Since our last Teaser in November 2019, it has been a roller-coaster ride for Sanofi. While an impressive mid-term growth strategy and robust Q4-19 results were appreciated by the investors, a COVID-19-driven sell-off eroded 23% of shareholders’ wealth within a month. However, the French pharma was swift enough to come out with a rescue plan – repurposed its arthritis drug (Kevzara) for the treatment of COVID-19 and joined hands with GSK to develop a vaccine for the pandemic – which provided some respite. The Q1-20 sales outperformance, driven by the stockpiling of drugs, was another shot in the arm and the liquidation of a ~20% stake in Regeneron (for ~$11bn), which bolstered Sanofi’s firepower, enabled the scrip to recover lost ground by April 2020.
However, the tides became unfavourable thereafter as lockdown-related disruptions (mainly lower new prescriptions) and a handful of R&D setbacks (for blockbuster potential drugs fitusiran and sutimlimab) made investors jittery. On top of this, disappointing phase I/II results for the potential COVID-19 vaccine made matters worse with a development process delayed by 6-12 months. Ergo, Sanofi has underperformed the AV Pharma Sector in the last six months (-8% vs. sector average: ~-1%).
Although the French giant would be late to the COVID-19 vaccine party, we believe that its jabs should find takers given the demand supply mismatch: the 2021 production capacity of approved/to-be-approved vaccines is pegged at 7-8bn vs. the requirement of 16bn. Also, the base business should recover (particularly demand for elective surgery-related drugs) once the vaccination process gathers momentum. Not forgetting, management’s aggressive M&A appetite (firepower of >€30bn) could further strengthen Sanofi’s positioning in the faster-growing therapeutic areas. Using its shares as currency would come at a cost though as Sanofi’s own valuations are pointing towards an under-valued zone (FY21 P/E of 16.6x vs. 7 years average of 21x). Sanofi is trading at agreeable multiples but the odds of a takeover on Sanofi are low and made lower by the recent intervention of the French government against a take-over of French food retail assets. The 27% upside on fundamentals does hinge on a confidence reconstruction exercise. Sanofi shareholders want to hear better operational news.
COVID-19 vaccine – all is not lost
Even though Pfizer and Moderna have got the first-mover advantage (on the back of the new mRNA-based technique used to develop a vaccine), Sanofi/GSK’s COVID-19 vaccine candidate (being developed using a traditional approach) is still in the game. Remember that the duo already has a pre-order book of ~750m doses (with an additional purchase option of 500m) and, given that the phase II/III trial, with an improved antigen formulation, is about to get underway, Sanofi/GSK’s vaccine could reach the market in H2-21. Interestingly, the durability of COVID-19 vaccines immunity is still unknown and if these jabs become an annual/biannual phenomenon (the same as the flu vaccine), Sanofi’s potential superior efficacy/safety profile (backed by its traditional approach as mRNA-based vaccines seem to have an adverse impact on allergic/elderly patients) could provide it an upper hand in the long term. Not forgetting, success with another COVID-19 vaccine candidate (in collaboration with Translate Bio using the mRNA-based technique; capacity 300m) and the contract manufacturing of Russia’s Sputnik V (if approved) could help cushion the vaccine delay blow.
A concrete strategy in place
At the recently held investors’ day, Sanofi’s newish boss (Paul Hudson) unveiled a strategy to fast-track growth. The immunology drug, Dupixent (9.5% of sales), is the first pillar of strength and label extension into the dermatology and respiratory space. Along with the geographic expansion in China, it could take the drug’s peak sales to >€10bn by 2027-28. The Vaccines segment (15% of sales) is the second strategic pillar and could outgrow the market fuelled by robust growth in three core franchises – influenza, respiratory and meningitis. Importantly, the acceleration in sales in the high-margin Vaccines segment should bolster profitability and combined with the five-year €2bn cost-savings programme (driven by downsizing of the commercial teams, smart spending and manufacturing efficiencies), the operating margin should expand to 22% in FY22 (vs. 20% in FY19).
Notably, the strategy seems good on paper and execution has been robust to date – Dupixent and Vaccines enabled Sanofi to navigate through the pandemic in Q3-20 (sales grew by 5.7% at CER vs the peer average of 1.2%; ~€1bn cost savings were achieved in 9M in 2020).
Looking at EBIT margins vs. peers – ex Bayer – shows that management has plenty of work on its plate as the firm manages c. 500bp less than its peers.
Operating margins: Sanofi (pink) vs. European peers
R&D engine overhauled
Hudson has taken some bold steps on the R&D front as well – programmes in the slow-growing cardiovascular and diabetes space have been terminated and the focus has shifted towards fast-growing therapeutic areas (six multi-blockbuster potential drugs have been shortlisted), though Sanofi is late to jump on the bandwagon compared to peers. Moreover, the reliance on a licensing/collaboration partner has been reduced and the internal R&D engine has been strengthened – spent ~€6.5bn on four deals (namely Synthorin, Principia Biopharma, Kymab and Kiadis Pharma) in the last 12 months to leverage on the their technology platforms to develop best-in-class drugs. Considering that Sanofi still has a dry powder of €25-30bn, more deals, particularly in the immuno-oncology space, sound probable. As a reminder, M&A deals carried out by the previous CEO had backfired and it remains to be seen how Hudson fares on this front.
There are no doubts that Hudson is a go-getter. But his decision to pledge COVID-19 vaccine to the US first and lay-off employees during the cost-cutting drive landed him in the wrong books of the French government (and Sanofi’s board). Although the relationship has improved a bit – with a €610m investment into a new vaccine plant and a research centre in France – caution is required on the governance front. It is a fact that Sanofi bosses since 2008 have been long on financial promises and rather short on delivery as their promises hinged a lot on debilitating cost cuts. As a reminder, the same Chairman kicked out Viehbacher in 2014 (no clarity about why), presumably terminated Brandicourt and handed over the baton to Hudson. If Hudson fails, the board should not escape the flak.
All green on fundamentals
Buying into Sanofi is a call on the improving fundamentals of the business. Both our intrinsic valuation metrics throw a healthy upside. Market multiples also point towards the over-sold zone. Not forgetting, the shareholders could also benefit from the upcoming IPO of the Consumer Healthcare business (worth c.€19bn; €15/share) and the world’s largest API company, EUROAPI (worth c.€2bn; €1.7/share; under the name of Generics in the NAV). Hopefully, Sanofi will not trip itself once more on execution.
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