Sanofi (NYSE: SNY), the subject of this article, is one of the oldest and largest pharmaceutical concerns in the world, competing in the same league as world-class enterprises Novartis (NYSE:NVS), Pfizer (NYSE:PFE), Glaxo (NYSE:GSK), and Merck (NYSE:MRK). In 2013, the company generated revenues of 33.0 billion euros (or 45.5 billion U.S. dollars), which trailed just Novartis and Pfizer. Sanofi, which bulked up with the acquisition of rival Aventis a decade ago and substantially increased its presence in the lucrative biotechnology arena earlier this decade with the addition of Genzyme, is a diversified powerhouse, with a product portfolio that includes seven blockbusters and dozens of medicines/vaccines that had sales of more than 100 million euros last year. Also in the financially rock‐solid company's fold is a healthy pipeline of mid‐ and late‐stage new‐drug candidates, which, along with options afforded by annual cash flow that exceeds $10 billion, should allow management to implement a multi-pronged strategy - internal R&D, strategic alliances, and acquisition - to keep revenues and earnings rising in the years ahead; at the end of last year, cash totaled 8.3 billion euros (or $11.1 billion).
Sanofi shares haven't been particularly good performers over the past 10 years or so, however, restrained by myriad issues. The financial crisis that rocked debt and equity markets in 2008 and 2009 certainly hurt investor sentiment, as have the persistently sluggish economies in many parts of Europe that hurt drug sales in that region. Hurting even more in recent years has been the expiration of patents on several historically large-selling products. Indeed, sales erosion stemming from generic copies of company drugs resulted in a three-year-long slide in profitability. Excessive valuations a decade ago probably also precluded a superior performance.
Significantly, the large France-based drugmaker now appears to be in the early stages of an earnings rebound that may well result in the bottom line rising at a high-single-digit compounded rate through decade's end; the drag from patent expirations abated considerably last summer and revenue comparisons have been favorable for three straight quarters, on a constant currency basis. Several growth platforms, most notably the diabetes and rare diseases franchises, are lifting the top line, helped appreciably by dissipated headwinds from generic competition. Persistent vigor in emerging markets is helping as well. Important, too, valuations have contracted nicely, setting the stage, in our view, for above-average long-term total returns; SNY offers an attractive (and secure) 3.6% dividend yield (subject to a 30% tax withholding for U.S. investors).
All that said, it should be noted that there are myriad complications inherent in the assessment of a foreign company that trades in the United States in the form of ADRs (American Depositary Receipts). At the top of the list is the issue of currency and exchange rates. Sanofi generates revenues in over a hundred countries and conducts business in literally dozens of currencies, but reports its financial results in euros. Does a U.S. investor then translate those euros into American dollars when analyzing the company's financial statements. Accounting principles can also vary in different countries, so should an investor reconcile the numbers in accordance with U.S. rules even though the price of the shares is largely determined in foreign markets. An evaluation of Sanofi is further obscured by a balance sheet laden with a huge amount of goodwill that is the legacy of several large acquisitions. The goodwill triggers substantial goodwill amortization expense, which is noncash and distorts the company's current financial performance. Truth be told, we've been struggling with how best to consistently address the currency and accounting issues for some 25 years and have yet to reach a conclusion; these complications probably explain why there's so little institutional research coverage given foreign equities. In this report, we've mostly used Sanofi's reported figures (in euros) and specified (or footnoted) where the numbers have been adjusted. As to the goodwill-related distortion, it is addressed below under the heading "the concept of business income."
(Note: Sanofi shares trade on the Euronext Paris exchange under the symbol SAN. In the U.S, they trade on the New York Stock Exchange as ADRs under the symbol SNY. Each share is equal to two ADRs.)
Sanofi is the third-largest pharmaceutical group in the world and the second-largest in Europe, as measured by revenues. The Paris, France-based concern was formed in 2004 by the merger of Aventis and Sanofi- Synthélabo, both of which were created through previous combinations. In all, part of its roots can be traced all the way back to 1863, which is when Hoechst was founded. The healthcare giant was known as Sanofi-Aventis from 2004 until 2011 when it took the current appellation after acquiring Genzyme, one of the biggest biotechnology companies in the world. Sanofi is organized around three principal activities: Pharmaceuticals, Human vaccines, and Animal Health. Pharmaceuticals constitute, by far, the largest business, accounting for 82.7% of aggregate revenues in 2013. Within the segment, the primary therapeutic areas of focus are diabetes, rare diseases, multiple sclerosis, and oncology. The vaccines business, conducted through Sanofi Pasteur, and Animal Health (via Merial) accounted for 11.3% and 6.0% of last year's revenues, respectively.
Sanofi has more than 112,000 employees operating in some 100 countries; its products are found in around 170 countries. The company's leading geographical market in 2013 was "Emerging markets" (see below for definition) where it is the leading healthcare concern, representing 33.3% of sales. The United States was second with 31.7%, while Western Europe was third with 23.8% of sales. Other countries represented 11.2%; Sanofi only has a 3.3% share of the large Japanese market, the same as in the U.S.
Like the other large drug groups such as Glaxo, Pfizer, and Merck, Sanofi grows through internal research and development (R&D), partnerships with other pharmaceutical and biotechnology firms, and acquisitions. Expenditures on R&D totaled 4.8 billion euros in 2013, equivalent to about 14.5% of revenues; the percentages were 14.1% in 2012 and 14.4% in 2011. As for partnerships, Paxil, which has been a huge-selling drug for many years, is the product of a partnership with Bristol-Myers, and the French drugmaker is poised to submit U.S. and EU regulatory submissions for alirocumab (to lower low-density lipoprotein cholesterol), which is being developed in conjunction with U.S.-based Regeneron Pharmaceuticals, Inc. (Note: Sanofi has a 20% equity stake in Regeneron that's currently worth $6.4 billion) Since January 2009, Sanofi has invested a total of 24 billion euros in external growth; in 2013, there were 13 new transactions, including one acquisition and 12 R&D alliances. Acquisitions include Chattem (in 2010), a leading U.S. consumer healthcare company, and Genzyme (2011). In parallel with diversifying its revenue base in recent years, the group now operates through seven "growth platforms": Emerging Markets, Diabetes Solutions, Vaccines, Consumer Health Care (NYSE:CHC), Animal Health, Genzyme, and Other Innovative Products (which is very small).
In 2013, the Pharmaceuticals segment accounted for 82.7% (27.3 billion euros) of companywide revenues and 84.6% (7.9 billion euros) of business operating income. In 2012, the comparable figures were 28.9 billion and 9.6 billion, respectively, while they were 27.9 billion and 10.6 billion in the preceding year. The business is large and diversified, incorporating five blockbusters (in U.S. dollars) and dozens of individual products that generate sales of more than 100 million euros each year. Within the segment, the important therapeutic categories are:
Ø Diabetes Solutions - consists of products that yielded sales of 6.6 billion euros in 2013. The main product is Lantus, a long-acting analog of human insulin that is the leading brand in the large (and growing) insulin market. The others are Amaryl, an oral once-daily sulfonylurea; Apidra, a rapid-acting analog of human insulin; Insuman, a range of human insulin solutions and suspensions; Lyxumia, a once-daily prandial GLP-1 receptor agonist; and BGStar, iBGStar, and MyStar Extra, blood glucose meters.
Ø Rare Diseases - added 2.0 billion euros to the top line. The principal products are enzyme replacement therapies: Cerezyme to treat Gaucher disease; Myozyme/Lumizyme (Pompe disease); Fabrazyme (Fabry disease); and Aldurazyme (mucopolysaccharidosis).
Ø Multiple sclerosis (NYSE:MS) - the relatively small MS franchise (168 million euros) consists of Aubagio, a once daily, oral immunomodulator, and Lemtrada, a humanized monoclonal antibody that selectively targets CD52.
Ø Oncology - the 1.5 billion euro category includes a large number of drugs, including five that had sales of more than 100 million euros in 2013. The leading top-line contributors are Taxotere (409 million euros) and Jevtana (231 million euros). Other important cancer products include Eloxatin, Thymoglobulin, and Mozobil.
In addition to the drugs that comprise the therapeutic areas of focus, Sanofi has a large number of "Other prescription products." In fact, this group, which includes blockbusters Plavix (1.9 billion euros), an antiplatelet agent indicated or a number of atherothrombotic conditions, and Lovenox (1.7 billion euros), a low molecular weight heparin indicated for prevention and treatment of deep vein thrombosis and for unstable angina and myocardial infarction, added 7.2 billion euros to last year's top line. The group also includes cardiovascular medicines Multaq and Aprovel/CoAprovel; renal drugs Renegal/Renvela, used in patients with chronic kidney disease; and Synvisc and Synvisc-One, which are viscosupplements that are used to treat pain associated with osteoarthritis. Additionally, the company's global pharmaceutical portfolio includes a wide range of consumer healthcare and generic products, which contributed revenues of 3.0 billion and 1.6 billion euros in 2013.
Sanofi, through its Sanofi Pasteur subsidiary, is a worldwide leader in the vaccine industry. Sales totaled 3.7 billion euros in 2013, with market-leading positions in pediatric, influenza, adult and adolescent booster, meningitis, and travel and endemic vaccines; sales were 3.9 billion and 3.5 billion in 2012 and 2011, respectively. The segment accounted for 9.7% (or 909 million euros) of last year's aggregate business operating income, compared with 10.1% (1.2 billion euros) and 8.1% (992 million euros) in 2012 and 2011, respectively. Last year's results were helped by record sales of influenza vaccines, especially in the U.S., and strong growth in Emerging Markets but hurt by manufacturing issues that delayed shipments of certain products. In Europe, Sanofi Pasteur vaccine products are developed and marketed by Sanofi Pasteur MSD, a joint venture that serves 19 countries. Created in 1994 and held equally by Sanofi Pasteur and Merck, Sanofi Pasteur MSD also distributes Merck vaccines, such as Gardasil and Zostavax. In 2013, Sanofi Pasteur MSD net sales amounted to 876 million euros. Sanofi Pasteur is expanding in Asia, Latin America, Africa, the Middle East and Eastern Europe. In addition, it is a key supplier to publicly funded international markets such as UNICEF, the Pan American Health Organization, and the Global Alliance for Vaccines and Immunization.
Sanofi's Animal Health business is conducted through Merial, one of the world's leading animal healthcare companies, dedicated to the research, development, and manufacture of a wide range of pharmaceuticals and vaccines used by veterinarians, farmers, and pet owners. Merial sales amounted to 2.0 billion euros in 2013, compared with 2.2 billion in 2012 and 2.0 billion in 2011. Business operating income in those years, meantime, were 502 million euros, 673 million, and 636 million, respectively, representing 5.4%, 5.8%, and5.2% of the annual totals. Merial became Sanofi's dedicated Animal Health division in March 2011 following the end of Sanofi and Merck's agreement to create a new animal health joint venture by combining their respective animal health segments.
The Animal Health segments consists of four major categories: parasiticides, anti-infectious drugs, other pharmaceutical products (such as anti-inflammatory agents, anti-ulcerous agents, etc.), and vaccines. Merial's top-selling products include Frontline, a topical anti-parasitic flea and tick brand for dogs and cats, the highest-selling veterinary product in the world; Heartgard, a parasiticide for control of heartworm in companion animals; Ivomec, a parasiticide for the control of internal and external parasites in livestock; Vaxxitek, a high-technology vector vaccine, protecting chickens against infectious bursal disease and Marek's disease; Previcox, a highly selective anti-inflammatory/COX-2 inhibitor for relief of pain and control of inflammation in dogs; Eprinex, a parasiticide for use in cattle; and Circovac, a PCV2 (porcine circovirus type 2) vaccine for swine. Merial is the world leader in vaccines for foot-and-mouth disease, rabies, and bluetongue. The major markets are the United States, France, Brazil, Italy, the United Kingdom, Australia, Germany, Japan, Spain, China, and Canada. Emerging Markets now account for 30% of Merial sales, with particularly strong growth in China (18% in 2013).
In response to both intensifying competition from generics for several major products and cost containment pressures from third-party payers and healthcare authorities, Sanofi began implementing a new strategy in early 2009, repositioning the company for more stable and sustainable growth. The strategy includes a reduced reliance on existing blockbuster medicines (sales exceeding $1 billion), greater diversification, and investing along the seven growth platforms that are outlined below; as readers will note, some of the so-called growth platforms are essentially components (in part or whole) of the three operating segments and were already described in detail above.
The Emerging Markets growth platform is a unit whose performance is monitored primarily on the basis of its net sales, which are derived from all three of the operating segments. It measures sales generated in all geographical markets excluding the United States, Western Europe, and Rest of World, which includes Canada, Japan, Australia, and New Zealand. In 2013, Emerging Markets, which represented 33.3% (or 11.0 billion euros) or overall revenues, was the only geographical region to post an improvement (up 4.4%), in constant currencies. Indeed, all subregions - Eastern Europe and Turkey (up 2.2% to 2.7 billion euros), Asia (10.1%; 3.0 billion euros), Africa (7.7%; 1.0 billion euros), and the Middle East (10.6%; 1.1 billion euros) - posted better results, except Latin America, where manufacturing issues contributed to a decline of 1.1% (to 3.0 billion euros). Sales in the BRIC countries (Brazil, Russia, India, and China) account for 34% of Emerging Markets sales. Business in China and Russia were particularly strong, rising 18.6% and 12.0%, respectively.
Sales of Diabetes Solutions continued to rise in 2013, surged 18.7% to 6.6 billion euros. This growth platform was led by Lantus, which saw its top-line contribution rise 20.0% to 5.7 billion euros. Given the rapidly increasing number of diabetic patients around the world and last year's launch of Lyxumia in several European countries, sales of diabetes products are likely to remain in a sharp uptrend for the foreseeable future.
The Vaccines growth platform, as delivered by Sanofi Pasteur, is one of the main players in pediatric vaccines in both mature and emerging markets, with a broad portfolio of standalone and combination vaccines protecting against up to six diseases in a single injection. Vaccine sales totaled 3.7 billion euros in 2013, led by contributions of 1.1 billion euros from polio/pertussis/hib vaccines, 929 million euros from influenza vaccines, and 496 million euros from meningitis/pneumonia vaccines. The total was 4.6% below the year-earlier figure (-0.1% on a constant currency basis), though, hurt by timing issues that squeezed sales of Menactra in the U.S., temporary restrictions on shipments of Adacel in the U.S., and manufacturing problems in Brazil.
Consumer Health Care
In 2013, Consumer Health Care sales reached 3.0 billion euros, up 5.2% year over year, on a constant currency basis. Almost half of these sales were generated in Emerging Markets, 22% in Western Europe, and 21% in the United States. The division is focused on six key categories: Anti-allergics, Analgesics, Cough and Cold Remedies, Digestive System Products, Feminine Hygiene Products, and Vitamins, Minerals & Supplements. The company established a Global Consumer Health Care Division last year to more proactively identify development priorities. Sales should benefit from last September's re-launch of the Rolaids brand of antacids that was acquired at the beginning of the year. The recent introduction of over-the-counter Nasacort allergy nasal spray ought to help, too.
As detailed above Sanofi's Animal Health business, as conducted through Merial, is one of the leading animal healthcare companies in the world. Sales have hovered in the 2.0 billion euro neighborhood in each of the past three years.
The Genzyme growth platform covers the rare disease and MS therapeutic areas that were secured through the 2011, $20 billion acquisition of Genzyme, which expanded Sanofi's presence in the biotechnology sector. The rare disease franchise - focused on products for the treatment of rare genetic diseases and other chronic debilitating diseases - consists of Cerezyme, Myozyme, Farrazyme, and Aldurazym, none of which target a patient population that exceeds 10,000 people. Sales totaled 2.0 billion euros last year, 16.6% higher than in 2012 (on a constant currency basis), with all four drugs posting double-digit percentage gains.
The Multiple Sclerosis activity is focused on the development and commercialization of therapies to treat the chronic autoimmune disease of the central nervous system, which afflicts more than 2 million people worldwide. The MS franchise consists of Aubagio, a once daily, oral immunomodulator, and Lemtrada, a monoclonal antibody. In September 2013, Lemtrada was granted marketing authorization in the E.U. for treatment of adult patients with relapsing forms of MS. It was also approved by regulatory authorities in Canada and Australia during the fourth quarter of 2013. Lemtrada is not yet approved in the important U.S. market, however, with the Food & Drug Administration issuing a Complete Response Letter (NYSE:CRL) last December, requesting additional information. Genzyme responded in May, submitting a sBLA (supplemental Biologics License Application). Additional marketing applications for Lemtrada are under review by regulatory agencies around the world.
The Concept of "Business Income"
In addition to reporting the standard income figures that are derived using generally accepting accounting principles (GAAP), Sanofi also provides what it refers to as "Business Operating Income" and "Business Income." These two measures essentially take GAAP operating income and makes adjustments to eliminate amortization and impairment losses charged against intangible assets (other than software); nonrecurring restructuring costs, gains/losses, litigation costs, and other special items; profits/losses attributable to non-controlling interests. On the other hand, profit or losses of associates and joint ventures are added back to the GAAP numbers. The non-GAAP financial measures are important in that they allow investors to better understand the company's performance because they segregate the results of current operations from the impact of past transactions, most notably acquisitions. This is particularly significant for a company like Sanofi since it has completed acquisitions that have added considerably to intangible assets, which produce noncash amortization expenses. The acquisitions of Aventis and Genzyme, for a total of 67.7 billion euros, added 39.2 billion euros to intangible assets, contributing heavily to the 2.9 billion euro amortization cost in 2013; amortization of intangible assets totaled 3.3 billion euros in both 2012 and 2011. As well, Sanofi recorded an impairment of intangible assets totaling 1.4 billion euros last year.
As it relates to the bottom line, GAAP earnings per share equaled 4.26 euros in 2011, 3.68 in 2012, and 2.78 in 2013. On a "business net income" basis, the comparable share net figures were 6.62 euros, 6.14 euros, and 5.05 euros. (Note: The bottom-line numbers in this discussion are for common shares, not American Depositary Receipts (ADRs), and haven't been translated into U.S. dollars.)
The Patent Cliff Now in the Rearview Mirror
Revenues were down 5.7% in 2013 (off 0.5% at constant exchange rates), despite considerable vigor in sales of diabetes solutions and Genzyme products. Top-line advances in 2012 and 2011 were also tepid, despite the acquisition of Genzyme in early 2011, which added more than 2 billion euros to annual revenues, and rapidly rising sales of medicines to treat diabetes. Sluggish performances in Western Europe, reflecting difficult macroeconomic circumstances, contributed to the lackluster overall results, with revenues falling 5.6% in 2013 after slumping 9.3% in the previous year. Temporary difficulties in the generics business in China also hurt, as did temporary supply limitations for a couple of vaccines in the United States. That said, the biggest impediment to revenue growth during the past several years was the loss of patent protection on a variety of drugs that led to an onslaught of competition from generic copies. A number of historical flagship products lost market exclusivity, including Avapro in March 2012, Plavix two months later, and Eloxatin in August 2012. In 2013, sales of products that had lost patent protection in either the U.S. or Europe fell 1.3 billion euros, this on top of the estimated 1.7 billion euros lost to generics in the previous year. Sales of Eloxatin, for example, which lost patent cover in the U.S. almost completely evaporated, slumping 97.4% to 19 million euro, while Approvel sales plunged 39.3% to 338 million euros.
Significantly, however, Sanofi appears to have scaled the patent cliff, posting year-over-year revenue gains in each of the past three quarters. Total group revenues increased 6.5% (to 8.5 billion euros) in 2013's final quarter, 3.5% (7.8 billion euros) in 2014's initial quarter, and 6.4% (8.1 billion euros) in the recently completed three-month period. Growth platform sales rose 7.9% in the March quarter and 14.5% in the June period, reaching 5.8 billion euros and 6.1 billion euros, respectively. (Note: The comparisons are based on constant exchange rates, or CER.) As has been the case for some time, the diabetes solutions and Genzyme growth platforms are leading the way, posting first-half gains of 14.7% (to 3.5 billion euros) and 25.4% (1.2 billion euros), respectively. On a geographical basis, Emerging Markets continues to outperform, with revenues surging 16.5% to 2.9 billion, which constitutes 35.1% of the company's total.
Revenues were up 4.5% (at CER) in the year's first half, totaling 15.9 billion euros. Business net income, meantime, rose 9.2% to 3.1 billion euros. And business earnings per share rose 9.9% to 2.34 euros, or US$1.57 per ADR. Management's guidance for all of 2014, factoring in the performance in the year's initial half, is for bottom-line growth of 6% to 8% (at CER); the guidance after the first quarter was for gains of 4% to 7%.
Uncertainties Related to the Flagship
Lantus (insulin glargine) is Sanofi's most important single product, adding 5.7 billion euros to 2013 revenues, which represents 17.3% of total revenues. It is the world's leading insulin brand, in terms of both sales and units. The product is available in over 120 countries, and sales are growing rapidly, up 15.3% in 2013 and 26.7% in 2012, on a reported basis. The biggest market is the U.S., accounting for 64.9% of the total last year, or 3.7 billion euros. The U.S. compound patent expires in August 2014 but a pediatric extension provides protection in the all-important U.S. market through February 2014. In Western Europe, the pediatric extension provides protection through May 2015.
Significantly, though, in mid-December 2013, Sanofi received notifications from Eli Lilly and Company that it had filed a New Drug Application with the FDA for an insulin glargine drug product. Lilly also stated that its NDA included a paragraph IV certification challenging six of seven Sanofi patents. On January 30, 2014, Sanofi filed a patent infringement suit against Lilly in the United States District Court for the District of Delaware, where the French concern alleges infringement of four patents. This suit resulted in a stay during which the FDA cannot approve Eli Lilly's NDA. The stay is expected to expire the earlier of a court decision favorable to Lilly or June 2016.
The 30-month stay strongly suggests that a biosimilar product from Eli Lilly won't appear on U.S. shelves until perhaps mid-2016 at the earliest. It's also important to note that making "generic" copies (or biosimilar) of biologics is far more complicated than producing copies of traditional pharmaceuticals. As such, even if Lilly does eventually succeed in getting its product to market, Lantus is unlikely to face serious pricing pressures anytime soon. In this regard, Eli Lilly's own experience may be instructive, in that its blockbuster diabetes drug Humalog lost patent protection more than a year ago but still faces no competition from a biosimilar rival.
A Healthy R&D Pipeline Diminishes Long-term Concerns
In February 2013, the European Commission granted marketing authorization in Europe for Lyxumia, a once-daily prandial GLP-1 receptor agonist indicated for the treatment of adults with type 2 diabetes mellitus to achieve glycemic control in combination with oral glucose-lowering medicinal products and/or basal insulin. On completion of pricing and reimbursement discussions, Sanofi initiated a phased launch of Lyxumia throughout the European Union. The product has been approved in several other countries, including Japan, Australia, and Brazil, and applications for regulatory approval have also been submitted in yet other countries. An NDA will likely be filed with the FDA next year. In September 2013, Lemtrada was granted marketing authorization in the E.U. for treatment of adult patients with relapsing forms of MS. The MS drug was approved by regulatory authorities in Canada and Australia during the fourth quarter of 2013. In the U.S., the FDA issued a Complete Response Letter last December, to which Sanofi submitted a supplemental Biologics License Application in May, meaning a U.S. launch could occur by early next year. Additional marketing applications for Lemtrada are under review by regulatory agencies around the world.
At the end of July 2014, the company's R&D pipeline contained 46 projects (excluding Life Cycle Management) and vaccine candidates that were in clinical development, of which 12 are in Phase III or have been submitted to the health authorities for approval. The pipeline is well diversified, but with a focus on large therapeutic markets diabetes, oncology, and vaccines. U300, for example, a new formulation of insulin glargine has been shown in clinical studies to have an improved pharmacodynamics profile with even longer, more stable and flatter activity than Lantus, with the potential to translate into good glycemic outcomes with less hypoglycemia. The completed Phase III program includes four studies (EDITION I, II, III and IV) and two studies in Japanese patients (EDITION JPI and JPII). The Phase III program is assessing the efficacy and safety of U300 compared with Lantus in various populations. The results of Edition I and II have demonstrated similar level of glycemic control between U300 and Lantus, while U300 was consistently associated with a reduction in risk of hypoglycemia. Topline results of EDITION III, IV and JPI showed a similar level of glycemic control in both groups.
In the cardiovascular arena, the French drugmaker is poised to submit U.S. and EU regulatory submissions for alirocumab (to lower low-density lipoprotein cholesterol). The Sanofi Pasteur R&D portfolio includes 13 vaccines currently in advanced development. The portfolio is well balanced, with six vaccines/antibody products for novel targets and seven vaccines that are enhancements of existing vaccine products.
An Earnings Recovery Seems Likely Going Forward
The headwind from generics has eased considerably and will dissipate further in the quarters ahead. At the same time, contributions from diabetes solutions, Genzyme products, and Emerging Markets continue to increase at a healthy clip. Moreover, revenues from recently launched and soon-to-be-introduced medicines should become more meaningful to the top line as time progresses. Profit margins, meantime, are likely to widen as a group-wide cost savings program that's anticipated to generate incremental cost saving by 2015 of more than 2 billion euros gains traction. All in all, business earnings per share of 5.40 euros seems likely in 2014, and rising to 6.05 euros next year. For U.S. investors, this translates into $3.65 per ADR in 2014 and $4.10 per ADR in 2015, up from $3.48 in 2013.
The Final Word
Sanofi certainly has had more than its share of challenges over the past several years. The loss of patent protection almost always leads to a substantial and rapid drop in drug sales, and that clearly posed a problem for both the top and bottom lines in the last few years. A relatively strong euro hurt results as well since revenues, most of which are derived in foreign currencies, had to be translated at unfavorable rates. Looking out a few years, management may also have to contend with competition (from a biosimilar) for its most important revenue contributor, Lantus. All things considered, though, the operating landscape looks far friendlier for the large healthcare concern than it has in a long time. The patent cliff has flattened dramatically. At the same time, many of its growth platforms are continuing to report strongly improved results. That's not all, recently launched products are likely to raise their profile in the quarters ahead, augmented by a large number of new-drug prospects that are either awaiting marketing approval or progressing further along in the R&D pipeline. Factoring in ongoing cost-containment measures, we think earnings growth over the next three to five years will be sufficient to generate price appreciation of 50% to 80%, which certainly is attractive in the current environment. Note, too, that our long-term earnings and stock-price projections conservatively assume far more modest debt reduction and share repurchases than Sanofi's free cash flow would support.
Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in SNY over the next 72 hours. 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.