Focus: EuroAPI, pharma through ingredients


Euroapi is in the middle of two major opposing currents. On the one hand industrial sovereignty, painfully highlighted for the pharmaceutical industry during the coronavirus pandemic, and on the other the propensity of large pharmaceutical companies to separate from their less profitable activities.

Because if Sanofi proceeded to the spinoff of Euroapi, it is because this asset is not at the level of performance of the other branches of the laboratory. The 2022 operating margin of the newly listed company is expected at 6.7%, when its former parent company should post nearly 29%. The market for active pharmaceutical ingredients is largely bottled and very mature, which is synonymous with low growth activity and modest margins. For years, the majors in the sector have outsourced the production of primary ingredients to low-cost third-party producers. So much so that currently, around 60% of API production sites are located in China and India. Hence, for example, the controversy over the lack of production of paracetamol in Europe. Studies show that 20% of APIs used on the old continent were produced in China and India in 1980, compared to 80% in 2020.

API players in the pharmaceutical value chain (Source Euroapi Presentation 04/01/2022)

A business to upgrade

Euroapi can therefore play the card of European localization, or even relocation since it is in tune with the times. The company of 3,350 employees has six production sites on the old continent. Financially, the track record is limited. The company generated €902m in revenue in 2021. Analysts tracking the stock (currently 6 in number) expect average revenue growth of 10% this year and 5-6% per year thereafter. (which is the standard for the pharmaceutical industry as a whole). To boost sales, external growth can be a valid lifeline. But this lever is difficult to activate in a sector where valuations are generally very high.

As for the results, the Ebitda margin is expected to increase from 12% this year to 18% in 2024. Rising profitability is the main stock market story that Euroapi has to tell. As shown in the table below, the group is lagging behind its listed peers. If Lonza is an extraterrestrial in the sector, with its high margins thanks to an unequaled expertise in specialized fields, it is quite easy to compare Euroapi to the Swiss Siegfried, which officiates in part on the same businesses and whose Ebitda margin is greater than 20%. The French also aims to reach more than 20% Ebitda margin in 2025, that is to say to reach market standards.

Company comparables (Source Euroapi Presentation)

Company comparables (Source Euroapi Presentation 04/01/2022)

Still, if Sanofi has let its subsidiary fly on its own without weighing it down with debt, cash flow generation is weak, since all (and even more) has been consumed by investments in recent years. Management explains that the emancipation costs have weighed, but the recovery promises to be slow: free cash flow should rise to around €73 million in 2024, according to analysts following the file.

Everything to prove

On the Sanofi side, we quickly understand the interest of such an operation, especially since the group retains 30% of the capital of the manufacturer, which will remain a privileged partner, at least in the medium term. It’s a way for the “big pharma” to concentrate its activities, even if Euroapi was a drop of water in the perimeter (1/40e of turnover into an even more negligible share of results). Sanofi can devote its investments to the strategy that has been successful for several years now, setting up partnerships with promising biotechs, like the agreements made with Genzyme (since acquired) or Regeneron (from which Dupixent is derived, which has become the best-selling Sanofi).

Listed at EUR 12 a little over a month ago, the company has since benefited from its rather defensive status and a favorable influx of air to progress when the market as a whole took a nose dive. The leaders, themselves, accumulate titles since the IPO, which is at worst a committed communication operation, at best a positive signal. However, the dossier is above all promising for the moment, since it is neither dynamic enough to be a growth stock nor cheap enough to be a discounted stock. This is somewhat the case for most pharmas, but Euroapi’s margins are quite far from sector standards. There remains the theme of the relocation of supplies, which is much talked about but which sometimes has difficulty in materializing given the attraction of Made in Asia. Chase the natural…



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