BreakingviewsDrug giants offer pandemic recovery sleeper trade

Aimee Donnellan
3 minute read

A lab technician wearing a full-face mask and a protective suit works on investigational coronavirus disease (COVID-19) treatment drug "Favipiravir" at Eva Pharma Facility in Cairo, Egypt June 25, 2020. Picture taken June 25, 2020.

Pharmaceutical stock market stragglers could be in store for a post-pandemic booster shot. Shares of companies like GlaxoSmithKline (GSK.L), Novartis (NOVN.S) and Sanofi (SASY.PA) struggled during lockdown as routine procedures and treatments were postponed. But a reopening economy should restore business as usual and repair depressed valuations.

The healthcare sector had its fair share of Covid-19 winners. Vaccine maker Moderna (MRNA.O) has seen its stock rocket 868% since January 2020. Yet some of the sector’s biggest names suffered as people shunned hospitals and mingled less, reducing new diagnoses and the transmission of diseases like flu. Shares in GSK, Novartis and Sanofi, which all reported first-quarter earnings last week, are down by an average of 18% since January 2020, underperforming the STOXX Europe 600 Health Care index, which is flat in the same period.

Some star products fared particularly badly. In March 2020, screenings for breast, cervical and colon cancer collapsed by as much as 94%, according to the Epic Health Research Network. Novartis, run by Vasant Narasimhan, saw its revenue from breast cancer drugs, such as Afinitor, fall nearly 30% over the year. Sales in GSK’s vaccine unit, which had grown by 21% in 2019 thanks to a new shingles jab, Shingrix, declined 2%.

Yet the sharp share price falls probably overstate the damage. Sanofi, which saw an 8% slump in its general medicines business sales last year, was helped by booming demand for its eczema treatment Dupixent. The French group’s overall revenue was flat in 2020. Novartis’s and GSK’s turnover even rose by 2.5% and 1% respectively.

As economies reopen, people will now be more willing to seek treatment. They will also need to catch up on missed eye tests and cancer screenings. Novartis’s net income is forecast to rise nearly 8% in 2021, according to Refinitiv data, and Sanofi’s by 5.5%. GSK’s earnings are expected to grow 13% in 2022 after two years of decline.

GSK, Sanofi and Novartis are on average trading at just 13 times forward earnings, compared with 15 times at the end of 2019, according to Refinitiv data. If those three companies were valued on their pre-pandemic forward multiples, their combined $423 billion market capitalisation would rise by nearly $71 billion or 17%, according to Breakingviews calculations. As lockdowns end, such a recovery may come quickly.

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CONTEXT NEWS

- Shares of Novartis, GlaxoSmithKline and Sanofi have declined by an average of 18% since January 2020, before the global outbreak of Covid-19.

- Novartis said on April 27 that its first-quarter core net income slipped 4% from a year earlier to $3.4 billion, compared to the $3.5 billion average analyst estimate in a Refinitiv poll. Sales were 1% higher at $12.4 billion, compared to the $12.5 billion forecast.

- Sanofi confirmed its 2021 targets on April 28 after it posted stronger-than-expected first-quarter results as sales of its star eczema treatment, as well as flu and polio vaccines, helped offset a dip in cough and cold treatments. Sanofi’s first-quarter net income was up 14.7% at 2 billion euros at constant exchange rates. Revenue rose 2.4% to 8.6 billion euros.

- GlaxoSmithKline said on April 28 that turnover for the quarter to March 31 fell 15% to 7.4 billion pounds, partly due to declining sales of cold and flu remedies like Theraflu and Robitussin, which suffered because social distancing prevented infections.

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