Is This Biotech Stock a Buy After a Groundbreaking Approval?

While some biotech investors are focused on the weight-loss market (and with good reason), breakthroughs are happening elsewhere. Take Regeneron (NASDAQ: REGN), a major player in the industry. The drugmaker recently scored a breakthrough that investors should take note of. On April 23, Regeneron announced that the U.S. Food and Drug Administration (FDA) had granted accelerated approval for Otarmeni, a gene therapy for OTOF-related hearing loss. It became the first and only gene therapy for genetic deafness to earn approval. What does this milestone mean for Regeneron?

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A (not so) surprising decision

Otarmeni works by delivering a working copy of the OTOF gene into patients' inner ear cells. In a clinical trial involving 20 patients, 80% showed hearing improvement, and 42% of those followed for 48 weeks after treatment achieved normal hearing. Note that people with OTOF-related hearing loss are typically deaf from birth. This fact highlights what a major achievement Regeneron just scored. And there is even more good news for eligible patients, though it may seem puzzling to investors: Regeneron has decided to offer Otarmeni to U.S. patients for free. On the surface, this decision is a head-scratcher.

It takes years and a lot of money to develop therapies from scratch. And when a company like Regeneron manages to do it, particularly in an area where there are no competing treatments, they tend to milk that achievement for all it's worth. That said, taking a closer look reveals that Regeneron's move here makes some sense. Here are three reasons why. First, the market is small. According to Regeneron, it is an ultra-rare disease, with roughly 20 to 50 newborn diagnoses in the U.S. every year.

True, gene therapies tend to be expensive, and Regeneron might recoup its investment by setting a high enough price for Otarmeni. But the revenue potential for the medicine may not justify the gains it would realize by offering it in the U.S. for free, which brings us to our second point. The majority of Americans who think that drug prices in the U.S. are too high (which is already a majority of them) blame, primarily, pharmaceutical companies.

Regeneron couldn't have set a lower price for Otarmeni, which may enhance the company's image. That's worth quite a bit for any corporation. Third, Regeneron's win here could serve as a proof-of-concept for other gene therapies for hearing loss that will target larger patient populations. Regeneron originally acquired Otarmeni as part of its 2023 acquisition of Decibel Therapeutics, a company developing gene therapies for hearing loss. Decibel had several other programs that Regeneron inherited that will target more common causes for hearing loss.

So, Regeneron may be using Otarmeni as a trial run and testing the market before it eventually earns approval for gene therapies for deafness with more significant market opportunities.

Is Regeneron stock a buy?

After several challenging quarters, Regeneron's sales growth is rebounding. In the first quarter, the company's revenue rose 19% year over year to $3.6 billion, the fastest growth rate it has recorded in quite a while.

REGN Revenue (Quarterly YoY Growth) data by YCharts

Regeneron owes this performance to Dupixent, a medicine for eczema it co-markets with Sanofi, as well as the newer high-dose formulation of its therapy for wet age-related macular degeneration, Eylea. These two products should continue driving solid top-line growth. In the meantime, Regeneron has newer launches and pipeline candidates that could also contribute meaningfully to its financial results in a few years. The list includes Lynozyfic, a cancer medicine that earned the green light last year.

Regeneron is also close to regulatory approval for cemdisiran, a potential therapy for generalized myasthenia gravis, while its pipeline features several promising candidates, including several in the weight-loss market. Investors should not purchase Regeneron's shares for its approval of Otarmeni, given that the biotech will not make any money from this new medicine. However, Regeneron has an attractive portfolio of drugs, a deep lineup of investigational candidates (including others for hearing loss), strong financial results, a dividend program, and a robust share buyback program. All those are solid reasons to invest in the company.

Prosper Junior Bakiny has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Regeneron Pharmaceuticals. The Motley Fool has a disclosure policy.