In October 2022, Euroapi shareholders had every reason to rejoice, when the company’s shares peaked at 19 euros. Less than six months earlier, they had in fact obtained them at 12 euros each during the IPO. The problem is that the stock lost half its value in the weeks that followed. Surprising for a healthcare company, a sector known for being stable and defensive. The reason: a series of bad news which largely tainted what was then shaping up to be a promising stock market story.
Opposing currents
Let’s go back a little. As part of a major reorganization, the French giant Sanofi took the decision in 2020 to make its division dedicated to active pharmaceutical ingredients, the famous APIs, autonomous – Active Pharmaceutical Ingredients – which were used to baptize this subsidiary. And since we’re talking about acronyms, Euroapi is part of the CDMO family – Contract Development Manufacturing Organization –subcontractors of the pharmaceutical industry, such as Lonza, Siegfried or Bachem.
At the time, the group was in the middle of two opposing trends. On the one hand, industrial sovereignty, painfully highlighted for the pharmaceutical industry during the coronavirus pandemic. On the other, the propensity of large laboratories to sell off their least profitable activities.
Because if Sanofi carried out the division of Euroapi, it is because this asset was not at the performance level of the other branches. The operating margin in 2022 was less than 5%, when that of its former parent company was around 30%. Nevertheless, Euroapi has considerable potential for progression to rise to the level of the best players in the sector. It is on this improvement – an a priori reasonable bet – that the appeal of the file last year rested.
Let’s dive successively
Until a first hiccup, on December 7, 2022. That day, the stock fell by 16% after a severe downward revision of annual objectives. An announcement that caused chaos, a few months after the arrival on the Stock Exchange. Euroapi’s explanation – a major production quality problem on its Hungarian site – did not reassure the financial community. Investors systematically see in this type of industrial snag a lack of internal control. Rebelote, on March 8 of this year, with a dizzying plunge of 22%. This time, it is an accounting depreciation and a shift in medium-term objectives which ignite the situation and further undermine the credibility of management.
Since then, things have been better. Management seems to have regained control of operations and no disappointments have been reported for several months. The title even rose little by little above its introductory price. The latest publication of results has finally reassured the markets. Consequently, Euroapi becomes frequentable again, with a return to the original scenario: considerable potential for optimization of the activity, in a context where the production of active pharmaceutical ingredients on European soil has once again become strategic.
Launch window
Financially, this translates into an operating margin which should double by 2025 and the provision of higher and more recurring free cash flow. Analysts are quite confident in the two pillars of the business model: a high market share in the small molecule API, and a notable strengthening of the CDMO division, which generated nine-tenths of the growth in the first half. Enough to allow turnover to grow by 7 to 8% between 2023 and 2026, a slightly faster pace than the pharmaceutical sector average. To the extent that the stock suffers from a strong discount on its peers, rather justified in view of the aforementioned events, there is probably a window of opportunity to exploit if the promises were finally to be kept.