Sunday, September 9, 2012

Sanofi Aventis Equity Research

The two most obvious things about health care are that Dr. Dre is not actually qualified to give medical advice and that every diversified investor’s portfolio, particularly in this environment, should have a high yielding large cap health care stock. I think Sanofi-Aventis $SNY is a stock that US investors should look closely at. Despite being one the big pharma stocks most affected by a patent cliff, it has successfully restructured and underlying growth is good.  The Genzyme acquisition has added growth and there is upside in the stock following resolution of some production issues. Moreover, it has a specialization on emerging markets and some exciting products in the pipeline. Throw in a 4.2% yield and the story is compelling.

Investors should not underestimate the sector. I spent much of 2008 trying to put some biotech investors together to create a fund in the UK and for good reason. In the UK, the three listed investment trusts recorded mid-teens returns despite the overall carnage.

Sanofi Dealing with its Patent Cliff

A few years ago Sanofi was faced with a significant patent cliff. From 2010-12, Sanofi had nine products going off patent. From an investors perspective this was always going to create a dark cloud that obscured the underlying growth. To put this into context, sales of the key genericized products declined from E2.21 billion  in Q2 2009 to E752 million in 2012. In contrast, sales from its growth platforms increased from E3.34 billion in Q2 2009 to E5.75 billion now. In other words, Sanofi has more than compensated for its losses to generic competition in the last three years.

In addition, there is good and bad news on this front. The bad news (I know you want it first) is that its second biggest product Plavix (blood clot prevention) which currently represents 6% of sales was off patent as of May. Moreover Lovenox (deep vein thrombosis) and Taxotere (chemotherapy) reported declining sales due to generic competition and Eloxatin will face similar completion from August 2012.

The good news is that, from the end of this year, there really isn’t any more bad news!

Sanofi will have largely come out of the patent cliff issue, comparables will get easier and it will start to look like a balanced pharmaceutical company with a diverse set of end markets, an exciting pipeline, and a strategic focus on diabetes and emerging markets.

Sanofi’s Growth Prospects

The company has long had strong emerging market exposure and it is the single biggest geographic segment with 31.8% of sales, moreover sales to emerging markets grew at 9.8% in the quarter. Favorable demographics and an overall increase in health care provision in these countries should drive growth for years to come in these regions and Sanofi is well placed in most of them. Everyone focuses on the BRICs but actually Sanofi sells nearly double to the non BRIC countries in the emerging market world.

Not only is Sanofi diversified geographically but its end markets are, too. The Genzyme acquisition gives it a specialty in rare diseases, while its strong diabetes franchise gives it exposure to one of the strongest growing emerging market indications. Sanofi is also set to record high single digit growth in consumer health and decent growth in animal health and vaccines.

A key aspect to this diversification is that much of these end markets leave the company with relatively little risk exposure (within the pharmaceutical world) to reimbursement issues or susceptibility to Government cutbacks.

It is interesting to contrast this strategy of diversification with that of a company like Pfizer $PFE which has taken the opposite route and decided to divest operations in a bid to return to its core competency. Pfizer is attractive in its own right, but its management have chosen a different way to deal with the patent cliff.

However, Sanofi’s principle near to mid-term risk comes from another source. Whilst it is the world’s leading player in diabetes and Lantus (long-acting insulin) saw sales rising nearly 17% in the quarter. It might come under pressure from competition in future from Novo Nordisk $NVO and Degludec.

I have more detailed information on the issue in an article linked here.  Since that article was written, the FDA has delayed approval of Degludec until after an expert review. Clearly Degludec approval is not a ‘done deal’ and even if it is, it would unlikely be on the market until 2013. Nevertheless Sanofi investors need to appreciate the risk.

Sanofi investors also need to appreciate the reward!

Sanofi’s Exciting Pipeline

Looking at regulatory milestones due in Sanofi’s second half there are decisions due for Aubagio (MS) and Lemtrada (MS) and it has an exciting PCSK9 inhibitor entering into phase III with Regeneron Pharmaceuticals $REGN.  Sanofi claim that in three phase II studies it was able to reduce LDL-Cholesterol by as much as 70% on top of high dose statins. It faces competition from the likes of Roche (NASDAQOTH: RHHBY.PK) but the timeline suggests it could be the first in class to get approved.

Another exciting development is a potential vaccine for dengue fever; a virus for which there is no available treatment. In addition, further upside could come from an increase in sales from the resolution of production problems at Genzyme and supply issues in vaccines.

The Bottom Line

In conclusion, Sanofi looks attractively priced for a company that has a good pipeline plus exposure to some fast growing markets. There is certainly risk with Lantus and the usual caveats over cuts in Government expenditure on health care need apply. However, every stock should be analyzed on a risk/reward basis and I think Sanofi provides good value.

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