Sanofi Still Looks Promising Despite The COVID-19 Vaccine Delay
Summary
- Sanofi's experimental COVID-19 was delayed in December, but they plan to apply for the regulatory submission in the H2 of 2021.
- Sanofi can hugely benefit from vaccine revenues in 2022 and the Specialty Care growth as the economic recovery takes over.
- On the other hand, Sanofi stands out as a quality Value Play with low valuation multiples in a time of extreme market valuations.
My original thesis was based on the idea that Sanofi (NASDAQ:NASDAQ:SNY) could soar as they announce the efficacy of their recombinant protein approach experimental COVID-19 vaccine. Sadly, initial findings were not satisfying, and the stock took a hit after the poor outcome of 1/2 vaccine trials. Although this was a clear setback in the vaccine development process, they quickly reinitiated vaccine production efforts with what they have learned from their failure. They are projecting the regulatory submission of the vaccine in the H2 of 2021. My initial thesis still stands as demand for the COVID-19 vaccines is still robust while supply is scarce. Therefore, it offers a better opportunity than ever to take a piece of this vaccine developer candidate at a bargain valuation.
Data by YCharts
There Is No Such A Thing As A Late COVID-19 Vaccine
Pfizer (NYSE:PFE), Moderna (NASDAQ:MRNA), and AstraZeneca (NASDAQ:AZN) were the first movers of the COVID-19 vaccine race. Sanofi was late from the start, but the unexpected negative results on December 11'th pushed the vaccine development process even further. Still, Sanofi got back on track with the vaccine development in collaboration with GlaxoSmithKline (NYSE:GSK), and they are planning to apply for regulatory submission by H2 2021, which means they will come up with the results of Phase 2 in a couple of months. Additionally, Sanofi is working towards its own mRNA approach-based vaccine, yet it is not likely to be ready until 2022 based on the latest disclosures.
Some people may think that Sanofi is too late for the COVID-19 vaccine development. I have previously explained why this is not the case when it comes to COVID-19 vaccines, and the last three months proved my view. World Health Organization repeatedly stated COVID-19 would be here for a long time even after normalization. Many other officials and vaccine-producing companies gave statements supporting this view. One of which was the founder of BioNTech (NASDAQ:BNTX), Mr. Sahin. He stated that COVID-19 would be here for a while, and people will need to get vaccinated every 1-2 years to make sure there are enough antibodies, just like flu vaccines. Recently J&J CEO Alex Gorsky made a similar statement saying:
People may need to get vaccinated against Covid-19 annually, just like seasonal flu shots.
On the other hand, emerging and underdeveloped nations are still struggling to get their hands on solid vaccine deals, and the last three months hadn't changed anything for them. Only the developed countries got vaccine deals. While Israel and UAE received enough doses to vaccinate a significant portion of their populations, most of Africa, Asia, and South America lack a vaccination plan, let alone enough vaccines for their populations.
Also, both Pfizer and Moderna declared that they are experimenting with applying a 3'rd dose to boost protectivity against other variants, which means there will be a need for more doses. All this evidence supports that robust demand for COVID-19 vaccines is likely to continue over the next couple of years.
Solid Outlook
COVID-19 vaccines proved to be a profitable revenue source as Pfizer expects $15 billion in revenues from the vaccine sales in 2021, accumulating 25% of the projected revenues for the year. It would be unrealistic to expect a similar revenue stream for Sanofi in 2022 from COVID-19 vaccines as Pfizer was the first mover, and it is a bigger company. Yet, we can argue that it can have a remarkable impact on 2022 revenues if everything goes well with the vaccines. However, Sanofi will not wait to take a piece from the cake on the table since they have signed an agreement with Pfizer to produce 125 million doses. They recently announced a similar agreement with J&J after their vaccine proved effective, and that deal is about a similar size, approximately 150 million doses in 2021.
Source: Company Disclosures
The company plans to move towards its glamorous years with exquisite management goals in the right direction for growth and increasing operating margins. We can expect the FCF to grow in the upcoming years by prioritizing higher growth and profit margin products, such as Specialty Care, rather than generic drugs. These efforts proved to be working as Sanofi's business operating margin grew 120 bp in 2020 despite all the troubles of COVID-19. They are working towards an ambitious 30% business operating margin by 2022 and above 32% by 2025. Management is happy with the current progress and looking forward to achieve their higher operating margin goals in the time frame.
Another positive metric is the growing Free Cash Flow with the efforts of the management. FCF grew %70 in the last two years from 4 billion to 7 billion Euros. Looking at the new developments, we can see that Dupixent proved to be a breakthrough in Specialty Care within only two years. It is a revolutionary drug for treating eczema, and it significantly increased revenues in Specialty Care. Looking at the 70% YoY increase in Dupixent sales during the pandemic, where people are less likely to visit clinics for eczema-related problems, we can argue that Dupixent has a long way to go as a new drug. We can expect similar growth to pre-pandemic sales levels in 2021, around new 2 billion euros revenues added to the revenue stream. Moreover, low penetration in Europe and the rest of the world suggests Dupixent has a significant undiscovered revenue generation potential in the ongoing years. Sanofi has a couple more promising medications that are projected to be ready for sale in the upcoming years. Although most will not be as successful as Dupixent, they will support management's ambitious goals.
Source: Company Disclosures
Valuation
In my previous article, we have looked into a brief peer comparison with its peers to understand better if Sanofi is cheap/expensive relative to its peers. Since December 2020, drug manufacturers had a bad couple of months, and Sanofi's discount relative to its peers somewhat decreased. Still, Sanofi is relatively cheaper if we look at the multiples with a Price/FCF of 13.40, which is lower than its peers rather than GSK that announced poor 2020 results. EV/Revenues are standing at a low 2.77, and the EV/EBITDA multiple is also smaller than the other companies we have compared.
| Sanofi | AZN | GSK | Novartis | Pfizer | |
| PE Ratio | 10.01 | 39.66 | 11.56 | 24.41 | 19.58 |
|---|---|---|---|---|---|
| EV/EBITDA | 9.42 | 16.65 | 9.82 | 12.70 | 14.56 |
| EV/Revenues | 2.77 | 5.21 | 2.97 | 4.38 | 4.98 |
| Price/Free Cash Flow | 13.40 | 57.93 | 10.62 | 17.82 | 20.03 |
Currently, Sanofi is trailing at ten year low PE ratio with a solid Free Cash Flow and promising future outlook. Looking at the chart below, we can see that PE ratio separation from the crowd over the last ten years has only been this extreme three times, and it caught up with its peers later on. I do not see any reason for earnings to drop from here even if we exclude the future COVID-19 vaccine revenues. Earnings are likely to increase if the current success in growing revenue streams and the operating margins continue. Additionally, the pharmaceuticals sector's mid-term outlook looks positive with the COVID-19 recovery. Since the earnings are likely to increase, the stock price should appreciate so the PE ratio can catch up with its peers.
Although the article's main point is not Sanofi's real value, Overall valuation suggests Sanofi is still a cheaper alternative than its peers when looking at peer comparison and its historical valuation multiples. Considering the mean PE ratios of the S&P 500 grew more than 50% in the last year to 38.80, we can argue that Sanofi is a cheap Value Play that stands out from the crowd.
Data by YCharts
Risks
The most prominent risk for the article's main point is another failure or delay in the COVID-19 vaccine. Considering all the other significant pharmaceutical companies had fewer difficulties with their experimental vaccines, I believe two of the biggest pharmaceutical giants, GSK and Sanofi, can develop a more efficacious vaccine in their second time. Another risk would be any setback or unexpected outcome from the ongoing M&A and R&D trials.
Conclusion
In conclusion, Sanofi's stock tumbled with the delayed COVID-19 vaccine and the sector's negative movements, but the lower stock price offers a chance for a COVID-19 vaccine to play at an even more affordable price. I expect COVID-19 production for Pfizer and JNJ to have a limited positive effect on revenues in 2021, while COVID-19 vaccines to increase revenues in 2022 significantly. In the meantime, recovery from the pandemic should help other segments and Sanofi's most promising drug Dupixent. Still, investors should be cautious as the drug manufacturer's negative trend can continue further in the short term. In that case, Sanofi is likely to get negatively affected as well. However, I expect the downwards movement to be less extreme than its peers, due to its cheaper valuation.
I will be taking long positions in Sanofi this week.
This article was written by
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in SNY over the next 72 hours. 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.
I am not offering financial advice but only my personal opinion. Investors may take further aspects and their own due diligence into consideration before making a decision.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (14)
Irrespective of PFE, Sanofi had a good future.
Dupixent will surpass $10 Billion in the next 3 to 5 years.
The pipeline is strong. Stronger in the 3 to 5 year window.
Patent related issues are totally behind them.
Dividend is excellent.
The drop in price is a good opportunity to pick up the stock.
