Sanofi SA (NYSE: SNY), a leading global pharmaceutical company, is BUY. We like Sanofi’s diverse range of businesses, which include branded pharmaceuticals, generics, vaccines, and consumer healthcare products. Sanofi has been challenged by patent expirations on two of its top-selling drugs, Lantus, for diabetes, and Plavix, for the prevention of blood clots. However, we believe that the company, now led by a new CEO, has largely moved past the most challenging period for patent expirations and expect it to benefit from continued strong demand for its multiple sclerosis drugs as well as from cost-cutting programs and recent acquisitions. The company also has a strong new drug pipeline of 84 molecular entities and vaccine candidates. Of these, 34 are in Phase 3 trials or have been submitted for regulatory approval.However, the data did show promising results for people ages 18-49.
Valuations are attractive. We like the fact that the company pays a sustainable dividend, with a yield of about 3.7%.
SNY is listed on the New York Stock Exchange in the form of American Depositary shares (ADSs), each of which represent half an ordinary share.
Over the past five years, SNY shares have gained 12%, below the gain of 25% for the index and 64% for the industry ETF (IYH).
Both sales and earnings were boosted in 1Q due to demand for Sanofi products, though results suffered in 2Q due to channel destocking, lower pharmacy traffic, and confinement-related deferrals of elective procedures. However, the company saw stronger demand in the third quarter, particularly for Dupixent and flu vaccines.
On the COVID-19 R&D front, Sanofi has been working with GlaxoSmithkline (GSK: BUY) in an effort to develop a vaccine. However, on December 11, the companies announced a delay in their vaccine program after interim data showed that the vaccine generated an insufficient immune response in older adults. The companies are now working to refine the concentration of antigen in order to provide stronger immune responses across all age groups. Despite the setback, the clinical data showed immuneresponses in participants ages 18-49 that were comparable to those in individuals who have recovered from the disease.
EARNINGS & GROWTH ANALYSIS
Sanofi is based in Paris and reports its results in euros. On October 29, SNY posted 3Q20 earnings of 1.83 euros per share, up 9% from the prior-year period at the coupon-equivalent rate (CER). Net sales grew 6% at CER to 9.5 billion euros, driven by strong Dupixent and flu vaccine demand. In U.S. dollars, using the quarter-average exchange rate of $1.17/euro, and the ratio of two ADRs per common share, the company earned $1.08 per ADR on sales of $11.1 billion.
It now expects full-year EPS to grow 7%-8%, up from its previous forecast of 6%-7%.
Sanofi is organized into four segments: General Medicines (38%, down 6% at CER); Specialty Care (29% of 3Q sales, up 24%); Vaccines (22%, up 14%); and Consumer Healthcare (11%, down 1%). In 3Q20, SNY generated 42% of its sales in the U.S. (or roughly 4.0 billion euros, up 14% year-over-year at CER), 24% in Europe (2.3 billion euros, up 4% year-over-year), and 34% in Rest of the World (3.2 billion euros, down 2%).
The company’s top-selling products in 3Q20 were Dupixent, a treatment for atopic dermatitis (918 million euros, up 69% year-over-year); Lantus, a treatment for diabetes (657 million euros, down 7%); a vaccine for polio/pertussis/hib (553 million euros, up 13%); Aubagio (505 million euros, up 7%), for multiple sclerosis; Lovenox (365 million euros, up 17%) and Plavix (205 million euros, down 40%), both used primarily for the prevention of blood clots; and Myoyzme (241 million euros, up 12%), a Gaucher therapy.
Sanofi relies in part on new products to fuel growth. In all, Sanofi’s R&D pipeline includes 84 new molecular entities and vaccine candidates, including its anti PD-1 immuno-oncology product cemiplimab, branded Libtayo, sales of which are consolidated by Regeneron. Of these, 34 are in Phase 3 trials or have been submitted for regulatory approval.
In addition to growing organically, the company has grown through acquisitions. In early December 2020, Sanofi announced that it had satisfied the competition condition related to its offer to acquire Kiadis Pharma N.V., a biopharmaceutical company focused on hematopoietic stem cell transplants in blood cancer patients. The two companies now expect to close the deal, valued at 308 million euros, in the first half of 2021. This acquisition strengthens Sanofi’s autoimmune and allergic disease categories. It also gives Sanofi control of tolebrutinib and additional BTK inhibitors that may be developed. In 3Q, the gross profit margin narrowed to 70.9% from 71.4% a year earlier. R&D expense fell 3%, while SG&A expense decreased 6%. The 3Q business operating margin was 31.9%, up 30 basis points year-over-year. Turning to our estimates, over the next few quarters, we expect revenue from continuing operations to benefit from recent acquisitions, as well as from increasing sales of multiple sclerosis products and Dupixent. At the same time, we look for reduced sales of diabetes drugs as sales of the relatively new Toujeo are unlikely to fully offset the impact of the Lantus patent expiration. We also expect margins to remain under pressure due to lower pricing for diabetes products in the U.S. As such, we are lowering our 2020 EPS estimate to $3.45 from $3.55. We look for better growth in 2021, driven by recent acquisitions and expected pipeline developments. Our 2021 EPS estimate is now $3.80, up from $3.75.
FINANCIAL STRENGTH & DIVIDEND
The company receives average scores on our key measures of debt levels, fixed-cost coverage, profitability and cash flow generation.
The company had 13 billion euros of cash and 9.6 billion euros of net debt at the end of 3Q. Sanofi had a stock buyback plan that ran for 18 months from April 2019 through October 2020. In 2019, the company repurchased 272,383 shares at an average price of 76.97 euros per share, for a total of 21 million euros; management has not disclosed its repurchase activity in 2020 and has not introduced a new plan.
The company pays an annual dividend. Along with its 4Q19 results, Sanofi declared an annual dividend of 3.15 euros per ordinary share ($1.84 per ADR). The dividend hike of 2.6% marked the twenty-sixth straight annual increase. We think the dividend is secure and look for continued modest growth based on the company’s solid cash flow. Our dividend forecasts are 3.15 euros per ordinary share ($1.84 per ADR) for 2020 and 3.22 euros ($1.88 per ADR) for 2021. We note that U.S. dollar dividends will be affected by currency translation, as well as by a $0.04 per share dividend fee and a withholding tax of up to 30% on dividends by the French government.
MANAGEMENT & RISKS
Paul Hudson joined Sanofi on September, 2019. He has also worked at AstraZeneca. Jean-Baptiste Chasseloup de Chatillon has served company’s executive vice president and as CFO since 2018. Prior to becoming CFO, Mr. Chasseloup served as CFO of the PSA Group.
Investors in SNY shares face risks. For example, management may not be able to successfully integrate businesses that it buys. Additional risks faced by investors include unsuccessful R&D efforts and regulatory setbacks for new drugs, competition from generics and other branded pharmaceuticals, and unfavorable currency translation.
Cosmetics company L’Oreal owns 9.4% of the voting rights in Sanofi.
Based in Paris, Sanofi focuses on treatments for diabetes and cardiovascular conditions as well as on specialty care and general medicines and consumer healthcare products. The company derives most of its revenues from the U.S., Europe, and emerging markets. It employs more than 100,000 people.
The shares are also trading at a low relative strength index of 43, suggesting that they could advance significantly before becoming overbought.
On the fundamentals, SNY shares are trading at 13-times our 2021 earnings per ADS forecast, near the low end of the range of 11-26 for large-cap pharma companies. We like the company’s sustainable dividend, with a yield of about 3.7%, and the fact that it has 34 product candidates either in Phase 3 trials or in regulatory review pending approval. We see value in SNY shares.
On December 17, BUY-rated SNY closed at $332.85, up $7.31.