Chardan Downgrades Regeneron Pharmaceuticals, Notes Valuation Concerns

Gbola Amusa, Chardan Capital Markets' head of healthcare research, commented in a note on Monday that investors should be "more selective" in the biotech space. As such, the analyst downgraded shares of Regeneron Pharmaceuticals Inc (NASDAQ: REGN) to Neutral from Buy with an unchanged $565 price target.

Amusa continued that he still maintains a "positive bias" on the stock given his above-consensus, long-term expectations for the company's cholesterol and ophthalmology franchises. While this will result in the potential for earnings momentum over the long term, the analyst sees "less scope" for outperformance in the near term.

Updated Valuation Model

Amusa further noted that he is updating his valuation model and is now assuming Praluent revenue will reach $7.5 billion in 2020 (up from a previous $6.8 billion estimate) and revenue from the company's Eylea global franchise will total $7.6 billion (up from a previous $7.0 billion estimate).

The analyst also expects the company's non-GAAP earnings per share to grow at a 27 percent compounded annual growth rate (or 44 percent GAAP EPS) through 2020.

Related Link: Regeneron Tops Q2 Estimates, Shares Surge

Increased Discount Rate

At the same time, the analyst is increasing the discount rate in his discounted cash flow model to 7.3 percent from 6.3 percent, which results in an unchanged $565 price target.

"With the 2015 ODYSSEY data release for Regeneron's anti-PCSK9 antibody, Praluent, we continue to see the anti-PCSK9 class as paradigm-shifting; and, our anti-PCSK9 market model shows the market growing to $19.6 billion in 2020 sales, of which Praluent is $7.5 billion," Amusa expanded. "Regeneron is additionally a central player in the high-growth (13 percent compounded annual growth to 2020) anti-VEGF and anti-VEGF combo ophthalmology market. We anticipate Regeneron will share in the economics from $7.6 billion of Eylea sales in 2020 from its partnered ophthalmology franchise."

Bottom line, the analyst stated he could be "premature" in his downgrade, but the stock is trading within 95 percent of his unchanged $565 price target.

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