Regeneron, Amgen And The 'Hope Creation Cycle"

NEW YORK (TheStreet) -- At the recent annual meeting of the American College of Cardiology, Regeneron Pharmaceuticals (REGN) (joined by partner Sanofi (SNY)) and biotech icon Amgen (AMGN) separately unveiled impressive data for a new class of molecules to treat hypercholesterolemia, or elevated cholesterol. The two drug candidates -- REGN-727 and AMG-145 -- are monoclonal antibodies that bind to protein convertase subtilisin/kexin 9, a tongue-twisting enzyme that regulates cholesterol and thankfully goes by the acronym PCSK9.

The science behind PCSK9 inhibitors is very cool, but bullish forecasts -- as much as $20 billion for the class -- are way too high. Not that commercial reality matters for Regeneron these days: The company's $11 billion market capitalization belies this year's sales guidance of $250-$300 million for Eylea, an injectable therapy for "wet" age-related macular degeneration (AMD), a common cause of blindness. (Eylea is similar to Roche's Lucentis, which the company inherited when it bought Genentech.)

Regeneron has mastered the "hope creation cycle," a biotech phenomenon in which the promise of the R&D pipeline -- in this case, the PCSK9 inhibitors, Eylea in oncology, and a host of early-stage monoclonal antibodies -- outweighs the albatross of fundamental valuation metrics that usually weigh on commercial-stage enterprises. Regeneron's current valuation is aggressive but it's hard to recommend the stock as a short because I'm not sure what event(s) in the near future would disappoint the bulls and cause them to sell. I certainly wouldn't be a buyer of Regeneron at these stock levels.

Amgen, the other major player in the PCSK9 inhibitor game, has a tough road ahead. Over the next few years, some of Amgen's most important sources of revenue, notably the red blood cell stimulant Epogen and rheumatoid arthritis drug Enbrel, will face competition from new branded drugs and biosimilars. Amgen's pipeline seems unlikely to make up for the predicted revenue shortfall. I think management is struggling against an increasingly inevitable spiral towards the wrong end of the hope creation cycle. Amgen looks like a decent short, but I will save a fuller discussion of the company's prospects for a future column.

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