It typically takes a while for the Street to really buy into a better-than-expected story, and it looks like catch-up is still the name of the game around French drug giant Sanofi (SNY). While growth is not great in absolute terms, there's more value here than many analysts seem able to see. Investors can take advantage of a company that should offer above-average growth and yield over the next three to five years.
Q2 -- Another Beat
Sanofi once again delivered a stronger-than-expected quarter. While reported revenue growth looked good at 6%, currency-adjusted performance was a far more sedate 0.4%. Likewise, reported pharmaceutical revenue growth of 5% was far ahead of the negative 0.4% currency-adjusted number. That said, Sanofi saw good double-digit growth in diabetes (up 14%cc), strong sales growth of Eloxatin, and a good ongoing recovery in Genzyme (up 9%).
Interestingly, Sanofi delivered 10% constant currency emerging markets growth, despite zero growth in Eastern Europe or Turkey (which make up 25% of the segment). That highlights just how much strength Sanofi has in EM vs. slower-growing European rivals like Glaxo (GSK), AstraZeneca (AZN), and Novartis (NVS).
Margin and income performance wasn't as strong, but there are valid explanations. Gross margin deteriorated more than two points sequentially, due in part to mix shifts. Likewise, operating income fell 6% (that is, "business operating income") as the company didn't enjoy the same benefit from "other" and "associate" income. Strip that out, and income did grow about 5%.
The Pipeline Is Starting to Deliver...
Sanofi should get approval of Zaltrap (oncology) and Aubagio (MS) this quarter, and while neither is likely to be a blockbuster, they ought to deliver respectable incremental growth. More importantly, the company's update on the Phase III design for the anti-PCSK9 cholesterol drug trial -- a drug the company is developing in partnership with Regeneron (REGN) -- was favorable. Sanofi looks to be the clear leader in time to market, ahead of Amgen (AMGN) and Roche (RHHBY.PK) by at least six months or maybe a year.
...But There's Still Work to Do
One of the strengths of Sanofi is also an area of concern for me. Diabetes care kicks in over 15% of total revenue, largely on the back of basal insulin analog Lantus. While Sanofi still has multiple years of patent coverage for Lantus, I do worry that insulin development efforts at Lilly (LLY) and Novo Nordisk (NVO) are ahead of those at Sanofi -- putting a rich stream of revenue and cash flow potentially at risk. Likewise, I'm not thrilled with Sanofi's commitment to a GLP-1 drug that is likely to be an also-ran (though perhaps more compelling if paired with Lantus in a combo device).
The Bottom Line
With the company still facing generic risk, the revenue growth at Sanofi is unlikely to be breathtaking. That said, it does compare favorably to most of its peers in Big Pharma. What's even more important (at least in terms of presaging stock outperformance) is that the analysts' numbers continue to move up. In addition, the company's growth opportunities in vaccines, emerging markets, and consumer health are not trivial.
I'm looking for more free cash flow growth at Sanofi than at Pfizer (PFE) or Merck (MRK), but not dramatically more. With a fair value near $50, this is an attractive Big Pharma stock to consider today.
Disclosure: I am long RHHBY.PK.