Regeneron Pharmaceuticals (REGN) found itself in the glare of unwelcome publicity when the U.S. Department of Justice (DOJ) announced it had filed a complaint accusing the biotech giant of fraudulently reporting the price of Eylea® (aflibercept), the blockbuster eye drug it co-markets with Bayer.

The DOJ alleges that Regeneron violated the False Claims Act by fraudulently inflating the Medicare reimbursement rates it received for Eylea. According to the DOJ, Regeneron knowingly submitted false reports to the Centers for Medicare and Medicaid Services that were based on average sales price (ASP), without accounting for price concessions—namely credit card processing fees that Regeneron paid to specialty drug distributors to benefit its customers.

Regeneron paid the credit card fees so that distributors would accept credit cards for Eylea purchases while still charging a lower, cash price for the drug, the DOJ alleges. As a result, Regeneron’s customers—typically retina and ophthalmic practices—could receive credit card benefits for their purchases, such as “cash back” and other credit card rewards.

“By purporting not to offer price concessions on Eylea, Regeneron could market Eylea’s stable ASP (and stable reimbursement) as a competitive advantage for retina practices when compared to Lucentis® (ranibizumab),” the DOJ stated in its court complaint, referring to the rival eye drug marketed by Roche (ROG:SIX) and its Genentech subsidiary.

What competitive advantage?

“Regeneron knew that offering and reporting discounts would likely trigger a Genentech ‘response’ that would lead to a downward pricing spiral and risk a price war,” the DOJ argued. “Regeneron knew that Eylea’s stable ASP gave it an advantage with customers, particularly customers with smaller volumes who were not eligible for large volume-based rebates that Genentech offered for Lucentis.”

According to the DOJ’s complaint, Medicare Part B paid more than $25 billion for Eylea between 2012 and 2023.

Regeneron countered in a statement that the DOJ allegations “are without merit.”

“The complaint, which follows a Civil Investigative Demand from the U.S. Department of Justice in June 2021, and which the company previously disclosed, relates to the company’s lawful reimbursement of costs incurred by our specialty distributors,” Regeneron added. “The Government’s complaint demonstrates a fundamental misunderstanding of drug price reporting standards. Regeneron has fully cooperated with the Government’s investigation and will vigorously defend itself in court.”

Somewhat concerned

Judging by Regeneron’s stock performance since the DOJ complaint surfaced, investors seem somewhat concerned, but not terribly so. Regeneron shares have slid 4% since Wednesday, from $936.20 at that day’s close to $904.70 on Friday.

Regeneron has a market capitalization (the product of the share price and the number of outstanding shares) of $99.302 billion, above its $91.51 market cap when it ranked fifth on GEN’s A-List of Top 25 Biotech Companies of 2024.

Jefferies equity analyst Akash Tewari offered a likely reason for the apparent mild response among investors: The financial damage to Regeneron from the DOJ is unlikely to be severe.

We’re skeptical on the DOJ’s case, given these discounts could be considered as ‘bona fide services reimbursements,’ which are not included in calculating ASP,” Tewari wrote in a research note Thursday. [emphasis in original]

He based that argument on dialogue with Regeneron executives, who offered a potential preview of their response to the DOJ’s complaint by arguing that nothing in the definition of an ASP alludes to credit card fees being included in the ASP calculation: “Rather than providing an incentive or rebate, REGN believes that by reimbursing the distributor for the credit card fee, they are reimbursing for the services rendered by the distributor, and not as a discount for doctors to promote Eylea for these reasons.”

“Given that REGN is 1) reimbursing the credit card fees otherwise incurred, 2) paying under the circumstance of distributor services, and 3) not passing through the reimbursements to the retinal practices or controlling the credit card benefits doctors could receive, these reimbursements could be classified as bona fide services fees,” the company added.

“Minimal impact”

Even if Regeneron opts to settle the allegations, Tewari continued, “Our analysis suggests minimal impact to REGN.”

Regeneron also told Tewari that some of its peer companies among biopharmas similarly did not include credit card reimbursements in their ASPs, yet were not seen to be falsely inflating their prices for Medicare: “Thus given these considerations and historical precedence for similar cases, we think the overall case falls fairly weak, and if needed, payments of <$100M could be granted to settle the allegations.”

Tewari projects that based on the precedent of earlier DOJ complaints against biopharmas, “all-in-all, REGN’s actual settlement fines could be <$50M.”

$50 million to $100 million would be 1.25% to 2.5% of Regeneron’s 2023 net income. The company finished last year earning $3.954 billion (down 9% from 2022) on revenue of $13.117 billion (up nearly 8%).

“In the most bearish scenario,” Tewari cautioned, “REGN’s treble damages would add up to less than $1B”—about 25% of 2023 net income.

“We cannot predict”

Taking a more uncertain view of Regeneron’s situation is David Risinger of Leerink Partners. “This is a negative development, and we cannot predict the potential financial risk to the company.”

Risinger cited the DOJ’s policy of pursuing treble damages, plus applicable penalties, against companies found liable for violating the Fraudulent Claims Act.

“Considering those figures, we are hoping that the risk to the company is a small percentage of its 12/31/23 cash & marketable securities position,” Risinger added. Regeneron finished 2023 with cash and marketable securities of $16.241 billion, up 13% from $14.334 billion.

At deadline, only a few other analysts besides Risinger and Tewari had weighed in on Regeneron. Geoff Meachem of B of A Securities barely raised his firm’s 12-month price target on Regeneron shares 1%, from $710 to $720, though he retained B of A’s “Underperform” rating on the company’s stock.

Brian Abrahams of RBC Capital maintained its “Outperform” rating on Regeneron and kept his firm’s price target at $1,189.

Nearly half (45%) of Regeneron’s 2023 revenues reflects the $5.886 billion in U.S. net product sales racked up by its two dosages of Eylea.

The 2 mg dose of Eylea generated most of those sales at $5.72 billion, down 9% from $6.265 billion in 2022, due to growing competition. The remaining $166 million came from patients using Eylea HD, an 8 mg dosage approved by the FDA last August—and which Regeneron is counting on to gain back at least some of the lost sales.

Both versions of Eylea are indicated for neovascular (wet) age-related macular degeneration (nAMD), diabetic macular edema (DME), and diabetic retinopathy (DR). The 2 mg Eylea, which won its first FDA approval in 2011, is also indicated for macular edema following retinal vein occlusion (RVO), and retinopathy of prematurity (ROP).

Outside the United States, Bayer’s sales of Eylea were all but flat last year, inching up 0.6% to €3.231 billion ($3.437 billion) from €3.213 billion ($3.418 billion). All of those sales were for 2 mg Eylea, since Eylea HD had not received marketing authorization from the European Commission until January.

Lucentis, by contrast, saw its sales plunge 52% in 2023, from CHF 1.012 billion ($1.108 billion) to CHF 460 million ($503.5 million). Lucentis is a vascular endothelial growth factor (VEGF) inhibitor indicated for nAMD, RVO, DME, DR, and myopic choroidal neovascularization (mCNV).

Roche has blamed growing competition plus its effort to switch Lucentis patients to its next-generation eye drug Vabysmo (faricimab-svoa). That effort paid off for Roche, as Vabysmo sales last year more than quadrupled, zooming 324% from CHF 591 million ($647 million) to CHF 2.357 billion ($2.58 billion). Vabysmo is a combination VEGF and angiopoietin-2 (Ang-2) inhibitor indicated for nAMD, DME, and RVO.

In contrast to the mild response to the DOJ complaint, investors have sent Regeneron shares skidding 10% since February 28, when they reached their 2024 high of $998.33.

A key driver of that decline was the FDA: On March 25, Regeneron acknowledged that the agency issued Complete Response Letters rejecting its BLA seeking accelerated approval for its CD20xCD3 bispecific antibody odronextamab to treat relapsed/refractory (R/R) follicular lymphoma (FL) and R/R diffuse large B-cell lymphoma (DLBCL), each after two or more lines of systemic therapy.

“The only approvability issue is related to the enrollment status of the confirmatory trials,” Regeneron stated at the time. “Enrollment in the dose-finding portion has begun, but the CRLs indicate that the confirmatory portions of these trials should be underway and that the timelines to completion be agreed prior to resubmission.”

Leaders and laggards

  • Eliem Therapeutics (ELYM) shares soared 71.5% from $2.67 to $4.58 on Thursday, after the company said it agreed to acquire privately held Tenet Medicines. Eliem plans to fund the deal through a $120 million private placement in which it will sell 31,238,282 shares at $3.84 a share to a syndicate of new and existing institutional life science investors, including RA Capital Management, Deep Track Capital, Boxer Capital, Janus Henderson Investors, Pontifax, and Samsara Biocapital. The private placement, plus cash and cash equivalents of the combined company, are expected to total approximately $210 million. Eliem said the combined company plans to focus on advancing the anti-CD19 antibody TNT119 for a variety of autoimmune diseases, including systemic lupus erythematosus, immune thrombocytopenia, and membranous nephropathy.
  • Enlivex Therapeutics (ENLV) shares plummeted 54% from $3.98 to $1.83 on Thursday, then skidded another 14% to $1.58 on Friday, after the company announced mixed results from its 120-patient Phase II trial (NCT04612413) assessing Allocetera™ in patients with sepsis. By day 28, an analysis showed 90% reductions in sequential organ failure assessment (SOFA) scores for sepsis patients whose infection source was urinary tract, 68% for community-acquired pneumonia sepsis patients, and 36% for internal abdominal infection sepsis patients. Due to randomization, Allocetra™-treated cohorts had 20% higher frequency of septic shock and 35% higher frequency of invasive ventilation before treatment, compared with the control group. Both “are associated with a significantly higher degree of difficulty of treatment and higher mortality rates. These imbalances made it challenging to deduce the relative effect in other patient subgroups,” Enlivex stated.
  • Rallybio (RLYB) shares zoomed 83% from $1.63 to $2.98 on Thursday after the company announced a collaboration of undisclosed value with Johnson & Johnson (JNJ) subsidiary Momenta Pharmaceuticals to support developing complementary therapeutic approaches aimed at reducing the risk of fetal and neonatal alloimmune thrombocytopenia (FNAIT). Rallybio also received a $6.6 million equity investment from J&J’s strategic venture capital arm Johnson & Johnson Innovation–JJDC, and will receive funding from J&J to promote J&J’s FNAIT clinical program in connection with Rallybio’s ongoing FNAIT natural history study (NCT05345561). Rallybio is developing RLYB212, a human monoclonal anti-HPA-1a antibody designed to prevent pregnant women from alloimmunizing. Rallybio said it is on track to launch a Phase II dose confirmation study for RLYB212 in the second half of 2024. J&J is conducting a Phase III study of nipocalimab, a monoclonal antibody targeting the neonatal Fc receptor in alloimmunized pregnant women.
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