Business Strategy and Outlook Karen Andersen, CF A, Analyst, 10 August 2020 Regeneron has leveraged its monoclonal antibody research and development platform to become one of the few biotechs to successfully emerge as a profitable commercial operation and establish a narrow moat. Lead drug Eylea has global sales north of $7 billion annually and is approved for wet age-related macular degeneration and other eye-related indications. The drug remains well positioned, as its 12-week dosing and potential high-dose formulation should allow it to continue to hold strong market share against Lucentis, A vastin, and Novartis' Beovu. Sales of Eylea grew at a double-digit pace through 2019, as sales outside the United States ramped up and usage in new indications like diabetic macular edema took hold. While positive data in the larger diabetic retinopathy population should provide another boost, we expect pricing pressure and competition (Novartis' Beovu approved in late 2019) should push Eylea to single-digit growth through patent expiration in 2023. Within in the Sanofi antibody collaboration, LDL cholesterol reduction drug Praluent has seen a slow launch trajectory because of payer restrictions, but we think U.S. sales growth can rebound under Regeneron's wing beginning in 2020. Immunology drug Dupixent is seeing a very strong launch in atopic dermatitis and asthma, and approvals continue to expend to new indications (nasal polyposis) and broader patient groups (younger dermatitis and asthma patients), leading to potential $10 billion peak sales. Also part of the Sanofi collaboration, Kevzara (rheumatoid arthritis) launched in 2017 and Libtayo (oncology) in 2018, and both drugs are gaining share in their niches. While the partnership with Sanofi for new pipeline products has been scaled back, this gives Regeneron several in-house opportunities, like lymphoma bispecific antibody REGN1979 and a pipeline of bispecifics targeting various oncology indications. Regeneron is also moving forward with antibody cocktails in infectious diseases, and is expecting approval for Ebola cocktail REGN-EB3 in October and data for COVID-19 cocktail REGN-COV2 by the fourth quarter of 2020. Important Disclosure: The conduct of Morningstar’ s analysts is governed by Code of Ethics/Code of Conduct Policy , Personal Security T rading Policy (or an equivalent of), and Investment Research Policy For information regarding conflicts of interest, please visit http://global.morningstar .com/equitydisclosures Regeneron's Eylea Franchise and Growing Antibody Portfolio Support a Narrow Moat. Bulls Say O Eylea has become the leading franchise in wet AMD and other ophthalmology markets because of its similar efficacy and more convenient dosing regimen compared with Lucentis and A vastin. O Dupixent is launching as a novel treatment for patients with severe atopic dermatitis and asthma, and its benefit could extend to several other allergy- related indications and COPD. O Positive early data for bispecific antibody REGN1979 supports the potential of Regeneron's in- house oncology program. Bears Say O Regeneron's Eylea is competing with Roche and Novartis in the ophthalmology market, and Eylea could be vulnerable to biosimilars beginning in 2024. O While Regeneron's Praluent has entered the multi- billion-dollar cholesterol-lowering market, it faces stiff competition (and litigation) from Amgen's Repatha. O Dupixent's potential could be cut short by the approval of novel oral dermatitis drugs (AbbV ie's Rinvoq) or injectable asthma therapies (Amgen/ Astra's tezepelumab), which could be more effective. Morningstar Pillars Analyst Quantitative Economic Moat Narrow Narrow V aluation QQ Overvalued Uncertainty Medium Medium Financial Health — Strong Current 5-Yr A vg Sector Country Price/Quant Fair V alue 1.22 0.97 0.82 0.83 Price/Earnings 23.6 60.3 26.5 20.1 Forward P/E 22.6 — 11.3 13.9 Price/Cash Flow 23.5 38.7 18.4 13.1 Price/Free Cash Flow 29.0 59.1 27.3 19.5 T railing Dividend Y ield% — — 1.50 2.35 Analyst Note Karen Andersen, CF A, Analyst, 05 August 2020 Regeneron reported solid second-quarter results (24% top line and non-GAAP net income growth despite pandemic headwinds), and after incorporating two recent U.S. government deals for the firm's infectious disease antibody cocktails (a $450 million contract in COVID-19 and a $344 million six-year deal in Ebola) as well as stronger -than-expected growth for immunology drug Dupixent, we're expecting to slightly raise our $473 per share fair value estimate. Our new fair value estimate will still imply that shares are overvalued at recent prices; while we do include the COVID-19 antibody cocktail REGN-COV2 in our valuation model, and have increased potential sales for 2021, we still see vaccines as the likeliest and broadest answer to stopping the pandemic. W e believe the market is overvaluing Regeneron's opportunity at this point, based on minimal antibody data and significant advancement with vaccines. Regeneron expects to report initial data from REGN-COV2, which is being studied as a treatment and a preventive therapy , beginning in September , and we assume the antibody could receive emergency use authorization in the fourth quarter Regeneron's ophthalmology franchise with Eylea and growing antibody portfolio in areas including immunology (Dupixent) and oncology (Libtayo) support a narrow moat. Economic Moat Karen Andersen, Analyst, 10 August 2020 W e assign a narrow moat to Regeneron based on the intangible assets that underlie the commercial potential of Eylea and its pipeline drugs and the exceptional productivity of its monoclonal antibody , or mAb, research and development platform. W e expect Regeneron’ s Eylea to achieve $8 billion in peak sales in 2023, given its strong competitive positioning due to its more attractive dosing regimen versus Lucentis/A vastin in ophthalmology indications. In addition, Regeneron has other promising products with blockbuster potential, including Praluent (alirocumab) in LDL cholesterol lowering, Kevzara (rheumatoid arthritis), and Dupixent (atopic dermatitis, asthma, nasal polyps, COPD, and allergic indications). This Source: Morningstar Equity Research Source: Morningstar Undervalued Fairly V alued Overvalued Quantitative V aluation d USA REGN Morningstar Equity Analyst Report | Report as of 11 Aug 2020 01:15, UTC | Page 1 of 14 Regeneron Pharmaceuticals Inc REGN (XNAS) Morningstar Rating Last Price Fair V alue Estimate Price/Fair V alue T railing Dividend Y ield % Forward Dividend Y ield % Market Cap (Bil) Industry Stewardship 11 Aug 2020 01:14, UTC 10 Aug 2020 11 Aug 2020 01:06, UTC 10 Aug 2020 10 Aug 2020 10 Aug 2020 QQ 608.24 USD 500.00 USD 1.22 — 0.00 64.71 Biotechnology Standard © Morningstar 2020. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law , Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner , without the prior written consent of Morningstar Investment research is produced and issued by subsidiaries of Morningstar , Inc. including, but not limited to, Morningstar Research Services LLC, registered with and governed by the U.S. Securities and Exchange Commission. T o order reprints, call +1 312-696-6100. T o license the research, call +1 312-696-6869. Please see important disclosures at the end of this report. ? demonstrates the company’ s ability to both internally develop and successfully commercialize drug products, a relatively rare feat among emerging biotechs. The company also has an extremely full earlier -stage pipeline that its mAb research partnership with Sanofi partly supports, which provides Regeneron with some financial support and notable strategic advantages (although the collaboration has been scaled back to focus on a handful of programs). Beyond the patent protection of its marketed products (through 2024 for Eylea and 2031 for Dupixent), all of Regeneron marketed and pipeline products are biologics, which provide added defense from generic competition due to the complexity and cost of manufacturing biosimilars. Regeneron's scientific leadership in the development of fully human monoclonal antibodies using its proprietary V elocImmune platform supported attractive terms for Regeneron's collaborative deals with Sanofi, whereby Sanofi has been responsible for up-front development costs until positive phase 3 results are obtained, allowing Regeneron to minimize its cash burn, shift development risk to its partner , and undertake larger development programs and advance more pipeline candidates than would have likely been feasible otherwise. The platform’ s advantage lies primarily with the speed and efficiency with which it can produce fully human antibodies, which are preferred due to their specificity for and tight binding to their therapeutic targets as well as the reduced risk of potential immune responses more common with antibodies that contain nonhuman components (typically from mice). The firm’ s proprietary trap and V elociSuite technology platforms (that includes V elocImmune), are themselves protected by patents as well as by significant accumulated scientific and technical expertise. Fair V alue & Profit Drivers Karen Andersen, Analyst, 10 August 2020 W e're raising our fair value estimate for Regeneron to $500 from $473 after further increasing our Dupixent estimates and updating for recent U.S. government deals for the firm's infectious disease antibody cocktails (a $450 million contract in COVID-19 and a $344 million six-year Close Competitors Currency (Mil) Market Cap TTM Sales Operating Margin TTM/PE Roche Holding AG ROG CHF 268,178 60,278 28.78 20.96 Novartis AG NOVN CHF 172,795 49,528 18.73 26.32 Amgen Inc AMGN USD 139,495 24,301 37.87 19.46 deal in Ebola). Regeneron's REGN-COV2 is now in testing for treating and preventing COVID-19. W e assume $3 billion in annual peak sales of the antibodies in 2021. Since the pandemic began, we've lowered our near -term estimates for cholesterol-lowering drug Praluent, immunology drug Dupixent, and ophthalmology drug Eylea, as we expect fewer new patient starts on Praluent and Dupixent and treatment delays with Eylea (high-risk patients to avoid physician offices on some level throughout 2020). The majority of Regeneron’ s fair value estimate is driven by our expectations for the Eylea and Dupixent franchises. W e think Eylea could see worldwide peak sales of $8 billion should it continue growing in international markets, despite slower U.S. growth and potential biosimilars in 2024. W e include $900 million potential peak sales for Eylea in our model for patients with proliferative and nonproliferative diabetic retinopathy W e think Praluent can achieve sales of more than $1 billion, and sales acceleration should follow recent price negotiations and the addition of cardiovascular outcomes data to the label in 2019. W e assume Dupixent sales peak around $10 billion, as we expect rapid uptake and long patent protection (now through 2031) but strong long-term competition in atopic dermatitis and asthma. The firm now has more than a dozen compounds in clinical development, and we have seen promising results from compounds outside its leading drugs. Our estimates for bispecific antibody program REGN1979 are on par with our estimates for a similar Roche program (including a 60% probability of approval). Overall, our probability-weighted sales estimates yield 6% compound annual growth for the firm over the next five years. W e assume a 7.5% cost of equity W e assume a 14% long-term tax rate for Regeneron following U.S. tax reform. Risk & Uncertainty Karen Andersen, Analyst, 10 August 2020 While Regeneron’ s near -term success appears to be assured with Eylea's blockbuster sales, it is still facing strong competition with entrenched players Lucentis and A vastin and potential new competition from Novartis. The market is also maturing, and proposals for controlling Medicare costs could hit Eylea's sales. With its PCSK9 inhibitor program (Praluent), Regeneron won the race with Amgen to be first to market with this Morningstar Equity Analyst Report |Page 2 of 14 Regeneron Pharmaceuticals Inc REGN (XNAS) Morningstar Rating Last Price Fair V alue Estimate Price/Fair V alue T railing Dividend Y ield % Forward Dividend Y ield % Market Cap (Bil) Industry Stewardship 11 Aug 2020 01:14, UTC 10 Aug 2020 11 Aug 2020 01:06, UTC 10 Aug 2020 10 Aug 2020 10 Aug 2020 QQ 608.24 USD 500.00 USD 1.22 — 0.00 64.71 Biotechnology Standard © Morningstar 2020. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law , Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner , without the prior written consent of Morningstar Investment research is produced and issued by subsidiaries of Morningstar , Inc. including, but not limited to, Morningstar Research Services LLC, registered with and governed by the U.S. Securities and Exchange Commission. T o order reprints, call +1 312-696-6100. T o license the research, call +1 312-696-6869. Please see important disclosures at the end of this report. ? promising class of drugs. However , there are questions about the market potential of these drugs given their high cost and subcutaneous dosing in the context of convenient, effective, and inexpensive oral cholesterol-lowering drugs like statins being the mainstays of treatment. While we have confidence that these agents will be successful in lucrative but smaller markets where statins are ineffective, such as heterozygous familial hypercholesterolemia and in statin-intolerant patients, the massive opportunity in uncontrolled statin patients has required additional price concessions. In addition, the company is facing ongoing patent litigation with Amgen over the intellectual property for PCSK9 drugs. While these types of lawsuits are typically resolved with negotiated settlements and single-digit royalty payments, Regeneron may face larger financial penalties should it be found to be infringing on Amgen's patents. Although we take comfort in Regeneron's robust pipeline, the road to drug approval is fraught with regulatory obstacles, and Zaltrap's troubles in other cancer indications demonstrate that clinical success is not guaranteed. As Regeneron's drug candidates do make it to market, they will go up against many tried-and-true products, and doctors are often slow to convert to new therapies. Regeneron's ability to supply a COVID-19 treatment has driven share price appreciation in 2020, but trials with Kevzara were disappointing, and it is unclear how long there will be demand for REGN-COV2 treatment, given strong and rapid vaccine development. Stewardship Karen Andersen, Analyst, 10 August 2020 W e assign Regeneron a Standard stewardship rating. Founder Leonard Schleifer has led Regeneron as chief executive since inception in 1988. The 12-member board is led by P Roy V agelos, who has served as chairman since 1995 and is the former CEO of Merck, and includes several seasoned biotech and pharma executives and scientific luminaries, notably two Nobel Prize winners. The company's strategy of signing on larger partners to share drug-development and marketing costs has served it well thus far , and we think management has done a solid job following through on stated goals, including bringing new compounds to market and rapidly filling in its pipeline behind recently approved products. Our enthusiasm for the leadership team is tempered by Regeneron's dual-class share structure. Class A shares, held primarily by insiders, are worth 10 votes per share and common shares are worth 1 vote per share. Therefore, despite owning only 10% of outstanding shares, Regeneron's management controls virtually all Class A shares and a quarter of voting rights. As of December 2019, partner Sanofi also owned about 22% of the firm's outstanding shares, which created an overhang on Regeneron shares due to a potential future sale, particularly given Sanofi's recent distancing from Praluent marketing and Regeneron's immuno-oncology pipeline. However , Regeneron managed Sanofi's exit from its Regeneron position (except for 400,000 shares) well, repurchasing $5 billion of the shares itself. While we are pleased with management's significant creation of shareholder value in recent years, we believe that its compensation policies are overly generous. While the total pay packages for Schleifer and chief scientific officer George Y ancopoulos fell below $30 million each in 2016 and 2017, pay had exceeded $40 million annually in recent years. Morningstar Equity Analyst Report |Page 3 of 14 Regeneron Pharmaceuticals Inc REGN (XNAS) Morningstar Rating Last Price Fair V alue Estimate Price/Fair V alue T railing Dividend Y ield % Forward Dividend Y ield % Market Cap (Bil) Industry Stewardship 11 Aug 2020 01:14, UTC 10 Aug 2020 11 Aug 2020 01:06, UTC 10 Aug 2020 10 Aug 2020 10 Aug 2020 QQ 608.24 USD 500.00 USD 1.22 — 0.00 64.71 Biotechnology Standard © Morningstar 2020. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law , Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner , without the prior written consent of Morningstar Investment research is produced and issued by subsidiaries of Morningstar , Inc. including, but not limited to, Morningstar Research Services LLC, registered with and governed by the U.S. Securities and Exchange Commission. T o order reprints, call +1 312-696-6100. T o license the research, call +1 312-696-6869. Please see important disclosures at the end of this report. ? Analyst Notes Archive Super T uesday Election Results Support a Moderate Outlook for Changes to U.S. Drug Pricing Policies Damien Conover , Sector Director , 04 March 2020 Initial results from the Super T uesday Democratic primary show increased support for former V ice President Joe Biden, whose nomination would reduce the likelihood of significant drug pricing policy changes, which is in line with our expectations. W e don’ t expect any major changes to fair value estimates or moat ratings in the drug and biotech industry based on these results, and we continue to view the industry as undervalued by more than 10% on average, due partly to excess concerns around potential major U.S. drug policy changes. W e note that election results have a bigger impact on the healthcare insurers and service providers (see “Super T uesday Primary Results Provide Relief Rally for Health Insurance and Service Providers.”) On the drug side, the movement toward more moderate Democrat Biden likely means more minor drug policy changes in the U.S. and reduces the chances of a “Medicare for All” scenario (championed by Biden’ s key opponent, Sen. Bernie Sanders), which would likely significantly reduce U.S. drug prices with the negotiating power of a one-payer system. With the election support shifting toward Biden, we believe the most likely change in U.S. drug pricing policy reform centers around a Senate bill, the Prescription Drug Pricing Reduction Act, or PDPRA. However , we still believe this proposal holds less than a 50% chance of passing based on the mixed level of support by both parties, and we haven’ t included passage of the bill into our models. However , if passed, we estimate a 5% aggregate hit to U.S. branded drug sales from Medicare inflation price caps and Part D redesign proposed in the bill. W e believe the drug and biotech industries could adapt to this headwind with only minor impacts to cash flows, partly through cost cuts and increased volumes based on the lower prices mandated in the bill. Importantly , the bill would limit out-of-pocket payments by patients in Medicare, which would likely help appease demands for lower U.S. drug prices. Defensive Nature of Healthcare Firms Should Offer More Protection From Coronavirus Concerns Damien Conover , Sector Director , 19 March 2020 The concerns around a global recession due to coronavirus disruptions are weighing on global markets, but the defensive nature of healthcare should hold up on a relative basis, and we don’ t expect any significant changes to our healthcare moat ratings. While we may make downward adjustments to our valuations in healthcare to account for near -term challenges, we expect more modest changes relative to recent stock price movements. Our base case calls for a strong economic rebound in 2021 following a recession in 2020, which should only have modest impacts to healthcare valuations, given the defensive nature of those companies. However , if the coronavirus pandemic exerts a sustained impact on the economy , with significantly higher numbers of patients unemployed and uninsured or underinsured, this could reduce healthcare demand to a greater extent. W e expect government efforts to reduce the near -term hit can keep most of the harder -hit industries in business while effective treatments emerge. On the near -term effects of coronavirus, we expect critically ill coronavirus patients needing essential medical services and therapies will crowd out more elective procedures, new products, and non-critical-care products. Fewer elective procedures will weigh on the device makers and service providers. Also, higher -than-expected medical costs focused on the COVID-specific cases could reduce profitability for health insurers. With branded drug firms already focused on specialty drugs, we expect less impact to this industry , but drugs administered in the hospital could still feel some crowding out by coronavirus patients. Also, clinical development timelines will probably face some delays due to coronavirus disruptions, which will likely slow some new product launches. Additionally , the coronavirus impact on the credit markets could weigh on more heavily indebted companies, such as some hospital firms and companies that have recently completed major acquisitions. Coronavirus Should Not Affect Big Drug Firm Moats and Cause Only Minor V aluation Pressure Damien Conover , Sector Director , 06 April 2020 W e have slightly lowered our Big Pharma and Big Biotech fair value estimates by almost 2% in aggregate, much less than the stocks have declined as a result of disruptions caused by the coronavirus outbreak. The high need for drugs should support continued demand and supply Also, we expect new treatments and vaccines to reduce the long-term impact of the virus. W e don't expect changes to our moat ratings, as innovation should continue with only minor disruptions. Successful coronavirus treatments Morningstar Equity Analyst Report |Page 4 of 14 Regeneron Pharmaceuticals Inc REGN (XNAS) Morningstar Rating Last Price Fair V alue Estimate Price/Fair V alue T railing Dividend Y ield % Forward Dividend Y ield % Market Cap (Bil) Industry Stewardship 11 Aug 2020 01:14, UTC 10 Aug 2020 11 Aug 2020 01:06, UTC 10 Aug 2020 10 Aug 2020 10 Aug 2020 QQ 608.24 USD 500.00 USD 1.22 — 0.00 64.71 Biotechnology Standard © Morningstar 2020. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law , Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner , without the prior written consent of Morningstar Investment research is produced and issued by subsidiaries of Morningstar , Inc. including, but not limited to, Morningstar Research Services LLC, registered with and governed by the U.S. Securities and Exchange Commission. T o order reprints, call +1 312-696-6100. T o license the research, call +1 312-696-6869. Please see important disclosures at the end of this report. ? by the pharmaceutical industry should also remind the world about the social importance of the group (a key ESG factor for the industry), shielding it from the potential pressures of any new drug-pricing policy reforms. In looking at the bigger picture around the coronavirus challenges, we view four key points for the drug and biotech industries. First, we don't expect much impact on drug sales from the economic disruptions the coronavirus is causing, because drug demand tends to be highly inelastic and governments are likely to prioritize drug supply Second, drug utilization in the near term is likely to face disruptions, especially for new drugs and drugs with new indications, but we expect entrenched drugs to face only minor impacts. Third, beyond capital appreciation, we view the dividends of the group to be secure, with an average payout ratio of close to 50%, giving firms room to adapt to near -term coronavirus pressures. Last, we expect new medicines and vaccines to emerge to treat the coronavirus and limit long-term impact. Maintaining Our $421 FVE Following Solid Q1; COVID-19 Pipeline Promising, but High Uncertainty Karen Andersen, Analyst, 06 May 2020 Regeneron reported a strong 33% increase in revenue in the first quarter to more than $1.8 billion, with U.S. sales of ophthalmology drug Eylea up 9% to nearly $1.2 billion. While management noted that there was a 15% dip in demand for Eylea in April, this improved by the end of the month, perhaps indicating that some patients (particularly elderly patients with wet AMD) are not willing to significantly delay injections that maintain their eyesight, but new patients are less likely to initiate therapy In addition, intraocular inflammation associated with Novartis' competing therapy Beovu is lessening the headwind from new competition. Higher sales of immunology drug Dupixent recorded by partner Sanofi translated into higher collaboration revenue for Regeneron in the quarter , as global sales of Dupixent more than doubled to $855 million. The drug is poised to receive approval in children ages 6-11 in moderate-to-severe atopic dermatitis later this month, and the ability for patients to administer injections at home has limited the impact of the pandemic on sales (although new patients are likely starting therapy at a lower rate than expected in the second quarter). Overall, Regeneron's Eylea frachise and antibody platform--including Dupixent, oncology drug Libtayo, and the bispecific pipeline--all support a narrow moat. W e're maintaining our $421 per share fair value estimate, and we think shares incorporate too large a premium for the value of the firm's COVID-19 pipeline, which has uncertainty tied to efficacy , safety , and ultimate financial benefit to the firm. Raising Regeneron FVE to $473 on Improved Long- T erm Dupixent Prospects; Shares Overvalued Karen Andersen, Analyst, 15 June 2020 W e're raising our fair value estimate for Regeneron to $473 from $421 after adding new potential Dupixent indications to our forecast and extending patent protection throughout our 10-year explicit forecast period. Regeneron and partner Sanofi last week disclosed additional details on their strategy and timelines for extending the immunology drug's approval into several new indications, and we've explicitly factored several new indications into our model. Dupixent's sales potential and long duration of patent protection help support Regeneron's narrow moat. However , shares continue to look overvalued, as the firm's oncology pipeline is still in the process of proving differentiation from other , more established competitors, Eylea faces biosimilar competition by 2024, and Regeneron's COVID-19 antibody program faces significant uncertainties around safety , efficacy , other targeted antibody competition, and duration of need (depending on waves of infection and speed of vaccine development). W e assume $10 billion in peak Dupixent sales, roughly in line with Sanofi's peak sales goal of more than EUR 10 billion, based on the drug's solid safety and efficacy profile in atopic dermatitis ($4 billion peak), asthma ($4 billion peak), and smaller immunology indications (total of $1 billion peak). Dupixent has numerous other opportunities in the immunology space. Dupixent was approved in June 2019 in patients with nasal polyps, and we model peak sales around $500 million. It is also in pivotal studies in eosinophilic esophagitis (phase 2 data was positive in May 2020, phase 3 data expected in 2022) and in skin conditions like chronic spontaneous urticaria, or hives (to submit in 2022), prurigo nodularis (to submit in 2021), and bullous pemphigoid (to submit in 2023). W e don't model additional indications that could lead to upside, such as the phase 3 COPD program (a high-risk development area) and midstage studies in peanut and grass allergies (data in 2020). Annual Pipeline Review of Leading Big Pharma and Biotech Supports Moats Morningstar Equity Analyst Report |Page 5 of 14 Regeneron Pharmaceuticals Inc REGN (XNAS) Morningstar Rating Last Price Fair V alue Estimate Price/Fair V alue T railing Dividend Y ield % Forward Dividend Y ield % Market Cap (Bil) Industry Stewardship 11 Aug 2020 01:14, UTC 10 Aug 2020 11 Aug 2020 01:06, UTC 10 Aug 2020 10 Aug 2020 10 Aug 2020 QQ 608.24 USD 500.00 USD 1.22 — 0.00 64.71 Biotechnology Standard © Morningstar 2020. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law , Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner , without the prior written consent of Morningstar Investment research is produced and issued by subsidiaries of Morningstar , Inc. including, but not limited to, Morningstar Research Services LLC, registered with and governed by the U.S. Securities and Exchange Commission. T o order reprints, call +1 312-696-6100. T o license the research, call +1 312-696-6869. Please see important disclosures at the end of this report. ? Damien Conover , Sector Director , 10 July 2020 Most Big Pharma and Big Biotech stocks in our coverage support wide economic moats as a result of their ability to generate new drugs to replace mature ones losing patent protection. Innovation is the central building block for the strong economic moats in the drug and biotechnology industry , supporting drug pricing power and launch trajectories. However , following patent expirations, drug sales fall significantly , making the continuous cycle of new drugs essential to the moats in the industry In looking at the leading large-cap U.S. and European drug and biotech industries, we expect steady innovation to drive 5% annual sales growth over the next five years, similar to consensus expectations. Overlaying our growth analysis with valuation, we see underappreciated areas: Roche's T ecentriq in several cancer niches; Bristol-Myers Squibb's steady position in immuno-oncology and massive pipeline and cash flow support from Celgene; Merck's oncology portfolio and vaccine and animal health cash flows; and Pfizer's new immunology drugs and strong vaccine positioning. T rump's Executive Orders on Drug Prices Have Limited Impact on Our Industry FVEs and Moat Ratings Damien Conover , Sector Director , 27 July 2020 President Donald T rump’ s executive orders targeting drug prices create modest pricing headwinds and slightly higher uncertainty for drug firms. However , we don’ t expect these actions to significantly affect our fair value estimates or moat ratings due to limited details, challenging implementation, and only minor impacts. T rump’ s executive orders, signed July 24, targeted three areas with varying degrees of impact; a fourth order is pending. First, the order allowing the importation of drugs from Canada would significantly reduce U.S. drug prices (which are close to double international prices), but safely implementing this is challenging, given the different labels across countries, and drug firms are likely to limit Canada sales. Importation of drugs has been passed by Congress twice, only to fail in implementation largely due to safety concerns. Second, the order to eliminate rebates within the supply chain without increasing premiums seems difficult to implement, as those rebates are typically used to reduce overall premiums, and it is unclear what eliminating rebates would do to net drug prices in this complex system. Third, passing insulin and epinephrine discounts currently benefiting certain health centers to patients would likely reduce patients' out-of-pocket payments, but this isolated change would not likely affect drug firms significantly T rump also targeted the potential to use international benchmark pricing for certain drugs administered in the hospital setting under Medicare Part B, but this order has not yet been released, as he is open to discussion with drug firms until at least Aug. 24 to find alternative ways to lower drug prices. While details of this strategy are less clear , we estimate a 10% reduction to Part B drug prices would hit industry earnings by close to 1%, and higher for firms like Amgen and Regeneron. Implementing this looks challenging as well, partly due to complexities and ambiguities around international pricing. Raising Our Regeneron Fair V alue Estimate Following Q2 Strength and Government Contracts Karen Andersen, Analyst, 05 August 2020 Regeneron reported solid second-quarter results (24% top line and non-GAAP net income growth despite pandemic headwinds), and after incorporating two recent U.S. government deals for the firm's infectious disease antibody cocktails (a $450 million contract in COVID-19 and a $344 million six-year deal in Ebola) as well as stronger -than-expected growth for immunology drug Dupixent, we're expecting to slightly raise our $473 per share fair value estimate. Our new fair value estimate will still imply that shares are overvalued at recent prices; while we do include the COVID-19 antibody cocktail REGN-COV2 in our valuation model, and have increased potential sales for 2021, we still see vaccines as the likeliest and broadest answer to stopping the pandemic. W e believe the market is overvaluing Regeneron's opportunity at this point, based on minimal antibody data and significant advancement with vaccines. Regeneron expects to report initial data from REGN-COV2, which is being studied as a treatment and a preventive therapy , beginning in September , and we assume the antibody could receive emergency use authorization in the fourth quarter Regeneron's ophthalmology franchise with Eylea and growing antibody portfolio in areas including immunology (Dupixent) and oncology (Libtayo) support a narrow moat. Morningstar Equity Analyst Report |Page 6 of 14 Regeneron Pharmaceuticals Inc REGN (XNAS) Morningstar Rating Last Price Fair V alue Estimate Price/Fair V alue T railing Dividend Y ield % Forward Dividend Y ield % Market Cap (Bil) Industry Stewardship 11 Aug 2020 01:14, UTC 10 Aug 2020 11 Aug 2020 01:06, UTC 10 Aug 2020 10 Aug 2020 10 Aug 2020 QQ 608.24 USD 500.00 USD 1.22 — 0.00 64.71 Biotechnology Standard © Morningstar 2020. 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The information contained herein is the proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner , without the prior written consent of Morningstar Investment research is produced and issued by subsidiaries of Morningstar , Inc. including, but not limited to, Morningstar Research Services LLC, registered with and governed by the U.S. Securities and Exchange Commission. T o order reprints, call +1 312-696-6100. T o license the research, call +1 312-696-6869. Please see important disclosures at the end of this report. ? Regeneron Pharmaceuticals Inc REGN Q Q 10 Aug 2020 02:00 UTC Last Close Fair Value Q Market Cap Sector Industry Country of Domicile 10 Aug 2020 10 Aug 2020 02:00 UTC 10 Aug 2020 608.24 498.33 64,712.1 Mil d Healthcare Biotechnology USA United States There is no one analyst in which a Quantitative Fair Value Estimate and Quantitative Star Rating are attributed to; however, Mr. Lee