Although I don't own it, I'm wondering if Sanofi (SNY) may just be the model of what a big pharma ought to look like. The company is exceptionally well-balanced geographically (with roughly 30% exposure to the U.S., EU and emerging markets) and has a complimentary array of businesses that include generics, vaccines, OTC and branded drugs. Sanofi also strikes a solid balance between drug types (biologics, etc.) and pipeline risk/reward.
While Sanofi still has some patent expirations to digest, this company actually has one of the better growth profiles in the space right now. It also happens to look meaningfully undervalued.
Q1 Results Not Quite As Good As They Look
Although Sanofi had a solid first quarter, it wasn't quite as good as the first look may suggest. Revenue did rise 9% on a reported basis (and 7% in constant currencies), but more than half of the incremental growth came from Genzyme. Still, growth is growth, and only Sanofi's animal health business saw a year on year sales decline.
Within the branded pharmaceuticals business, Lantus was a superstar again (up 17% cc), while Lovenox revenue declined and Plavix was weaker than expected. Eloxatin continues to roll out well, with sales doubling this quarter.
Sanofi looked to have a good quarter operationally, but here too the details matter. Gross margin fell about a half-point, while reported operating income rose 13% (or 8% cc). This was meaningfully ahead of analyst estimates, but a large portion of the beat came from "other" and associate profits. Consequently, it wasn't an especially high-quality (nor necessarily repeatable) beat.
Six Drugs To Watch
Sanofi has a deep pipeline, but there are a half-dozen drugs that investors should watch as they have the most significant revenue potential over the next five to 10 years.
Lemtrada is looking like a legitimate potential blockbuster in MS and a worthy competitor to Biogen Idec (BIIB) and Novartis (NVS). While Aubagio isn't likely to be as strong, it should have a solid role as an alternative for refractory patients.
Sarilumab, which is a product of the company's partnership with Regeneron (REGN) is an interesting case. Although it has shown enough to suggest it could be a blockbuster in rheumatoid arthritis, I do wonder how it will compete with Pfizer's (PFE) oral alternative.
Zaltrap is still on target to be a successful drug in colorectal cancer, though a trial failure in prostate cancer blunts the enthusiasm a bit in the short term. The failure was not unexpected, but it does serve as a reminder that it's not a panacea.
Kynamro, the cholesterol drug that Genzyme licensed from Isis (ISIS), is an interesting drug at this point. While the development of an anti-PCSK9 antibody (again, with Regeneron) might be seen as limiting the drug's potential, it now looks as though management is going to position it as a "rare disease drug" with the attendant eye-popping price tag.
Last and not least is Lyxumia, Sanofi's late entrant into the GLP-1 market. Honestly, I don't know what the point is in introducing another once-daily injectable GLP-1 drug, but I suppose so long as Novo Nordisk (NVO) can maintain strong share of the market with Victoza, it's going to be considered a worthwhile candidate. Suffice it to say, I'm not high on Lyxumia's prospects, though I do admit the ability to combine it with insulin could be an interesting twist.
The Diabetes Competition Is Going To Heat Up
Perhaps it's a bit ironic given Sanofi's position as one of the Big Three in insulin (along with Novo Nordisk and Lilly (LLY), but the company's diabetes market position is a bit of a worry for me right now. Lilly wants to introduce a biosimilar version of Lantus, and Novo hopes to use degludec (aka Tresiba) to grab share in the basal analog market.
Granted, Sanofi is working on a new formulation of Lantus and one that could show clinical benefits - a detail that would help keep it differentiated. That said, I just find Sanofi's overall diabetes pipeline/portfolio to be a little lacking and would like to see a renewed focus here on next-gen therapies (perhaps including SGLT inhibitors).
The Bottom Line
Even if I don't necessarily share the bullish sell-side appraisals of drugs like Lyxumia, I do believe Sanofi has a very interesting business and a good chance of becoming one of the better growth stories in the sector. What makes that more encouraging to me is that just 4-5% free cash flow growth should be enough to support a fair value in the low $50's. Given that valuation, this is probably my first choice for new money in big pharma today.