The pharmaceutical industry is a good investment choice due to long-term demographic trends. Despite the current increase in mortality rate due to COVID, rising average life expectancy around the world and increase in the number of health conscious people should benefit pharmaceutical companies, especially those diversified from consumer healthcare to specialty care.
Additionally, this industry which is normally coined as “defensive”, due to its ability to survive many economic crises while making a profit, has nonetheless been impacted by COVID, especially during the second quarter when revenues fell quite steeply.
However, despite some challenges remaining, third quarter did see a recovery for Sanofi (SNY) whose revenues outperformed Q3-2019 figures, when expressed in CER (constant exchange rate) whereby fluctuations due to exchange rates are eliminated when calculating financial performance.
Figure 1: Quarterly revenue progression in USD.
Source: Chart built through data from Seeking Alpha
Now, going forward with surging virus cases in the U.S. which is an important market for Sanofi and lockdown measures in European countries, I assess the capacity of the French group to continue showing positive performance.
First, I go deep into third quarter’s operating results.
The third quarter saw an additional €23 million expense for the monoclonal antibody collaboration with Regeneron (REGN), a U.S. biotech with which Sanofi has a longstanding partnership.
This collaboration includes sharing of profit and loss with Regeneron, whereby the latter reimburses development costs to Sanofi and the French group does the same for commercialization expenses incurred by the U.S. company. Thus, reimbursements to Regeneron increased to €229 million during the third quarter compared to only €206 million in Q3-2019.
However, despite this higher expense, the company has been able to increase operating margin slightly, mostly through an increase in sales.
Figure 2: Margin growth compared to Q3-2019.
Source: Seeking Alpha
The growth in quarterly sales was supported by strong demand for Dupixent and influenza vaccines.
First, Dupixent is proving to be a fruitful development for Sanofi as it calms an over-reactive immune system instead of suppressing it and this difference means fewer and less severe symptoms of chronic inflammatory conditions.
The Food and Drug Administration (FDA) first approved Dupixent (also called Dupilumab) in June 2019 for use with other medicines to treat chronic rhinosinusitis in adults whose disease is not controlled. Moreover, Dupilumab can also be used for treating atopic dermatitis and asthma.
Additionally, in May 2020, the FDA approved Dupixent for children aged 6 to 11 years with moderate-to-severe atopic dermatitis.
Figure 3: Sales of flu vaccines and Dupixent.
Source: Seeking Alpha
Second, driven by the influenza vaccine, sales in the segment increased by 13.6%. This increase more than offset declines in travel vaccines and Menactra (used to prevent infection caused by meningococcal bacteria).
On the other hand, sales of drugs for cough, allergy and cold were impacted and were down 13% compared to last year. Also, the recovery in general medicines including diabetes was offset by lower prices.
Now, given that Dupixent forms part of the Specialty Care segment whose sales grew by 23.8%, it has now become a key growth driver for Sanofi and thus, it is important to perform a competitive analysis to identify present and future threats.
Competition and challenges
First, the size of the global atopic dermatitis treatment market is valued at $10.4 billion in 2020 and is expected to grow at a CAGR of 13.13% to reach $19.3 billion by 2025 according to a report by Market Data Forecast.
Therefore, this is a huge market with Sanofi’s sales only having reached 918 million euros for Q3-2020. Looking further, AbbVie’s (ABBV) Humira and Novartis’ (NVS) Cosentyx compete with the French Pharma for a share of the atopic dermatitis and asthma market.
Also, there are contenders developing drugs but these are still at Phase 3.
In this case, some investors will remember that Eli Lilly’s (LLY) acquisition of skin disease specialist Dermira (DERM), a developer of an experimental therapy covering atopic dermatitis for about $1.1 billion in cash. At that time, the FDA had given fast track designation to Lebrikizumab, its Phase 3 treatment.
Other contenders include Pfizer’s (PFE) FDA-approved Eucrisa but there are safety questions and with the advent of COVID-19, which has not only disrupted normal care but also impacted the ability of laboratories to conduct clinical trials, Sanofi may have earned itself some temporary relief.
However, this remains a crowded space and one company which published primary data from its three pivotal ECZTRA Phase 3 trials of tralokinumab in adult patients with atopic dermatitis (“AD”) is Leo Pharma in October 2020. The results demonstrated “safety” and “sustained improvements”. LEO Pharma has submitted regulatory applications for tralokinumab to the Food and Drug Administration.
Figure 4: Drug candidates and companies for atopic dermatitis.
Source: Table built from individual search results on clinicaltrials.org for Dupilumab, Tralokinumab, Lebrikizumab and Abrocitinib.
However, the French company is witnessing strong growth with Dupixent, at 69% in Q3-2020. This has been furthered by the solid launch in pediatric patients with AD. Additionally, apart from the U.S, European growth has been at 21% and the company has launched Dupixent in 50 countries including China.
Therefore, with such rapid gain in market share, geographical expansion plus growth in target population, the French enterprise has a strong competitive position but it is important to identify any challenge which may come across Sanofi’s path.
Hence, looking in the rear mirror, there was that bold forecast of €10 billion in sales, Sanofi’s CEO Paul Hudson made for Dupixent back in December 2019 during Capital Markets Day.
Figure 5: Growing market share in atopic dermatitis through Dupixent.
Now, given that there are disruptions in normal care with in-office patient visits with dermatologists and allergists still being around 20% below pre- pandemic levels, a dose of realism becomes important.
Moreover, market research suggests that for most dermatologists, it will be impossible to reach normal pre-COVID patient volume due to safety restrictions and precautions that have been put in place at the state and local levels. These measures are in place both in the U.S. and Europe due to second and sometimes third waves of the coronavirus.
However, the fact that Dupixent’s new-to-brand prescriptions have grown so rapidly in a lockdown environment is mind-blowing and should maintain double-digit growth despite doubts as to when in-office visits will return to normal.
Additionally, there are some new verticals as the company continues to invest in the Dupilumab brand for other indications (health conditions) like allergies (Eosinophilic Esophagitis).
Also, an increase in the telemedicine appointment trend should help the French group to maintain existing prescriptions.
In conclusion, in addition to growing its topline, Sanofi has kept a firm lid on expenses.
Valuations and key takeaways
Hence, despite incurring additional expenses to further develop Dupixent, investing in flu vaccine campaigns and funding clinical trials for drug candidates still at Phase 3, Sanofi has been able to lower combined R&D and SG&A expenses slightly, by 0.4% in the quarter.
In this case, the company has launched Smart Spending initiatives under the leadership of the new CEO, who took up the new role 15 months back. Also, management is confident that despite COVID, it remains on track to meet its operating income margin target of 30% by 2022.
Figure 6: SG&A and R&D expenses quarterly change.
Source: Seeking Alpha
Exploring further, the company has seven new Phase 3 programs in oncology and immunology currently being launched. Also, the recruitment of patients for the Phase 1/2 study of the adjuvanted recombinant protein vaccine against COVID-19 has been finalized. The company is also involved in a MRNA-based vaccine candidate, at a much earlier stage of development.
Figure 7: Sanofi’s involvement in COVID-19 vaccine development.
Thinking aloud, Sanofi is not among the first to have developed a vaccine but one strong positive is that the company is using the same platform used to develop its influenza vaccines for COVID. The French group and its British partner, GlaxoSmithKline (GSK) should play a secondary but more long-term role in the coronavirus treatment as from mid-2021 provided that Sanofi’s phase 3 clinical trials are favorable.
In the meantime, the group is witnessing increased production of seasonal influenza vaccines in the unique context of the COVID-19 pandemic and this could prove useful in offsetting potential downturns in normal care with sales in the General Care segment being down by 6.4% in Q3-2020, reflecting the impact of the Value-Based Purchasing program by hospitals in China and lower diabetes sales in the United States.
In this case, Sanofi Pasteur is the vaccines subsidiary of the French pharmaceutical group, the largest company in the world devoted entirely to vaccines. For the 2020/2021 influenza season, the Company is delivering 20% more doses of flu vaccines globally, reaching an unprecedented production level of 250 million doses, across its influenza vaccine portfolio which includes both the standard doses and differentiated ones.
To that end, differentiated (and improved) influenza vaccines produced with new recombinant protein technology are demonstrating greater efficacy within different age groups.
Hence, while not having the current clout of Pfizer with its COVID-vaccine sales, Sanofi has nonetheless two strong and diversified sources of revenues through Dupixent and differentiated flu vaccine. Also, during times of uncertainty and disruption in normal care, patients tend to select medication from trusted sources instead of going to competitors which may develop alternative eczema treatments.
Consequently, Sanofi’s EV/Revenues ratio is on the low side compared to Regeneron with which it has a partnership. Additionally, its Dupilumab was already seeing more New-to-Brand Prescriptions (NBRx) with dermatologists than Novartis’ medication back in December 2019.
Figure 8: Comparing Sanofi’s EV/Revenues with peers.
Looking further, with Sanofi Genzyme, a fully owned subsidiary based in the U.S., Sanofi focuses on developing specialty treatments for debilitating diseases that are often difficult to diagnose and treat.
Also, there is the COVID-19 vaccine wildcard further down the road.
On the financial front, the French group has managed to reduce net debt from €15.1 billion in December 2019 to only €9.6 billion as at September 30, 2020, helped to a large extent by the sales of Regeneron shares. This means that with increasing revenues, it has the potential to increase its free cash flow.
Therefore, Sanofi is a buy at $50, with a medium-term potential upside of 10-15%. The French group also pays dividends at a yield of 3.41%.
This said, the new CEO seems not to have yet won the confidence of investors and as a result, the stock market has not rewarded Sanofi despite generating both topline and bottom-line growth in a difficult environment.
Fourth quarter results should further confirm the French group’s improvement.
Disclosure: I am/we are long SNY, NVS, GSK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This is an investment thesis and is intended for informational purposes. Investors are kindly requested to do additional research before investing.