Can Sanofi Get Back On Track?

Sep.20.13 | About: Sanofi (SNY)

The Briefest of Histories

Sanofi-Aventis (SNY), the love-hate child of the 2004 merger between Sanofi-Synthélabo and Aventis, is a Top 5 pharmaceutical company. It is the essence of Big Pharma, and it operates with all the aplomb of an organization that has kept on impressing its financial critics and stakeholders alike over the past decade. Originally created through the acquisition of Aventis by Sanofi-Synthélabo, the company dropped the second half of its name seven years later, citing the reason that the Chinese (as an example) would find the new, shorter name easier on their tongues. Unfortunately, they're not faring too well in that part of the world (not an example) at the moment. One thing is for certain: despite its aging troubles and new-born challenges, this Parisian giant is undeniably one of the fastest-growing Big Pharma companies in today's market, and a sure bet when the overall market is weak.

Sanofi, today, is as fit for a fiscal fist fight as it was 10 years ago. It faces challenges from competing generic drug manufacturers; it is confronted by accusations of bribing 503 doctors with a total of over a quarter of a million dollars in China back in 2007; and in August 2013, Cowen and Company downgraded its shares from outperforming to market performing. Despite these challenges, however, Sanofi's prospects are nowhere near gloomy.

Sanofi in Action

Sanofi's loss of two major patents during 2012 was estimated to cost the company in the neighborhood of €800 million during the first half of 2013. H1 results have already witnessed the dent these two drugs' competitors have made in Sanofi's armor. Although Q2 performance drop is being attributed to the Brazilian escapade, the company is well aware of its need to move against the tide yet again. To counter the loss in sales to generic drugs, Sanofi is now in diversification mode.

Through diversification, they believe they can strengthen their pipelines across no less than seven major areas of therapy: vaccines (of which they are the global leader), oncology, diabetes, thrombosis, internal medicine, CNS and cardiovascular. They have also been showing impressive figures for emerging markets bar a few quarters; the fall in growth in these markets, however, will be an interesting trend to follow as far as investment insight is concerned.

The Crowd Pullers in Sanofi's Drug Cabinet

There's no doubt that the most popular drugs are the family of bacterial and viral vaccines from Sanofi Pasteur. With an arsenal of drugs covering 20 major infectious diseases and a highly diverse market, its numero uno position in the field of immunization is apparently unshakable. This segment grew by 7.2 percent in the year since June 2012, and shows no signs of flagging soon. The assurance of the commercialization of vaccines in 19 countries by Sanofi Pasteur MSD has contributed strongly to the growth in human vaccine sales, offsetting the losses in animal health revenue.

As a lone-ranger drug, however, Lemtrada is expected to outstrip all the competition - including its own peer product Aubagio; this Multiple Sclerosis drug has recently been approved in the EU and subsequently in the U.S. by the end of 2013 and has been pegged as the next biggest thing since New Genzyme, which posted a 16.9 percent growth in pro forma sales.

The diabetes drug Lantus has also made a mark in its segment, showing strong growth and keeping its winning streak going beyond the past eight quarters.

Perhaps the most interesting event in the past year has been in the consumer healthcare division. This segment saw the company rank world number 3 in 2012, with revenue growth a shade under 10 percent. It continues to grow stronger through 2013 and is expected to fortify the company against further loss to the competition.

Historic Financials (2003 - 2012)

Sanofi recorded a stunning 18.12% compounded annual growth rate during 2003-2012. As shown in the chart below, revenue and earnings per share have steadily moved north in the last ten years. The revenue growth is especially impressive considering Sanofi was able to achieve it without loading itself with heavy debt. During this ten-year period, total assets grew by 29.61% (OTCPK:CAGR) while total liabilities grew by 32.51% (OTCPK:CAGR).

Sanofi Revenue Vs. EPS

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Sanofi Assets Vs. Liabilities

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Margins and Recent Performance

Gross margin has slowly moved from the low 80s in 2003 to the high 60s in 2012, but Sanofi has managed to maintain its operating margin between 15 to 20% throughout the period of analysis; this is not actually a bad thing, because sales growth was perfectly healthy and vigorous during this time. However, their second quarter results left a lot to be desired, as net sales dived 6% (at constant currency) thanks to competition from generic drug manufacturers and an inventory management issue with one of its subsidiaries in Brazil.

Though Sanofi's management wants to showcase the second quarter results as an aberration, blaming it on its Brazilian woes, the results have thrown up a few interesting twists in the plot. Net sales in emerging markets in H1 2013 rose 6.6% (constant exchange rates, excluding generic sales in Brazil). In 2012 (full year), net sales in emerging markets grew 8.3% (at constant currency). Animal health was down 4.4%.

Genzyme and diabetes solutions performed strongly during the first half of 2013 posting healthy 25.5% and 17.8% growth, respectively. What's worrying is the slowing growth in emerging markets and this is one area we need to watch closely in the next few quarters.

Net Sales Pharmaceuticals Segment

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Total Pharma




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Pipeline - The Future of Sanofi

A pharmaceutical's lifeline is its pipeline, and Sanofi seems to be leaning very heavily on Lemtrada's EC and FDA decisions. Aubagio (MS) has already experienced a setback in the EU with the decision to deny its acceptance as a new active substance, but projections show healthy sales of $389 million by 2016, with the primary market being the United States. Eliglustat, the Gaucher disease drug, is now under the regulatory submission phase, but is expected to follow in Aubagio's footsteps the following year.

Among the most interesting of its pipeline drugs is Alirocumab (anti-PCSK9). This hypercholesterolemia drug is expected to perform well, and may even have a shot at the billion-dollar-club; however, the stiff competition from other players in the market and the fact that the cholesterol market is essentially an unknown entity may hamper its growth potential.

The way it stands at the moment, the bulk of the burden lies on Lemtrada and Alirocumab to pull Sanofi safely through the challenging times ahead and into a consistently profitable future.

Sanofi Pipeline

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The Verdict - Valuation

With current P/E around 30, Sanofi looks a bit overvalued, thanks to the drop in Q1 and Q2 2013 earnings. The forecast for 2013 is also flat but the market seems to be upbeat about the prospects of Sanofi in 2014 and into the future, which is helping push share prices higher. Sanofi has taken several strong steps in the right direction and is recommended as a decent buy. If you need some margin of safety then buy during market weakness.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within 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.