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The Long Case For Sanofi

|Includes: Sanofi (SNY), SNYNF

Summary

In order to value pharma company, investor should be guided by NPV (net present value) of existing branded drugs portfolio (the "known") and risked estimated of future pipeline (the "known unknown").

The thesis is that Sanofi has greater NPV than current share price and market will sooner or later realise the value gap. Fair value estimate is Eur80, whilst current share price is trading at Eur69.

Company Description

Sanofi is a large France based international pharmaceutical company. Sanofi develops and markets pharmaceuticals with a concentration in oncology, cardiovascular disease, central nervous system disorders, diabetes, and vaccines. The company offers a diverse array of drugs with its highest revenue generator, Lantus, representing over 15% of total sales. Sanofi is subject to patent expiries on existing drugs and hence needs to develop and/or buy new drugs to sustain the sales.

Thesis & Catalyst For Sanofi (NASDAQ:SNY)

Business model

Sanofi has leadership positions in diabetes and cardiovascular, vaccines and rare diseases (Genzyme acquisition) and trying to build competitive position in oncology (despite rightly walking away from Medivation bid), multiple sclerosis and immunology. Sanofi has strong exposure in emerging markets, relatively diversified production portfolio and robust R&D pipeline.

Sanofi is launching 3 potential blockbuster drugs with >$1bln sales potential - Toujeo for diabetes, and pipeline drugs Praluent for lowering cholesterol and dupilumab for immunology disorders.

Company is facing challenges and pricing pressures on insulin (Lantus is 15% of sales) following patent expiry in 2014/15. This is causing market to remain concerned on earnings visibility as competition is on the way.

Key risks to the thesis

-Insulin (Lantus) pricing and market competition more intense than expected

-New products don't deliver

-Management destroys value by overpaying for an expensive acquisition

Scenarios:

Bull case - €100

Market recognizes NPV embedded in Sanofi shares and gives a modest value to future R&D pipeline. No value destroying acquisition.

Base case - €80

Market recognizes NPV embedded in Sanofi shares. No value destroying acquisition.

Bear case - €70

Company realizes cash from existing product portfolio, destroy value on non-productive R&D and assume no value from future R&D pipeline

Valuation

Valuation:

By conservative estimates of many analysts, Sanofi's existing marketed drugs portfolio is worth between €70 to €80 per share. Risked pipeline is valued conservatively at €10-€20 per share. Overall, this gives Sanofi between €80 to €100 NPV per share versus present share price of €70.

Competitive Landscape

Risk profile

Sanofi has relatively low risk profile as existing drugs portfolio is known including patent expiries. Demand for drugs is inelastic with market cycle.

Revenue & EPS Outlook

EPS / PE Cons.

Period EPS PE

Dec 2015 €5.64 12.5

Dec 2016 €5.49 12.8

Dec 2017 €5.51 12.7

Dec 2018 €5.96 11.8

Supporting Documents

  1. Sanofi__SNY__-_Value_Gap_or_Value_Trap_-_04_Sep_20...

Disclosure: I am/we are long SNY.

Additional disclosure: I put my money where my mouth is and I, the author of the report, may presently or in the future hold a common stock investment in the securities mentioned in this report.