2023-12-20 08:00:00 ET
Summary
- Sanofi's Q3 results were lower than expected, causing pressure on its share price.
- The company reported a decrease in revenue, largely due to FX effects, but saw an increase in underlying revenue at constant exchange rates.
- Sanofi plans to invest in its biopharma business, streamline operations, and cut costs by €2 billion by 2025.
Introduction
Sanofi (SNY) (SNYNF) is one of the largest pharmaceutical companies in the world, but its share price came under pressure when it announced its Q3 update as the third quarter was not as strong as the investment community had anticipated. Additionally, the market was also unsure about Sanofi's plans to separate the Consumer Healthcare business from the company.
Sanofi has a very liquid US listing (one ADR represents 1/2 underlying common share), but investors could also trade in the company's securities on the Euronext Paris exchange where Sanofi is listed with SAN as its ticker symbol . The company publishes its financial results in Euro, and I will use that currency as base currency throughout this article unless indicated otherwise.
A reasonable result in the first nine months of the year
Sanofi reported a total revenue of just under 12B EUR in the third quarter of the year, which represents a decrease of 4.1% compared to the same quarter a year ago. The lower revenue was almost entirely caused by FX effects as the FX changes had a negative impact of 7.3% which means the revenue on an underlying basis and at constant exchange rates increased by approximately 3.2%.
Sanofi Investor Relations
Although Sanofi reports its financial results in Euro, the EUR represents just 20% of the revenue currency mix.
The lower revenue and the higher cost of sales had a slightly negative impact on the gross profit result, which decreased by 4.8% to 8.86B EUR, despite seeing a 12% increase in the 'other revenue' segment. The company was also able to reduce its R&D investments (in absolute numbers; the percentage of revenue invested in R&D remained stable) while the SG&A expenses also decreased but this most definitely wasn't enough to prevent a double-digit decrease in its operating income and its net income.
The company reported a total net profit of 3.2B EUR representing an EPS of 2.55 EUR per share.
Looking at the 9M 2023 results, we see a much smaller revenue decrease (and once again that entire decrease was caused by changes in the exchange rates as the revenue at constant currency actually increased by 3.9%.
Applying the IFRS rules resulted in an EPS of 2.01 EUR in the third quarter of this year as the company recorded a 562M EUR amortization of intangible assets and a 259M EUR restructuring cost during the quarter. Those restructuring costs are definitely weighing on the bottom line and as you can see below, Sanofi recorded 806M EUR in restructuring costs during 9M 2023.
Although that is a substantial 30% reduction from the 1.17B EUR in 9M 2022, these restructuring costs still represent almost 10% of the operating income before those restructuring expenses. Nothing to sneeze at, for sure. These restructuring expenses are used to further streamline the business.
While the EPS in the first nine months of the year came in at 4.76 EUR per share, these restructuring expenses had a negative impact of just over 45 cents per share.
Sanofi has reconfirmed its full-year guidance, as the company expects its underlying earnings to increase by a mid-single digit percentage at constant exchange rates. That's great, but the reported earnings will be substantially worse, as the company is guiding for an EPS decrease of 6-7% using the average exchange rates in October.
And just as a reminder, the exchange rate sensitivity table is shown below.
Sanofi has also provided more details on its ' Next Chapter of Play to Win' , its strategic plan to create long-term shareholder value. Spinning out the Consumer Healthcare division is pretty high on the list of priorities and the company would like to complete this by the end of next year, which will free up resources and focus on the biopharma business.
Sanofi also plans to invest more in that division: it plans to 'significantly step up its R&D investments' to generate more value from its own development pipeline.
And finally, Sanofi is still working on a series of cost-cutting initiatives and the company expects to cut costs by 2B EUR by the end of 2025.
Investment thesis
While the market reacted disappointed on Sanofi's Q3 update, I understand why the company would like to invest in its pipeline to ensure future growth. Looking at the initial projections for 2024, Sanofi expects its business EPS to remain stable compared to 2023 but as the company expects a higher average tax rate (21% versus 19%) the reported business EPS will decrease. In 2025, Sanofi expects a 'strong rebound in business EPS growth' as that's the first year all the planned efficiency initiatives should kick in.
This explains why the market reacted so disappointed, but I don't mind the 'short-term pain for a long-term gain' game plan, and the next few months could offer excellent opportunities to start building a position ahead of the anticipated earnings improvement from 2025 on.
For further details see:
Sanofi: Expect A Weak 2024 Leading Up To A Strong 2025