Sanofi SA (SNY, Financial) is one of the world's leading pharmaceutical companies, specializing in developing and commercializing medicines targeting asthma, chronic inflammatory skin diseases, rare diseases, Type 1 diabetes, cancer and more.
Investment thesis
On Oct. 27, the company released third-quarter 2023 financial results that exceeded our expectations. Sanofi's revenue was about $12.64 billion, beating estimates by $140 million and, more importantly, up 1.6% yearly. Meanwhile, its third-quarter non-GAAP earnings were $1.35 per share, an increase of 40.6% from the previous quarter.
Growing demand for its crucial products, Dupixent, Nexviazyme, Sarclisa, Xenpozyme and Praluent, continues to impact the company's financial position positively. However, its management does not plan to stop at the progress already achieved in expanding its product portfolio and continues pursuing aggressive research and development and mergers and acquisitions policies to obtain and develop best-in-class medicines.
On Oct. 4, Sanofi entered into a partnership agreement with Teva Pharmaceutical (TEVA, Financial) for the joint development and commercialization of TEV'574, a TL1A inhibitor for the treatment of inflammatory bowel diseases, including such widespread diseases as Crohn's disease and ulcerative colitis. According to the CDC, 3.1 million American adults have been diagnosed with IBD and, more importantly, this number continues to grow year over year, thereby creating significant business opportunities for the company.
Additionally, in late October, Sanofi announced plans to spin off its consumer health care business to create a publicly listed entity that could be valued at more than $20 billion, according to a Bloomberg report. One of the key goals of this decision is to improve the company's margins and focus on developing treatments in areas of high medical need.
Another investment thesis we highlight is Sanofi's dividend yield of over 4%, outperforming its key health care peers Johnson & Johnson (JNJ, Financial), Eli Lilly (LLY, Financial), AstraZeneca (AZN, Financial) and Merck (MRK, Financial).
Author's elaboration, based on GuruFocus data.
In addition to its relatively low multiples and rapid expansion of its pipeline of experimental drugs, its high dividend yield is the cherry on top of making Sanofi an attractive investment opportunity for conservative investors.
The financial position of Sanofi and its prospects
The company's reported financial results for the third quarter of 2023 were excellent, excluding lower sales of Aubagio, driven by increased competition with its generic versions and continued weaker demand for influenza vaccines relative to our expectations.
At the same time, Sanofi's forward non-GAAP price-sales ratio is 2.5, which is 33.52% higher than the sector average, indicating that financial market participants continue to remain conservative regarding its product candidates and medicines approved by regulatory authorities.
Author's elaboration, based on GuruFocus data.
A key contributor to Sanofi's revenue growth in recent years is Dupixent (dupilumab), a medicine approved by the Food and Drug Administration to treat patients with various inflammatory skin diseases, asthma and chronic rhinosinusitis with nasal polyposis.
Author's elaboration, based on Sanofi press releases.
The mechanism of action of Sanofi's product is based on the inhibition of reactions induced by the type 2 cytokines such as interleukin-4 (IL-4) and interleukin-13 (IL-13). As a result, this leads to a significant slowdown in pro-inflammatory cytokine signaling and also a decrease in the release of immunoglobulin E and chemokines, which ultimately helps in the fight against inflammatory disorders.
Sales of Dupixent amounted to about 2.85 billion euros ($3.11 billion) for the three months ended Sept. 30, up 13.1% year over year thanks to its high rate of label expansion and maintaining its high efficacy despite increasing competition in the global anti-inflammatory therapeutics market.
Author's elaboration, based on quarterly securities reports.
Moreover, due to Dupixent's mechanism of action, it has the potential to treat many other common diseases. So in partnership with Regeneron Pharmaceuticals (REGN, Financial), Sanofi is conducting clinical studies to determine its efficacy in combating various Type 2 allergic diseases.
Author's elaboration, based on Regeneron Pharmaceuticals presentation and ClinicalTrials.gov data.
On Nov. 27, the company announced that a phase 3 clinical trial evaluating the efficacy and safety profile of Dupixent for the treatment of patients with chronic obstructive pulmonary disease (COPD) achieved primary and secondary endpoints. The company's product reduced moderate or severe acute COPD exacerbations by 34% over 52 weeks compared to the placebo group. According to the CDC, about 14.2 million American adults were diagnosed with COPD in 2021, and if Dupixent is approved by the FDA for a new indication, this could significantly accelerate the growth rate of its sales as early as 2025.
On a more global scale, we believe the second key contributor to improving Sanofi's financial position will be Sarclisa (isatuximab-irfc), which works by inhibiting the ectoenzymatic activity of CD38. The company's targeted monoclonal antibody received its first FDA approval in March 2020 for the treatment of certain patients with relapsed refractory multiple myeloma (RRMM).
Global Cancer Observatory – IARC
Sanofi's product sales in the third quarter of 2023 were 97 million euros, up 22.8% year over year, driven primarily by new patient growth in the U.S. and Europe.
Author's elaboration, based on quarterly securities reports.
We expect Sarclisa sales to continue to grow in the future due to its mechanism of action, which has the potential to combat various types of blood cancers effectively.
Source: Sanofi
The French pharmaceutical company is anticipated to release financial results for the fourth quarter on Febr. 1, 2024. According to analyst projections, Sanofi's revenue for the quarter is expected to be $11.62 billion to $12.12 billion, up 2.7% year over year.
Besides, according to our model, the company's total revenue will be above the median of this range and will reach $12.1 billion. Sanofi's year-over-year revenue growth will be driven primarily by increased demand for Dupixent, Sarclisa, Enjaymo and Praluent, which partially offset declines in sales of Aubagio and Lovenox.
We expect the French company's operating income margin to reach 23% in 2023. Furthermore, this financial indicator will increase to 24.5% by 2024, mainly due to lower inflation in the European Union, growth in sales of its crucial products, regulatory approval of its medicines and expansion of its portfolio of product candidates.
Source: Sanofi presentation
Projections show Sanofi's fourth-quarter earnings per share are expected to be 90 cents. We estimate its earnings per share to be marginally higher at 92 cents, down one cent from the prior year.
Author's elaboration, based on GuruFocus data.
At the same time, Sanofi's trailing 12-month non-GAAP price-earnings ratio is 10.89, 40.69% lower than the sector average. Moreover, the forward price-earnings ratio is 11.01, which is 11.64% lower than the average over the past five years. As a result, this is one of the factors indicating the continued conservatism of financial market participants regarding the company's prospects despite significant growth in sales of many of its drugs for the treatment of cancer, rare diseases and inflammatory disorders.
Conclusion
As one of the world's leading pharmaceutical companies, some of the key risks we highlight are the loss of exclusivity of Aubagio, Jevtana, Mozobil and Toujeo, the negative impact of President Biden's Inflation Reduction Act on the health care sector and the unsuccessful spin-off of Sanofi's consumer health care business in 2024.
However, despite the risks described above, the company's extremely high dividend yield, growth in its revenue from year to year, growing demand for Dupixent, Nexviazyme, Xenpozyme and Sarclisa, aggressive R&D and M&A programs allowing it to expand its portfolio of product candidates at a relatively high pace and reducing total debt are some of the crucial investment theses that make Sanofi an attractive asset for long-term investors.
Author's elaboration, based on GuruFocus data.
We initiate our coverage of Sanofi with an outperform rating for the next 12 months.
