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Keep Calm and Spend On, Regeneron

Investors tend to recoil when a company's expenses jump. It's not always the best reflex.

As drugmaker Regeneron reported mixed quarterly results on Thursday -- earnings beat expectations but revenue did not, while sales of core eye drug Eyelea soared but cholesterol drug Praluent languished -- it announced plans to spend more money. Shares fell 3.4 percent.

Regeneron has underperformed biotech peers this year as its cholesterol lowering drug has run into legal and commercial barriers.

The company raised and tightened its guidance on unreimbursed R&D and other expenses for 2016. The dollar amounts aren't huge -- about $100 million in total upward adjustment of the midpoints. But it indicates something of a strategy shift.

Regeneron's spending load has typically been lightened by partnerships, most notably with Sanofi. The firms team up on Praluent and other drugs, and Sanofi pays much of its partner's expenses. But Regeneron expects Sanofi to contribute less this year, and it's doing more development on its own. On its earnings call, the company said it is has seven product candidates in human trials that it's developing independently (of 15 total) and expects to have more start human trials in the near term.

Regeneron also spent a combined $150 million in up-front payments and stock purchases in recent months to collaborate with Adicet on cell therapies for cancer and to work with Intellia on therapies using CRISPR gene-editing technology. As more research programs approach Phase 3 studies and the company spends more on similar early stage business development, RBC analyst Adnan Butt expects expenses to keep rising.

Regeneron's expenses are increasing as the company shifts to working on more drugs on its own without big partners.

But faster expense growth shouldn't make investors antsy in this case. Regeneron grew revenue by 21 percent in the quarter from a year earlier. The company needs to spend money to take fullest advantage of its drugs that are on or about to hit the market, progress its pipeline, and justify its expensive valuation. (The company's blended forward P/E ratio is 31.6 compared to 26, on average, for its peers.)

Regeneron's pipeline is all homegrown; it has a commitment to doing its own drug discovery, occasionally with partners, that's increasingly rare in an M&A-focused industry. It has produced 15 clinical candidates and several expected blockbusters while spending less on R&D than larger peers.

Regeneron's trailing 12-month R&D expense is $1.75 billion, some of which is funded by Sanofi. Gilead's 12-month figure is $4.2 billion, according to data collected by Bloomberg. Biogen's is just short of $2 billion, and Amgen's is $3.98 billion.

As many of those peers have learned, it's better to spend while growing than to play catch-up with M&A as sales slow, or to rely on price hikes and expense management to keep up profit margins. That's when investors should get worried.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

By Max Nisen

Aug 5, 2016

Source: http://www.bloomberg.com/

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