Sanofi reported 4Q17 sales growth of -1.6%, impacted by the Dengue vaccine issue in the Philippine and continued pressure in its Diabetes franchise in the US. As a consequence, Business EPS declined ~9%. Sanofi has been more successful recently in its M&A strategy, which should bring back some growth to the business in the coming years. Price target and position size unchanged.
Current Price: $40.45 Price Target: $51
Position Size: 1.5% TTM Performance: +0.5%
Thesis intact. Key takeaways from the quarter:
1. Sales growth of -1.6% is disappointing
a. Vaccines sales +1.2%, negative impact from CDC order phasing and Dengue vaccine. The Philippine suspended its Dengue vaccination program on school children on fear its caused serious illness: people who never had dengue and later become infected, the vaccine may provoke a much more severe form of the illness
b. Sanofi Genzyme +16.9%, growth driven by immunology franchise (Dupixent, Kevzara), multiple sclerosis (+11%) and rare disease (+8%)
c. Diabetes -19.1% (-30% in US, while EM +8%, and Europe slight increase), Praluent and Toujeo are growing well but still on a small sales base. The pricing pressure in the US will most likely persist
d. General Medicines & EM: -2.7%
e. Consumer Health: +2.5% driven by allergy and Gold Bond brand in US and good growth in Europe from Doliprane
f. Gross margin declined 250bps, reaching 67.7%, impacted by the Dengvaxia withdrawal from the market and the loss of exclusivity in the US of its diabetes drug
g. Business operating margins -440bps y/y impacted by higher R&D and SG&A (which were expected)
2. 2018 EPS guidance is 1-3% below consensus
a. Management guided to EPS +2 to +5% at constant currency (FX negative impact of 3-4%) that includes the Bioverativ accretion and a lower tax rate
b. Global roll-out of Dupixent in 2018. Over 33,000 patients prescribed in the US
c. Benefit from US tax rate cute, lowering 2018 tax rate from 23.5% to 22%
d. More deals are a possibility: Sanofi’s CEO mentioned having 7B euros left out of its 20B euros available for M&A
3. Valuation supported by a good dividend yield and an ongoing share buyback program
a. PT unchanged on lack of catalysts
b. 4.2% dividend yield, 1% share buyback and a FCF yield of ~7% are attractive
Bioverative Acquisition Platform:
Thesis on SNY:
• Sanofi is approaching the end of its patent cliff, and is well position to grow earnings
• ROIC and ROE are likely to improve from current levels
• Underappreciated pipeline, with eighteen new product launches expected over the next four years
• Attractive dividend yield, valuation and capital allocation