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A Biotech With a Growing Moat

Stefan Quenneville, CFA

Stefan Quenneville: Regeneron (REGN) is a biotechnology company that we rate as having a narrow moat and a positive moat trend. We think its positive moat trend is driven by its recent string of clinical and commercial successes, as well as its very full and productive drug-development pipeline.

The company turned profitable in 2012, largely due to its key drug Eylea, which is a growing blockbuster that treats degenerative eye diseases. What's really important, though, from a moat perspective is the company's ability to reinvest those profits to develop new drugs that target attractive market opportunities. This is a very challenging thing to do for a lot of biotechs; a lot of biotechs fail here. But Regeneron has been able to do this successfully, and we really think this is what's driving its long-term competitive advantage, or its moat.

Currently, the company has 16 drugs in clinical development, including three very promising drugs in Phase III. We think each of those Phase III drugs has the opportunity to be a blockbuster in its own right. So overall, this strong R&D productivity, as well as this progress in its pipeline, is really what's driving [Regeneron's] positive moat trend. Currently, the company is trading at a slight premium to our fair value of $365 per share, but we think investors should keep it on the radar screen in case they get a chance to buy it on a dip.