Update: Sanofi Should Finally Start Growing Again

Aug. 3.14 | About: Sanofi (SNY)


In the middle of a sharply correcting stock market, Sanofi rose strongly after a better than expected earnings report.

Investors are probably getting increasingly confident that the company has finally left behind the patent cliff and is well-positioned for growth.

In my October 2013 analysis, I had estimated FCF growth to over €6-7 per share in the next few years which I still expect to be reached.

On July 31, Sanofi (NYSE:SNY) reported better than expected Business EPS growth of 13.4% at constant exchange rates and raised its 2014 guidance. Business EPS is now expected to be 6%-8% higher than 2013 at CER (before: between 4% and 7% at CER). Management sounded pretty optimistic on the subsequent Q2 earnings call. In fact, Sanofi seems to have finally left behind the patent cliff and has positioned itself very well for a prolonged period of earnings growth, largely avoiding future patent cliffs. As a note aside, an interesting snippet of the earnings call seems to confirm the basic thesis included in my first article on the company:

The growth platforms have been the story for the last five years. We started five years ago at about 38% of sales, they are now 76.3% of sales. It clearly doubled as a percentage of our sales partly through the organic growth, partly of course because we lost the old blockbusters.

In my article, I had highlighted the impressive predictability of Sanofi's earnings growth, which I supposed to be a result of smart management incentives. Among all major pharmaceutical companies, Sanofi is the only one that links bonuses to a return on assets calculation. The trajectory of the growth platforms (CAGR: 15%) seems to confirm Sanofi's astute and careful capital allocation strategy.

At this time, due to restructuring charges and currency headwinds, cash flows still do not reflect the much more favorable prospects, but I am confident that they will soon grow again, as the euro should not continue to rise forever, and a whole set of promising new drugs is likely to deliver a boost to Sanofi's sales. However, investors should keep an eye on free cash flow generation in the next earnings reports.

Disclosure: The author is long SNYNF. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.