Regeneron shares rose to an all-time high level, driven by strong Q2 results and guidance.
Regeneron could see further upside based on just fundamentals.
The company is moving closer to a stage where it might consider returning some cash to shareholders, which will boost returns.
A stock split could also help.
Regeneron Pharmaceuticals (NASDAQ:REGN) shares rose to an all-time high level on Tuesday as the company reported solid results for the second quarter and raised its revenue guidance for the full year. I was going to write an article discussing the results and the potential for further upside in REGN shares. However, I see that DoctoRx has written about the results and the potential for further upside in REGN shares in great detail. I therefore decided to focus on couple other factors that could provide a boost to the stock price.
The past year has seen REGN shares gain nearly 80%, driven by expectations that the company's PCSK9 inhibitor will hit the market. The approval for Praluent came in July as expected. The question after the approval has been whether there is any further upside in REGN shares. Based on the latest revenue guidance given by REGN for 2015, the stock is now trading at 13x sales, which is above the average for the biotech sector. But, based on the potential peak sales of Praluent, REGN's pipeline and strong Eylea's sales, this would still seem like an attractive entry point. You see if REGN achieves 50% revenue growth in 2015, which is the high end of its guidance range, and only 20% sales growth thereafter until 2020, it would reach $10 billion in sales. Based on 2020 sales estimates, REGN is still trading at just under 6x sales. If the multiple moves closer to the industry average, then as DoctoRx mentioned in his article, $1000 looks a possibility. A nearly 70% upside means that REGN is still attractive in terms of valuation.
Apart from of course the potential of Eylea, Praluent and the pipeline, there are two other factors that I believe could help REGN in generating robust returns for shareholders. One is of course returning some cash to shareholders, which is not uncommon in the biotech sector these days.
Dividends are generally not the reason for investing in biotech. But some of the biggest biotech have actually become cash cows even as they have attractive growth prospects. Gilead Sciences (NASDAQ:GILD) and Amgen (NASDAQ:AMGN) are classic examples. Amgen began paying dividends in 2011. Any corporate finance textbook will tell you that when a company does that, it is normally a sign that it doesn't see significant growth in the future. That of course has not been the case with Amgen. Since 2011, Amgen shares have gained 222%. The company has seen its revenue grow from around $15 billion in 2010 to $20.06 billion in 2014.
Gilead initiated a dividend earlier in the year, which highlights the company's cash flow generating abilities driven by the strong performance of its anti-viral product segment. And of course, Gilead still remains a growth story.
Given the kind of returns biotech such as Amgen, Gilead and Regeneron have generated over the years, a 2% dividend yield may not matter much. However, regular dividends make these stocks attractive to income investors. Essentially, a large section of the investor community that hitherto had not looked at a particular biotech will move in due to the lure of regular dividends. Yield hungry investors may not see biotech as the best pick, but very few dividend paying companies in any sector will offer the kind of visibility that some of the big biotech have when it comes to sustaining free cash flows.
Of course, this is not to say that Regeneron will be paying out a dividend anytime soon. For the full year 2014, Regeneron generated $410 million in free cash flows. Amgen had free cash flow of $5.2 billion when it initiated its dividend program in 2011. Gilead generated free cash flows (operating cash flows less capital expenditure) of more than $12 billion in 2014. Based on when Amgen and Gilead began paying dividends and Regeneron's free cash flows in 2014, a dividend looks unlikely in the near future. But remember, Gilead's free cash flows rose four times from 2013 to 2014, driven by its Hep C products launched in 2013/2014. In Praluent, Regeneron has a product that can significantly boost the company's free cash flows despite the fact that the product is being jointly commercialized with Sanofi (NYSE:SNY). If Praluent meets expectations then Regeneron could move to a stage where returning some cash to shareholders could be a consideration. Regeneron expects its revenue for the full year to increase between 45% and 50%. Assuming that free cash flows also increase at the same rate, free cash flows could cross $600 million this year. If the rate of growth is maintained, free cash flows would cross a billion by 2017. While this will be still below the levels when Gilead and Amgen paid dividends, a case for returning some cash to shareholders will become valid. If Praluent sales surpass expectations then a case for paying dividends will become quite strong.
The second factor that could help in boosting Regeneron's returns is a stock split. Well a stock split itself does not have any impact on market cap or ratios, however, there is evidence that a stock split in general boosts price. The reason is quite simple. Regeneron currently trades at just under $600, which means it is out of reach of a large section of the retail investor base. A stock split will enable some of these investors to move in. There is actually evidence that stock split boosts price, especially for stocks like Regeneron whose chart has essentially been vertical. Gilead is again an example. The company completed a 2:1 split at the start of 2013 even though the price was well below the levels REGN is currently trading at. The stock doubled by the end of 2013. In the tech world, there is Apple (NASDAQ:AAPL). Apple announced a 7:1 split in 2014. At the time, Apple shares were trading above $600. In the year after the split, AAPL shares gained nearly 40%. Of course, fundamental factors such as earnings growth would have driven the stock price higher, but I think the stock split also contributed. Finally, there is Netflix (NASDAQ:NFLX), which completed a 7:1 split just last month. In Netflix's case, the impact of stock split on price is quite evident as shares have already gained more than 20% in less than a month.