2023-11-28 01:23:58 ET
Summary
- Limited pipeline catalysts until 2025 mean a "show me" story status.
- Higher R&D costs and uncertainty for the future.
- A new spin-off in the consumer division with no 2025 profitability targets. Sanofi is still attractive, but we are lowering our target price.
At the Lab, we extensively cover Sanofi and the EU pharmaceutical environment ( SNY , OTCPK:SNYNF ). Following our positive readouts on Zantac Litigation , we decided to increase our long-term position, and this was supported by Three Reasons : 1) pipeline advancement, 2) solid balance sheet, and 3) attractive valuation.
Following the Q3 results and considering Sanofi's step up in research and development investment to fund the pipeline, our internal team has decided to cut our forecasted 2024-2025-2026-2027 EPS in the 8-10% range. While an R&D step-up might make sense, many of these investments will not be visible for at least three years due to a Phase III readout post-2026. Sanofi will disclose a pipeline update on December 7; however, here at the Lab, we believe a pipeline re-rating will take some time. In Q3, the company also communicated a consumer division IPO/spin-off at the end of 2024.
Source: Sanofi Q3 results presentation - Fig 1
Changing the Narrative
In our view, the French pharmaceutical giant was previously seen as a safe and defensive player within the sector. This was supported by visible mid-single-digit top-line sales and high single-digit EPS growth until 2030, thanks to the lack of patent expiry and lower competitive pressures from biosimilars. In addition, compared to Roche and Novartis , we had a lower risk to pipeline expectations. After the Q3 results, the CEO removed 2025 profitability targets and increased R&D pipeline investments. This directly poses the company to lower earnings projections and has changed our investment equity narrative, turning Sanofi's buy rating thesis into an R&D execution story over the next visible period (2024-2030).
There are now new risks to consider in our forward-thinking estimates:
- Sanofi has limited R&D pipeline catalysts until 2025. Therefore, here at the Lab, we see that long-term growth has a show-me story , and we believe we will likely need time. In addition, new investments are coming in a momentum where investor expectations and visibility are limited. In detail, Sanofi forecasts seven drugs will deliver top-line sales of €2.9 billion by 2030. Looking at the visible period, there are just three pipeline catalysts in 2024: 1) tolebrutinib pivotal (where we continue to see a challenging US market due to the FDA stance on needing to see a favorable risk-benefit profile and an ongoing partial clinical trial related to liver enzymes), 2) Amlitelimab in asthma (phase III), and 3) Rilzabrutinio data readouts (Fig 2);
- The other investments in multiple sclerosis (frexalimab), Ulcerative Colitis and Crohn's disease (TLIA TEV574), and pneumococcal disease (PCV21 ) will not be visible for at least three years, and we are not taking into account financial estimates for drugs in the Phase II process;
- For 2024, including a minus 5% decline for GenMed, we forecast Sanofi sales to grow at 5%, thanks to 21% growth in Dupixent. Despite that, including incremental R&D expenses of €1 billion, we see Sanofi's business operating margins falling to 28.3%. This, coupled with a higher tax rate of 21% (Fig 4), leads our EPS estimates to decline by 8% to €8.00. This also aligns with Sanofi's guidance for a low single-digit decline in Business EPS in 2024. In our previous guidance, the Sanofi tax rate was set at 19% (Fig 3).
Fig 2
Fig 3
Fig 4
Following the results, we arrived at a 2023 EPS of €8.26, while in 2024, Sanofi's internal estimates are set at €8. 2025-2026 EPS are at €8.35 and €9.45, respectively. In our numbers, our previous Sanofi estimates were set at a 7.5% EPS growth until 2028 compared to an industry average of 7%. In line with management commentary, our updated core EPS forecasts stand 10-12% below consensus, reflecting higher research and development investments, headwinds in the GenMed segment (Fig 5), and a higher tax rate. Despite that, we decided to leave our Dupixent projection unchanged with our revenue model analysis, which predicts a turnover pick of €13 billion. Today, the company also announced positive news on the Dupixent blockbuster. The drug significantly reduced COPD exacerbations in the trial, likely accelerating FDA submission. Dupixent will become the first approved biologic drug for this severe disease.
Fig 5
Conclusion and Valuation
Sanofi's valuation is still attractive. Despite that, we lowered our 2024 EPS projection, deciding to cut our buy estimates. Ex-Novo Nordisk A/S, the French pharma player, trades at 20% and 18% on a 2024 P/E basis and EV/EBITDA discount, respectively. Even if we lower the EPS projections due to a mixed R&D productivity track record and higher R&D expenses, the company is set to grow over the next visible period. Here at the Lab, we now believe that Wall Street will likely wait for the R&D story to play out, and this valuation discount will probably lower over the mid-term. Therefore, applying a 12x P/E target (in line with the historical discount) to our €8 EPS 2024 projection today, we arrived at a valuation of €96 per share ( from €115 per share ). We still have an overweight valuation, but we are more cautious until there is more visibility on the consumer spin-off. Sanofi's buy thesis has moved from a consistent earnings growth story with limited Loss of Expiration risks to an R&D execution story until 2030. Sanofi is no longer our Value Pick .
For further details see:
Sanofi: A Shift In The Story