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We are reverting to a Neutral recommendation on Regeneron Pharmaceuticals (REGN - Analyst Report) as we believe that all the positive news that led to our previous Outperform recommendation on the stock are reflected in the current price.

Regeneron performed impressively in the second quarter of 2012, driven by strong sales of its eye drug Eylea. Sales of Eylea launched in the US on November 21, 2011, for the treatment of the neovascular form of age-related macular degeneration (wet AMD) climbed 57% sequentially to $194 million in its second full quarter on the market.

Encouraged by the strong performance of Eylea, the company increased its forecast for 2012 US Eylea sales for the second successive quarter. Management now expects the eye drug to record 2012 sales in the range of $700-$750 million as opposed to the previously forecasted range of $500-$550 million. We, too, expect Eylea to continue performing well.

The label expansion of Eylea in the US for the treatment of macular edema following central retinal vein occlusion has further boosted its sales potential. Regeneron is studying Eylea for other indications as well such as diabetic macular edema (phase III) and branch retinal vein occlusion (phase III). Moreover, the US approval of Zaltrap for treating previously treated patients suffering from metastatic colorectal cancer is another positive for Regeneron. Zaltrap is under review in Europe for the indication. Zaltrap is being studied for other oncology indications as well.

However, we are mindful of the regulatory/pipeline setbacks at Regeneron. In July 2012, Regeneron suffered a setback in its efforts to expand the label of its marketed drug Arcalyst (cryopyrin-associated periodic syndromes). The US Food and Drug Administration (FDA) declined to approve Arcalyst for preventing gout flares in patients initiating uric acid-lowering therapy on the basis of the submitted data and issued a complete response letter.

Moreover, in April 2012, Regeneron and partner Sanofi (SNY - Analyst Report) suffered a pipeline setback when Zaltrap performed disappointingly in a phase III study which evaluated the candidate as a first-line therapy for metastatic castration-resistant prostate cancer. Similar setbacks have the potential to pull down Regeneron.

We note that all three marketed products at Regeneron – Arcalyst, Eylea and Zaltrap face competition in their respective areas. While Arcalyst is facing competition from Novartis’ (NVS - Analyst Report) Ilaris for cryopyrin-associated periodic syndromes, Eylea competes with Roche (RHHBY - Analyst Report)/Novartis’ Lucentis in the wet AMD space and Zaltrap competes primarily with Roche’s Avastin in the colorectal cancer space.

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