, pain, hematologic conditions, infectious diseases, and rare diseases.”
As the following excerpt from a 10-K table indicates, its biggest three revenue generators are EYLEA (ophthalmology), REGEN-COV (Covid-19) and Dupixent (oncology):
On June 2, Regeneron announced it would spend $900 million plus future considerations to buy out its partner Sanofi’s (SNY, Financial) stake in Libtayo, a cancer drug which they jointly developed. Some investors didn’t like the deal, and the stock dropped 4% that day.
For the next three years, it has set ambitious targets for commercialized growth:
Source: Reneneron investor materials
The company faces substantial competition from pharmaceutical, biotechnology and chemical companies, though this is a given considering the industry. Competition among products is based on efficacy, safety, reliability, availability, price, patent position and other factors.
Looking at Regeneron’s financial strength ranking, ratios and interest coverage, we can safely assume the company has only a modest amount of debt.
The balance sheet shows cash and cash equivalents of $3.346 billion, long-term debt of $1.980 billion and no short-term debt.
One other point of interest in this table is that the weighted average cost of capital (WACC) is just 2.01% while the return on invested capital (ROIC) is roughly 25 times greater at 51.81%, indicating strong value creation.
Also of interest is the way free cash flow shot up in 2021:
Regeneron also gets very attractive scores on profitability, with margins that most companies can only imagine. We can tell the company is outperforming most of its peers because the bars in the "vs. industry" tab are dark green.
What’s more, the company has been profitable every year of the past decade. Revenue, Ebitda and earnings per share without non-recurring items have grown commensurately over the past three years, showing the following growth rates:
- Revenue: 47.3%.
- Ebitda: 53.6%.
- EPS without NRI: 50.1%.
Dividends and buybacks
Regeneron does not pay a dividend and has bought back relatively few shares:
With a price-earnings ratio of 8.7, Regeneron is a better value than 84% of companies in its industry from a valuation perspective. When we divide the price-earnings ratio by the five-year Ebitda growth rate of 38.90%, we get a PEG ratio of 0.22, which falls well below the fair value marker of 1.00.
Because the company gets only one star out of five for business predictability, the discounted cash flow analysis will not provide a reliable estimate of value.
The company's historical share price returns are summarized below:
- Year-to-date 2022: -2.78%.
- One year: 19.22%.
- Three years: 26%.
- Five years: 4.96%.
- 10 years: 16.88%.
Total annual returns:
- 2018: -0.65%.
- 2019: 0.53%.
- 2020: 28.66%.
- 2021: 30.72%.
- 2022 (to the end of Q1): -2.78%.
Regeneron has a strong contingent of guru investors, appearing in the portfolios of 14 gurus at the end of the 1st quarter of 2022. The three largest holdings were those of:
- Dodge & Cox, which added 701.46% in the quarter and finished with 2,237,063 shares. That was good for a 2.04% stake in the company and made up 0.95% of the fund’s assets under management.
- The Vanguard Health Care Fund (Trades, Portfolio) reduced its holding by 6.02%, and ended the quarter with 1,743,332 shares.
- Bill Nygren (Trades, Portfolio) of the Oakmark Fund reduced his holding in the stock by 13.01%, which decreased his total to 467,896 shares.
Regeneron Pharmaceuticals appears to have potential for future share price appreciation once it and the market climb out of their current funk. Personally, I believe a recovery is inevitable. The company has very good fundamentals, little debt and high profitability. It turns borrowed and invested capital into excellent returns. It is currently available at a discounted price. Regeneron may be of interest to value investors with some tolerance for debt, and to growth investors who take a long view.
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