Brandes Investment Comments on Sanofi

Sanofi is one of the world’s largest pharmaceutical firms, with a well-diversified business portfolio that includes pharmaceuticals, generics, vaccines, and consumer care products. The company is also diversified geographically: the U.S. and Europe represent approximately 40% and 25% of total revenues, respectively, while emerging markets and Asia make up the rest. Sanofi has top positions in drugs aimed to combat rare genetic diseases, and in a broad range of vaccines and consumer products.

We have held Sanofi in various portfolios for well over a decade. At the time of our initial purchase, Sanofi, along with many of its pharmaceutical peers, was struggling with several challenges, including patent expirations for its large products, increased competition, and poor research and development (R&D) productivity. We believed these issues led the market to be overly pessimistic about Sanofi’s long-term prospects.

While revenues were impacted by patent expirations, Sanofi managed the difficult period through cost reductions, asset restructuring, and strategic capital deployment. At the same time, Sanofi continued to strengthen its pipeline through investing a meaningful portion of its revenues in R&D, licensing, and bolt-on acquisitions. During this past decade of transformation, the company has been able to consistently generate healthy free cash flow, continuously increase its dividends, and optimize its business portfolio through divestments and acquisitions. Furthermore, the launch and subsequent success of asthma/atopic dermatitis medication Dupixent (co-developed with Regeneron) has helped the company revert to revenue growth.

Recently, investor concern about the uncertainty related to the litigation focused on heartburn medicine Zantac led Sanofi’s share price to decline meaningfully, driving its market cap to drop by over $20bn in a week’s time in August 2022. While the market seems to assign close to a worst-case scenario, we believe the ultimate liability will likely be split among multiple companies and any subsequent charges may take some time to be paid out.

Despite this recent market negativity, we believe Sanofi merits a continued inclusion in our portfolios. We appreciate the company’s ongoing efforts to cut costs and strengthen its margins. The pipeline has been improving, revenues have been growing, and there is minimal patent expiration risk over the next few years. We also take comfort in the substantial value of Sanofi’s franchises in vaccines and consumer products, which the market may be underappreciating. Moreover, litigation risks have always been a consideration in our valuations for pharmaceutical firms, and we reflect this in our assumption of a higher cost of equity/higher discount rate for these businesses. We believe Sanofi has a strong balance sheet that should help protect the downside of potential damages related to the litigation. At its current valuation, Sanofi offers an appealing margin of safety to us.