Sanofi Q1: Wait And See For Now (Downgrade)

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Sanofi acquired Inbrx to add lung disorders to its treatment portfolio, with an estimated sales peak of €600 million by 2032.The company settled 4,000 lawsuits related to Zantac, which is not expected...

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Therefore, we moved our rating to a neutral status.Panama7 Sanofi (NASDAQ:SNY) (OTCPK:SNYNF) (NASDAQ:GCVRZ) released its Q1 results update on April 25th. Here at the Lab, since 2022, our team has extensively covered the company, and following A Shift In Sanofi Equity Story, in November 2023-end, we decided to lower our internal estimates. Our buy rating was supported by Three Main Reasons: 1) a solid balance sheet, 2) a pipeline advancement, and 3) an attractive valuation. Since then, Sanofi's stock price has only gone up by 4.79%, confirming our status as a \"show me story.\" At that time, despite maintaining a buy rating, we lowered our 2024 EPS projection, reporting the following:  Limited pipeline catalysts until 2025; Higher R&D costs; A new spin-off in the consumer division; No 2025 profitability targets.  After the Q1 update, the company showed declining EPS for the year. In addition, by year-end, Sanofi will spin off its consumer division, creating uncertainty on a twelve-month basis. For this reason, we decided to apply additional changes in our estimates, leading us to downgrade to a Hold. Mare Ev. Lab Rating Status Sanofi's Latest News Firstly, in the Q1 results, Sanofi presented its numbers with a new CFO, Francois-Xavier Roger (ex-Nestle). Since our last coverage, Sanofi acquired Inbrx for $1.7 billion, and there is positive news on Zantac Litigation (one of Mare Evidence Lab's risks). On 04/04/2024, the French pharmaceutical company agreed to settle 4,000 lawsuits in the United States. The US FDA required manufacturers to withdraw Zantac drugs from the market in 2020. Sanofi did not disclose the financial terms of the compensation. However, they assured Sell-Side analysts they will not significantly impact the company's balance sheet as it reflects \"the limited period during which Sanofi has marketed Zantac.\" As a reminder, Sanofi was accused of not disclosing to the patients that Zantac could cause cancer. The agreement reached will apply to pending court disputes, where most cases (20,000) remain pending. That said, here at the Lab, we were positive on Zantac lawsuits, and we believe Wall Street will continue to lower the financial burden for Sanofi. Related to the Inbrx acquisition, the company agreed to acquire the US biopharmaceutical company in early January 2024. The operation will allow Sanofi to add lung disorders to its treatment portfolio. In detail, Inbrx-101 is a human recombinant protein that promises to enable patients with alpha-1 antitrypsin deficiency to normalize serum Aat levels with less frequent dosing (monthly rather than weekly). Inbrx-101 completed the FDA Phase 1, demonstrating positive safety results, and is enrolling in Phase 2. Given Sanofi's rare disease expertise, we believe this acquisition has a strong business rationale. According to our estimates, the Inbrx-101 launch will take place in the United States during 2026, with longer regulatory times outside the US due to more rigorous clinical trial requirements. This is due to the Fast Track designation granted by the FDA. This status expedited review to facilitate drug development that treats life-threatening conditions and fills medical needs. As usual for new drugs, we estimate a sales peak of €600 million by 2032 with an 80% probability of success. Only in the USA, there is a potential market for almost $3 billion in annual sales. While, in the European region, this field is currently dominated by Grifols (GRFS), another company our team covers. In numbers, Grifols' Prolastin dominates the market with a share of 70% and a turnover of around €750 million. That said, this market is significantly underdiagnosed, with less than 10% of patients under treatment. Inbrx sales potential Source: Inbrx Investor Presentation Earnings Results and Our Changes In Q1 2024, the company's top-line sales increased 2.4% to €10.46 billion. FX movements had a negative effect of 4.3% (Fig 2). Dupixent turnover was up 24.9% to €2.83 billion, and the company confirmed a turnover pickup of €13 billion (Fig 1). This was already aligned with our past coverage. As a reminder, we also anticipated a limited R&D pipeline with higher costs. Indeed, this was already evident in Q1. In numbers, the company's R&D expenses grew by 11.8%. This was supported to reflect a strategic shift of resources into drug development stages. Dupixent expectations Source: Sanofi Q1 results presentation - Fig 1 Essential to report is a change in Sanofi's effective tax rate. The company increased tax expectations from 19% to 21.0%. Including this impact, the company expects 2024 EPS to decrease to a single digit. Including the Q1 FX changes, the currency impact on 2024 EPS is estimated to be between minus 5.5% and 6.5% (Fig 3). Sanofi Q1 P&L Snap Fig 2 Sanofi EPS guidance Fig 3 In our previous numbers, our updated core EPS forecasts were 10-12% below consensus, reflecting higher research and development investments and headwinds in the GenMed segment. Before going to our financials update, it is essential to report the latest CFO and CEO comments. Starting with the CFO, Sanofi's capital allocation was a key topic. The CFO does not exclude share repurchases if the company cannot find suitable bolt-on acquisitions. Following the consumer separation and increasing the EPS is an optionality. On the analyst call, the management team said all options were open. The CFO confirmed that during his Nestlé time, he had never missed guidance. He also has a similar approach to our guidance: under-promise with over-deliver. He also emphasizes that he is not interested in cost-cutting, but has an approach with a solid focus on cost control. From what we understood, M&A is an optionality in the $2-5 billion range. On his CEO note, he discussed Dupixent patents beyond 2032. There is a patent cliff, and he debated fragmenting the franchise with approximately 40 additional innovation patents. That said, there were not many details. After Q1 results and following the Inbrx acquisition, we now forecast sales of €47.75 billion and EBITDA at €12.8 billion. Including higher R&D expenses, we are lowering the company's business operating margins to 26.5%. In addition, including a corporate tax rate of 21%, our core EPS moved from €8 to €7.1. Q1 business earnings per share reached €1.78 and were down by 17.6% on a reported basis. As a reminder, In our numbers, our previous Sanofi estimates were set at a 7.5% EPS growth. After the Q1 update, our new forecast is aligned with the company's latest 2024 outlook. On the debt part, we now forecast a €11.5 billion financial obligation by year-end. That said, Sanofi has deleverage potential thanks to a solid FCF generation at approximately €4 billion per year. Valuation Methodology Lowering our 2024 EPS projection, we decided to cut our rating to neutral status. As a reminder, Sanofi has always traded at a discount compared to its EU pharmaceutical peers. As we reported, we now believe that Wall Street will likely wait for the consumer spin-off and the new R&D development to draw attention. Here at the Lab, given the rich pipeline catalyst expected in the next two years (Fig 5), we still think the company is a growth pick in the next visible period. In line with the historical average, we applied our P/E target of 12x and arrived at €85 per share target price (from a previous target price of €96 per share). This change is due not to an adjustment in our valuation methodology but a declining EPS in the current year. An EV/EBITDA multiple analysis also backs our valuation. In detail, considering Sanofi's historical EV/EBITDA average of 9.5x and considering our EBITDA 2024 projection (€12.8 billion) and an €11.5 billion financial debt, our equity value is at €110 billion vs a current market cap of €116 billion. Therefore, we see a balance of risk/rewards, and on our EU Pharma coverage, we prefer Novartis (Higher Guidance, Now A Buy) and Roche (Strong Long-Term Potential Overshadowed). Risks Sanofi company-specific risks include higher Dupixent competition and the launch of LLY's Ebglyss (lebrikizumab), higher R&D costs to replace Dupixent forward sales, failure in Sanofi's pipeline (Fig 5), ongoing litigation with negative results from Zantac, further pricing risk, and regulatory changes. In addition, we could report lower-than-expected market penetration for new launches Beyfortus and Altuviio and the unfortunate currency movements. Sanofi reported in € terms, while 79.4% of the total company's sales are generated outside Europe (Fig 4). In the figure below, there is an EPS sensitivity on 2024 numbers. Sanofi FX Sensitivity Fig 4 Sanofi 2024/2025 pipeline Fig 5 Conclusion Lower company guidance and a higher tax rate weigh Sanofi's EPS and target price. We still believe the company has potential; however, we are more cautious about the consumer spin-off and the R&D story. On a twelve-month basis, we prefer to move our rating to a neutral status and wait for Sanofi's next steps.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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