Regeneron Shares Get a Spark

When is a decision to stop using a drug greeted with cheers by both the
manufacturer and a competitor? Look no further than what happened on Wednesday.
The Department of Veterans Affairs announced it had decided to stop using the
cancer drug Avastin to treat an eye disease because it wants to take a closer
look at reports of serious infections and blindness. On the surface, that
pronouncement would appear to be bad for the company that supplies the drug,
Roche's Genentech unit. Not so. That's because Genentech also provides the
far more costly drug Lucentis, which, unlike Avastin, is specifically approved
to treat wet age-related macular degeneration the leading cause of blindness in
the elderly. Lucentis sales have been hurt as physicians increasingly prescribed
Avastin off-label to treat the disease because they thought it worked as well at
a fraction of the cost. That may change now. The VA decision is a boost for
Genentech, but it appears to be monumental leap for Regeneron (Nasdaq: REGN ).
If all goes well, the Tarrytown, N.Y.-based biotech hopes to get FDA approval of
its injectable drug Eylea in November. Investors certainly recognized the
potential for Eylea to carve out a nice market share now that Avastin has been
sent to the sidelines. On Wednesday, they bid the stock up to a 20-year high of
$79.90 before closing up more than 9% to $70.28. Amid Thursday's broad market
selloff, the stock had given back 2%. If approved, Eylea will become
Regeneron's second marketed product, joining Arcalyst , which is available in
the U.S. for treating Cryopyrin-Associated Periodic Syndromes (CAPS), a spectrum
of rare, inherited auto inflammatory syndromes that affects about one of every 1
million people. The market for Eylea promises to be much bigger. Advanced
macular degeneration is a leading cause of blindness in Americans ages 60 and
older, according to the National Eye Institute. About 15% of patients have the
more advanced "wet" form of the disease tied to abnormal blood vessels that
grow under the macula, the part of the retina responsible for seeing in fine
detail. Blood and fluid leaked from the vessels can result in vision loss.
Regeneron estimates about 1.5 million people have the wet form of the disease
with 200,000 new cases diagnosed each year. Earlier this year, one analyst said
Eylea could capture 15% of the U.S. market and has annual sales potential of
more than $1 billion. Both those figures could be bumped up substantially after
the VA's action on Wednesday. But investors might be wise to temper their
enthusiasm because Regeneron' path is still fraught with obstacles. First, the
drug has to get FDA approval. Second, the VA is likely to face political
pressure to reinstate Avastin because doing so would reduce government spending
on drug costs. The third big issue is the same one facing Lucentis: cost. A dose
of Lucentis is $2,000. Regeneron has yet to say what it will charge for Eylea,
but it's likely to be competitive with Lucentis. One thing working in
Eylea's favor is that it's dosed half as frequently as Lucentis. Because
injections are made directly into the eye, patients obviously appreciate less
dosing.