Although Sanofi (NYSE:SNY) has not always gotten the attention that other major pharmas have drawn for their respective restructuring efforts, Sanofi has changed in some meaningful respects over the past few years. The company could still handle some of its internal operations a bit better, and there are definitely still some challenges to its revenue base, but investors would do well to consider one of the largest pharmaceutical companies in the world for their portfolios.
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Sanofi certainly has the scale that it takes to compete in the modern global pharmaceuticals market, as this is not only the fifth-largest drug company, but also one that is well-balanced between markets in the United States and non-U.S. markets. Moreover, the company has a sizable vaccines franchise and has been reinvesting capital in ancillary divisions like consumer health and animal care. (For related reading, see A Primer On The Biotech Sector.)
Sanofi has long had a significant presence in diabetes, thrombosis, cardiovascular, cancer and the aforementioned vaccines. While patent expirations are in the process of decimating four of the company's five largest drug franchises, the pipeline is solid. Drugs like Zaltrap (cancer), Visamerin (embolisms), Lyxuma (diabetes) and sarilumab (rheumatoid arthritis) are all significant potential revenue sources, and the company has an interesting one-two punch in multiple sclerosis. While Sanofi is developing an oral MS compound to compete with drugs from Novartis (NYSE:NVS), Biogen Idec (Nasdaq:BIIB) and Teva (Nasdaq:TEVA), the company also has an interesting infused drug (Lemtrada) in trials as well.
Sanofi's pipeline development had some major stumbles at the end of the last decade, as would-be blockbusters like Accomplia (obesity) ended badly. Those setbacks, combined with the unfortunate overlapping patent expirations of drugs like Plavix, Lovenox, Taxotere and Avapro set up the prospect of a nasty patent cliff. As a result, the company has had to rely more on deals - including the large acquisition of Genzyme; a deal that has thus far not really earned its cost.
Worse yet, the company may not be completely past some significant competitive concerns. Sanofi's oral multiple sclerosis drug could be too little too late. Worse, the company's very profitable Lantus insulin franchise (roughly one-quarter of profits) could be under attack soon - Lilly (NYSE:LLY) is trying to develop a biosimilar, while Novo Nordisk (NYSE:NVO) looks to market its own rival product.
To some extent, Sanofi's opportunities lie in fixing up issues that some investors may file under the "Bad" category. For instance, the company is still very weak in biologics and generics, and has no diagnostics offerings to speak of. The company has a deep partnership with Regeneron Pharmaceuticals (Nasdaq:REGN) that could start paying dividends in a few years, but that's not the same as having a strong internal biologics franchise.
Sanofi also has the opportunity to improve its internal efficiency. One of the biggest problems with Sanofi used to be that it held on to low-potential drugs for too long and invested too much R&D in products with small chances of success. In the past three years the company has gotten better about snuffing out low-potential candidates, but more can be done to improve the company's overall R&D efficiency and the time it takes to go from proof-of-concept to human trials. (For related reading, see Buying Into Corporate Research & Development (R&D)).
The Bottom Line
Investors should realize that Total (NYSE:TOT) and L'Oreal (OTCBB:LRLCY) are significant holders that are both looking to eventually sell their stakes (about 10% in total). Even with that overhang, though, these shares look too cheap.
Sanofi's existing drug business and near-term pipeline should be sufficient to drive revenue growth in the range of 2-4% for the next few years. At the same time, there should be a gradual improvement in the free cash flow margin - perhaps even up to the 25% level. Should that all transpire, investors could see nearly 50% returns from this name.
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At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.