Sanofi: A Good Bet On Pharma

| About: Sanofi (SNY)

Summary

Sanofi’s stock demonstrated the best return in the industry and among its major competitors.

There are several catalysts for further growth in the stock’s value.

Our DCF analysis shows that there is an upside opportunity of 17-54% from the current market price of the shares.

Sanofi's (NYSE:SNY) stock demonstrated the best return among the major competitors during the one-year period. We believe that Sanofi's shares have not yet reached their potential, and there are catalysts that may catapult the stock to the new highs. The company's pipeline includes a very valuable project in the pharmaceutical industry - Dupixent (dupilumab) with an NPV of $12.9B, which can be the key platform for the company's future expansion (Source: Evaluategroup.com). Our valuation model shows that the current share price is at the middle of the fair price range. If Sanofi capitalizes on its pipeline, the stock's price can soar to the new uncharted highs.

(Source: Nasdaq.com)

As we can see from the graph above, Sanofi's American Depositary Receipts' (ADRs) price has grown impressively after the news regarding the company's pipeline. One of the drugs in the pipeline, the new eczema drug called Dupixent, has recently received the FDA approval. Why was it so important for Sanofi to get this approval? According to Evaluate Group's estimates, dupilumab's (the generic name of the Dupixent) sales will reach $4.1B in FY2022. This corresponds to about 11% of Sanofi's FY2016 revenue from the sales of drugs and vaccines.

(Source: Evaluategroup.com)

Currently, Sanofi holds on additional research on dupilumab, and the studies are in Phase II and III. If Sanofi proves the effectiveness of dupilumab for the treatment of persistent asthma, nasal polyposis, and eosinophilic esophagitis, it will increase sales of Sanofi's immunosuppressants. In the period of 2017-2021, the possible CAGR in corresponding revenues can reach a level of 55%. We have included this effect in our valuation model. Dupilumab is not the only promising drug in the company's pipeline. Sanofi has disclosed its R&D portfolio on the corporate website:

"At the end of April 2017, the R&D pipeline contained 46 pharmaceutical new molecular entities … and vaccine candidates in clinical development of which 13 are in Phase 3 or have been submitted to the regulatory authorities for approval" (Source: corporate website).

In our DCF analysis, we have taken a closer look at the company's existing product portfolio and the promising drugs in the R&D pipeline.

DCF Model

For the purpose of better revenue forecasting, we have divided the company's product portfolio into the following segments: Anti-Diabetics, Oncology, MS (multiple sclerosis) therapies, Cardiovascular Therapeutic Drugs, Anti-Coagulants, Anti-Rheumatics, Anti-Bacterials, Immunosuppressants, Immunostimulants, Anti-Hyperlipidaemics, Other and Rare Diseases, CHC (Consumer Healthcare), Generics, and Vaccines.

We have made estimates about the probable revenue growth rates separately for each segment.

Anti-Diabetics

It is one of the company's core product segments. In FY2016, Sanofi's Lantus (new-generation insulin - insulin glargine) was the best-selling Anti-Diabetics pharmaceutical product in the world. Moreover, it has been the company's number one driver of sales for the last five years: it constituted 17% of the total drugs and vaccines sales in FY2016 and made 55% of the total prescription drugs sales in the same year.

(Source: Evaluategroup.com; pharmaceutical companies' annual reports)

However, Sanofi is not dominating in this segment. In FY2015, it was only the number two with the total segment sales of around $8.3B. Novo Nordisk (NYSE:NVO) was the favorite with the sales of $12.7B (Source: Evaluategroup.com). In its portfolio, Novo Nordisk also has the new-generation insulin - Tresiba (insulin degludec). In spite of Sanofi's lawsuit, Merck & Co. (NYSE:MRK) got the approval for Lusduna (biosimilar insulin glargine) by the European Medicines Agency. Biosimilar competition is the main reason why Evaluate Group's experts believe that Sanofi will lose its market share in Anti-Diabetics, declining from 20% in 2015 to 11.7% in 2022 (Source: Evaluategroup.com).

However, Sanofi is not going to surrender so easily. It has started selling LixiLan (Soliqua/Suliqua), which joins together the insulin glargine and the GLP-1 receptor agonist (lixisenatide). This Anti-Diabetics treatment can be the next blockbuster in the market. Plus, there are six NMEs (new molecular entities) in Sanofi's pipeline for the diabetes mellitus treatment.

Taking these facts into account, we estimate the following revenue CAGR for Sanofi's Anti-Diabetics segment (FY2017-FY2021):

CAGR is conservatively set at the level of 1% in our "Base Case Scenario" (due to fierce competition and biosimilar menace) and at 7.2% (at the industry's level) in the "Optimistic Scenario".

Immunosuppressants

Currently, this product line is not the top segment neither in the worldwide prescription and the OTC drug sales nor in Sanofi's portfolio overall. However, the probable revenue CAGR for Immunosuppressants is the second highest in the industry (Source: Evaluategroup.com). This is because of the approval in the above-mentioned Dupixent (dupilumab).

(Source: Evaluategroup.com; pharmaceutical companies' annual reports)

We estimate the following revenue CAGR for Sanofi's Immunosuppressants segment (FY2017-FY2021):

CAGR is set at the level of 11.3% (industry's level) in our "Base Case Scenario" and at 55% (if dupilumab sales reach the forecasted figures) in the "Optimistic Scenario".

Oncology (excludes anti-emetics, anti-anaemics used in chemotherapy-induced anaemia, interferons, immunostimulants, immunosuppressants)

Oncology is the top therapy area: it is No.1 by segment size (about $83.2B in 2015) with an estimated CAGR of 12.5% in FY2016-2022 (Source: Evaluategroup.com). Currently, Sanofi's product portfolio is not well positioned for such a strategically important segment: the company's Oncology portfolio contains only four drugs. Total sales for the portfolio have declined from €1.8B in FY2012 to €772M in FY2016.

Sanofi is going to change this declining trend. According to the company's annual report, the development of the Oncology segment is now one of its strategic priorities. Sanofi announced several Oncology R&D programs with its affiliated company - Regeneron Pharmaceuticals. Currently, there are five NMEs in Sanofi's pipeline for cancer treatment.

We assume the following revenue CAGR for Sanofi's Oncology segment (FY2017-FY2021):

CAGR is set at the level of 12.5% (industry's level) in our "Base Case Scenario" and at 18% in the "Optimistic Scenario" (in the case the company reaches the FY2012 revenue level by the end of FY2021).

Anti-Rheumatics

Sanofi's hopes in this segment are connected with Kevzara (sarilumab). It was recently approved by FDA for the treatment of adult patients with moderately to severely active RA (rheumatoid arthritis). We estimate the following revenue CAGR for Sanofi's Anti-Rheumatics segment (FY2017-FY2021):

CAGR is set at the level of 1.6% (the industry's level) in our "Base Case Scenario" and at 40% in the "Optimistic Scenario" (if sarilumab's sales reach the forecasted figures).

Rare Diseases

Sanofi is a one of the world leading companies in the segment presented with the drugs for the treatment of rare genetic diseases. Four of the company's assets in the Rare Diseases pipeline have received breakthrough or fast-track designation from the FDA (Source: Sanofi's annual report). We estimate the following revenue CAGR for the Sanofi's Rare Diseases segment (FY2017-FY2021):

CAGR is conservatively set at the level of 1% in our "Base Case Scenario" and at 9.2% (in line with the global orphan drug market (Source: Bccresearch.com)) in the "Optimistic Scenario".

The revenue CAGRs for other prescription drug sales were set at conservative levels in our "Base Case Scenario" (at 0-2.5%) and at higher levels in the "Optimistic Scenario".

Vaccines

In 2016, Sanofi " provided more than one billion doses of vaccines immunizing more than 500 million people across the globe against 20 serious diseases, and generated net sales of €4.6B" (Source: Sanofi's annual report). Furthermore, in 2016, Sanofi launched the sales of Dengvaxia - the world's first dengue vaccine (Source: Sanofi's annual report). We estimate the following revenue CAGR for Sanofi's Vaccines segment (FY2017-FY2021):

CAGR is set at the level of 4.1% in our "Base Case Scenario" (in line with the historical figures) and at 5.1% (the industry's level) in the "Optimistic Scenario".

Other Considerations

The EBIT's forecast for the period of FY2017-FY2021 is based on the average historical operating profitability separately for each division. The rest of the forecast period's figures are calculated in line with the historical numbers.

Our DCF model shows that after the inclusion of the above-described assumptions, the target range per ADR (one ordinary share corresponds to two ADRs) is:

- $37-56 in the "Base Case Scenario"; and

- $49-74 in the "Optimistic Scenario".

The market price was around $48 per ADR as of the time of writing. Hence, we conclude that the stock has a considerable upside potential.

DCF Sensitivity: EBITDA Multiple Method

Value Per ADS ($) "Base Case Scenario"

(Source: Author's DCF Model)

DCF Sensitivity - Perpetuity Growth Method

Value Per ADR ($) "Base Case Scenario"

(Source: Author's DCF Model)

DCF Sensitivity: EBITDA Multiple Method

Value Per ADR ($) "Optimistic Scenario"

(Source: Author's DCF Model)

DCF Sensitivity - Perpetuity Growth Method

Value Per ADR ($) "Optimistic Scenario"

(Source: Author's DCF Model)

As one can see, there is an upside potential of around 17% in the conservative scenario and approximately 54% in the optimistic case.

Conclusion

If you are interested in investing in the pharma industry, Sanofi is a great choice due to the strong pipeline with blockbuster products like Dupixent (dupilumab) and Kevzara (sarilumab) and a well-diversified current product portfolio. Our valuation model shows a target price range of $37-56 per ADR in the "Base Case Scenario" and $49-74 per ADR in the "Optimistic Scenario". In current market conditions, the potential upside can reach 17-54%. Hence, we recommend buying the stock aiming at the exit price range in accordance with personal risk/return profiles.

Supporting Documents

  1. SNY_DCF_value.xlsx

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Societe Financiers is an investment research team focused on long-term, long- and short-only ideas. Our research objective is to cover equities in various regions, such as North America, EMEA, Asia, Australia, and Emerging Markets. Readers should consider whether any advice or recommendation in our research articles is suitable for their particular circumstances and, if appropriate, seek professional advice, including tax advice. The price and value of investments referred to in our research articles and the income from them may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Fluctuations in exchange rates could have adverse effects on the value or price of, or income derived from, certain investments. Certain transactions, including those involving futures, options, and other derivatives, give rise to substantial risk and are not suitable for all investors. Transaction costs may be significant in option strategies calling for multiple purchase and sales of options such as spreads.

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