Should Investors Worry About Sanofi's Stumble?

Earlier this week, Sanofi (NYS: SNY) released disappointing clinical-trial results for its dengue vaccine, surprising experts in the field. The implications for Sanofi could be significant. Here's what you need to know.

It's just a fever, right?
Dengue threatens half the world's population. In developed countries with good hygiene and medical care, it is rarely fatal, but it is a killer in communities without access to clean water and in vulnerable populations like children and the immunocompromised. Fatality rates of the severe forms can exceed 20%. There is no known cure.

What went wrong?
There are four strains of dengue virus. Sanofi's Phase 2b vaccine trial in Thailand was designed to protect against all four but failed on one. As it happens, that strain was the most prevalent in the test region, so overall efficacy measures plummeted.

Still, the news is not all bad. Protection rates against the other three strains were superb, which means that Sanofi has successfully demonstrated that a dengue vaccine is viable. That is a first, and it is significant. Some tropical-disease experts believe that a vaccine that successfully inoculates against three of the four strains could still significantly curb global dengue infection rates.

Sanofi has several final-stage Phase 3 dengue vaccine trials underway in other regions of the world. The results will be of critical significance.

Flagship or side project?
The dengue vaccine is one of Sanofi's most important pipeline products. Some analysts have projected that it would yield more than $1 billion in yearly sales, and Sanofi's own projections were for $1.3 billion. Still, that is only about 2% of 2011 revenues, so while a failure would sting, it would hardly be Sanofi's death knell.

The real implications for Sanofi have to do with timing. The disappointing results eliminated the prospect of early marketing approval in some countries and delayed the possibility of regulatory approval until the results of Phase 3 trials are announced in 2015. This means that Sanofi will miss early revenue opportunities, but that constitutes sales deferred -- not lost.

The other potential risk is that Sanofi's delay gives competitors a chance to catch up. That seems unlikely to happen, though. Merck (NYS: MRK) is in Phase 1 trials with a dengue vaccine, and GlaxoSmithKline (NYS: GSK) is just now beginning Phase 2 trials of its own version. It's a long way to go from Phase 1 to final-stage Phase3. Furthermore, the Dengue Vaccine Initiative recognizes Sanofi's method of using live attenuated virus as the most successful. Merck is testing a different type.

The contenders nipping at Sanofi's heels are the NIH and privately held Inviragen, a company focused on vaccine development. Both are using the more effective live attenuated virus. Still, both are only in Phase 2 trials, and it would be a serious feat to catch up to Sanofi. I don't see it happening under current circumstances.

Things to watch out for
Sanofi put out a press release on July 25 announcing proof of efficacy of its dengue vaccine. While the company acknowledged a lack of protective benefit against one dengue strain, it made no mention of the fact that the results tanked overall efficacy measures to below statistical significance. This in no way means that Sanofi misstated the results; as an announcement of proof of efficacy, it did its job. But investors may have been overzealous in their interpretation of the press release, and Sanofi's stock price surged for several days. The fact that the price then dropped on Monday after the company's most recent announcement could lend support to this assertion. Of course, it is impossible to isolate a single factor that explains stock price movements in such a large company, but the correlation is noteworthy.

According to Scott Halstead, a senior scientific advisor to the Dengue Vaccine Initiative, Sanofi could have designed its study better. In a recently published article in the Science journal "The Lancet," Halstead described the trial as "a cautionary tale for investigators designing future dengue vaccine efficacy trials." Sanofi used far too few test subjects in its Thai trial, and the small sample size may have compromised the results. Its upcoming trials in other regions are much bigger, and hopefully this will help. An expert review of Sanofi's results concluded that if the company had used mathematical modeling techniques common to such studies, Sanofi could have derived more relevant results, even from a small sample size.

Foolish Bottom Line
The Thai trial results took some wind out of Sanofi's sails, but the company retains its first-place status in the race to release a dengue vaccine. The market seems to recognize this, too: After its dip following the trial results, Sanofi's share price has recovered nicely. Investors should watch for the Phase 3 trial results and should not get too excited about press releases that do not include hard data.

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Fool contributorSara E. Wrightowns none of the stocks mentioned in the story above, but has had her fair share of tropical diseases. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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