I am bullish on Sanofi (NASDAQ:SNY) as I see the company undervalued as compared to both the company’s financials and competitors (EU pharma peers). Valued at an estimated 2023 P/E of below x13, the market prices Sanofi like a value trap. Instead, I argue the company should be priced at GARP. Based on a residual earnings valuation model, anchored on analyst EPS consensus, I see more than 50% upside. My target price for the stock is $77.11/share.
Sanofi is a leading global pharmaceutical company, with strong research and innovation capabilities. The Company researches, develops, manufactures and distributes prescription pharmaceuticals and vaccines. Sanofi specializes in areas such as rare diseases, immunology, diabetes, oncology and cardiovascular health. Notable best-selling pharmaceuticals of the company’s portfolio include Aubagio, Lantus, Lovenox, Plavix, Allegra, Doliprane, and Dupixent. Sanofi operates three major segments: pharmaceuticals which accounts for approximately 70% of the company’s total revenue, vaccines with about 17%, and consumer healthcare with about 13%. Geographically, Sanofi's biggest market is the United States with about 225% of total sales, followed by Europe with about 25% and the rest of the world accounting for the remainder.
I believe Sanofi is deeply undervalued, as the biotechnology company is trading at an expected 2023 P/E of x12 and a P/B of x1.7. EV/EBITDA is below x9. Sanofi is trading at an approximate 25% discount to European pharma peers, anchored on both P/E and P/B. Notably, these are multiples frequently ascribed to value traps, which I see as highly unjustified. With a long term CAGR from 2022 to 2029 of about 8%, as estimated by analyst consensus (Source: Bloomberg Terminal), I argue that Sanofi should trade at a GARP valuation. Accordingly, this should imply a multiple expansion of at least 50%.
The GARP argument is supported by a strong drug pipeline. Notably for the next 24 month, investors should expect more visibility for new pharma initiatives including Fitusiran, Efanesoctocog Alfa, and Rilzabrutinib, which might kindle an upside move for the company’s shares. Moreover, I believe the market still underestimates the sales potential of Sanofi’s key growth driver Dupixent, which is estimated to more than double 2021 sales number to achieve more than >€13 billion peak sales.
Dupixent is an injectable medicine developed to treat atopic dermatitis. The drug was initially approved by the FA in March 2017 and has quickly grown to become one of the world's best-selling drugs--continuously surpassing analyst expectations. For pharma-experts and interested readers, here is a great article to learn more about the drug and its success: Dupixent drives Sanofi to hike its full-year profit forecasts.
Sanofi’s financials look very attractive. In 2021, the company generated $46.3 billion of revenues and $7.8 billion of net income (approximately 17% margin). For the same period, Sanofi expensed more than $6.7 billion of R&D investments, or about 15% of total revenues. I also like Sanofi’s balance sheet. As of March 2022, the company recorded $13.6 billion of cash and short term investments against $25.5 billion of total debt. Given that Sanofi recorded operating cash-flows of $12.4 billion in 2021, the company’s approximate $12 billion net-debt position should be no concern to investors. In fact, I see Sanofi’s financial position as more than strong enough to justify both attractive shareholder distributions and M&A optionality. Going forward, analysts are positive on Sanofi. For 2022, 2023, 2024 and 20224, consensus estimates Sanofi’s revenues at $4.3 billion, $43.9 billion, $45.85 billion and $48 billion. Respectively, GAAP net income is estimated at $8.3 billion, $8.7 billion, $9.5 billion and $10.5 billion, which indicates a CAGR of >8%. (Source Bloomberg Terminal, July 22)
While Sanofi's multiples relative to peers point to a strong undervaluation, let us now look at Sanofi's valuation in more detail. I have constructed a Residual Earnings framework based on the analyst consensus forecast for EPS 'till 2025, a WACC of 9% and a TV growth rate equal to nominal GDP growth. Although the effective cost of capital for Sanofi is considerably below 9% (about 8.3% according to the Bloomberg terminal as of 22. July 2022), I think an adjustment upwards to 9% is reasonable in order to reflect a conservative valuation.
In addition, the long-term growth assumption equal to zero might definitely be an underestimation, in my opinion, but I prefer to be conservative. If investors might want to consider a different scenario, I have also enclosed a sensitivity analysis based on varying WACC and TV growth combination. For reference, red cells imply an overvaluation, while green cells imply an undervaluation as compared to Sanofi's current valuation.
Based on the above assumptions, my valuation estimates a fair share price of $77.11/share, implying a 53.7% upside potential based on accounting fundamentals.
Although I think Sanofi is significantly de-risked at the current valuation of about x12 P/E, an investment is not without risk. The primary risk, as for every pharma company, is competitive pressure to innovate successfully and to legally protect and defend intellectual property. Apart from that, investors should consider the general risk sources such as management execution of strategic ambitions, operational efficiency and currency exposure.
In my opinion, Sanofi is an underappreciated gem. A global pharma company with strong innovation capabilities trading at a x12 PE is just too attractive to ignore. Compared to peers, as calculated by Seeking Alpha, the company is about 30 to 40 percent undervalued. This is slightly less than my personal calculated undervaluation of about 50%. I initiate coverage with a buy recommendation and set a $77.11/share target price.
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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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: Not financial advice.