Sanofi: Stiff Competition Will Impact Future Performance

| About: Sanofi (SNY)

Summary

Eli Lilly and Boehringer Ingelheim’s biosimilar version of Lantus has been approved by the EMA under the market name of Abasria.

Abasria has received tentative approval in the US but will be held off until 2016 due to the lawsuit filed by Sanofi against Eli Lilly.

Novo Nordisk’s Tresiba will have first-mover advantage with its insulin/GLP1 combination drug in the US.

Sanofi's (NYSE:SNY) revenues are distributed through three major segments and a large chunk is attributable to the pharmaceutical segment; 85% of revenues are attributed to the pharmaceutical segment. More than half the pharmaceutical revenues are drawn from the US and Western Europe. The following article will discuss the upcoming patent expiration of Lantus, its successor drug Toujeo, and how the competition from biosimilars and other patent approved drugs are expected to impact the company's top and bottom lines and its drug pricing. Lantus is presently one of Sanofi's blockbuster medicines with an annual sales contribution of $8 billion but it might lose popularity in the wake of low-cost rival drugs in the market.

Toujeo, Lyxumia, and Tresiba

Sanofi's Toujeo was accepted for review by the Food and Drug Administration (FDA) and the European Medical Association (EMA) in June of 2014. Toujeo would be a successor of the current insulin drug, Lantus, if it receives approval from the regulatory agencies. The expectations are that the drug will be approved in the US by early next year following the expiration of Lantus. However, the company is not the only one struggling to replace Lantus. Eli Lilly (NYSE:LLY) and Boehringer Ingelheim's biosimilar version of Sanofi's Lantus has already been approved by the EMA under the market name of Abasria. However, the drug has only received tentative approval in the US meaning that Lantus is still safe from the poaching of the biosimilar since the US accounted for roughly 66% of the drug's sales as of FY2013.

Sanofi filed a lawsuit against Eli Lilly earlier this year which would hold off the launch of the biosimilar in the market until mid-2016 which gives Sanofi a considerable amount of time to bring forth its own improvement upon the expiring Lantus and transfer its patients to Toujeo. Patients are unlikely to switch drugs once they begin to use a certain type unless they face serious complications. That being said, Toujeo is expected to partially replace the sales from its predecessor. However, Toujeo's revenues are not expected to be as spectacular as Lantus because not only is the company facing competition from generics and biosimilars but it is also standing up against Novo Nordisk's Tresiba whose clinical trials indicated a better efficacy rate than Toujeo and also threatens the sales of Lyxumia. Lyxumia is another combo drug by Sanofi meant to target diabetes but its approval is not expected until 2017, which gives considerable room to the drug's competitors to establish themselves in the diabetes market. Novo Nordisk's (NYSE:NVO) Tresiba will have first mover advantage with its insulin/GLP1 combination drug that is expected to depress the sales of Sanofi's diabetes drugs.

Drug Pricing

In the wake of higher competition brought forth by low-cost drugs and other patent-approved drugs, the company's top and bottom line will be impacted due to lower average pricing and possibly lower unit sales as well. While drug prices would definitely be lower on average a drastic plunge is not a likely event. The exact decline percentage in price is difficult to estimate but investors should expect it to fall by as much as 10-15% or possibly more. It is important to understand that while competition is not the only factor that drives the prices of drugs it does play an important role.

Following is a graphical representation of how the company enjoyed high revenues from Lantus even as its unit sales diminished.

Source: Drugs.com

Both Sanofi and Novo Nordisk enjoyed near monopolistic power in the industry and increased the prices of their insulin drugs by approximately 15% and 10% respectively. However, that monopoly would dissipate as generics and biosimilars encroach the market. The potential encroachment of rival drugs might have been a triggering factor for escalating insulin drug prices in the first place, motivating companies to milk the drugs while their patents still held.

Concluding Remarks

Sanofi beats its counterparts in terms of profit margins and dividend yield. The company maintains a gross profit margin of 67.1%, operating profit margin of 16.96% and net profit margin of 12.76% compared to the industry's average gross profit margin of 51.43%, average operating profit margin of 14.2% and average net profit margin of 10.09%. The company also pays a higher dividend yield than its peers of 3.42% in an industry where 1.46% is the norm.

The performance of the company's top and bottom lines is expected to be adversely impacted in the future due to rising competition and declining insulin drug prices. That being said, the company will have to lower the prices of its products in order to make its new drugs market competitive. However, the company would still have the advantages of market share and the period between the expiration of the patent and the launch of biosimilars.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within 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.

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