Turning a tanker takes a long time and a lot of effort. Shareholders in French pharmaceutical giant Sanofi (FR:SAN) know this all too well. It has been heavy work at the helm for Paul Hudson, who was appointed in 2019 as skipper to refocus the group on drug innovation and growth.
The long-winded and uncertain nature of drug development has added to a sense of a plodding pace. Meanwhile, the research and development (R&D) spending needed to reinvigorate the drug pipeline is a headwind for profits. This was evident last October when Sanofi shares dropped by about a fifth on news that increased R&D would depress profits.
The shares have managed to recover about half that lost ground, but some of the world’s best fund managers are betting there could be much more to come.
A total of 30 Elite Investors, all among the top 3% of equity managers monitored by Citywire, are backing Sanofi. Their enthusiasm for the stock is so strong that it earns Sanofi a top AAA Elite Companies rating and the company now ranks as the most popular in Europe based on its level of smart-money backing.
The jump in the popularity of the shares with top managers in June comes as Sanofi works on plans to spin off its consumer business, billed as a major step in Hudson’s transformation of the group and which could fetch up to €20bn before 2024 is out.
‘Management has been simplifying the business mix in recent years, selling its large ownership stake in Regeneron, spinning out the majority of an active pharmaceutical ingredients operation, and now planning an exit from a consumer health division, all of which is sharpening the focus of the company and has improved profitability,’ said Andrew Cox, an Elite manager backing Sanofi through his Guardian International Equity Select fund.
Of particular focus for Sanofi are immunology medicines, rare diseases and extensions of its strong vaccines franchise.
Sources: Citywire/Morningstar, latest holdings data.
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Already the group is having success with new drugs. A child respiratory treatment called Beyfortus, which generated its first sales last year, is expected to reach blockbuster status – sales of more than €1bn – in 2024. Brokers forecast sales of €2.2bn by 2027.
Likewise, haemophilia drug Altuviiio, having produced an initial €159m of revenue in 2023, is also expected to become a blockbuster, with €1.4bn forecast for 2027.
There could be much more to come as Sanofi estimates peak sales for nine treatments in its pipeline, if approved, of between €2bn and €5bn, and three more with €5bn-plus potential.
One of the reasons new revenue streams are so important is Sanofi’s growing reliance on is hugely successful eczema and asthma drug Dupixent.
From a standing start in 2017, Dupixent accounted for about a quarter of sales last year, at €10.7bn, making it the largest contributor to the top line and some way ahead of the €7.5bn from Sanofi’s well-established vaccines business.
Dupixent sales are expected to continue to soar, with Sanofi currently seeking approval to use the drug as treatment for emphysema. Analysts expect revenues from the drug to be close to a third of total sales, at €18.1bn, by 2027.
Dupixent will be a major contributor to forecast annualised sales growth of 7% by 2027. Yearly profit growth is expected to be marginally behind at 6%, reflecting the R&D rise.
‘Its marquee drug Dupixent, a leading treatment for asthma and atopic dermatitis, is now expanding its range of approved indications,’ said Cox. ‘Meanwhile, the company has a sizeable vaccine and rare disease drug portfolio that we think will continue to be a dependable financial contributor.’
The fear of overreliance on Dupixent is because patent protection ends in the early 2030s when cheap generic competition will be allowed to muscle in.
This threat down the line helps explain why, despite the decent growth outlook, Sanofi’s shares look cheap compared with its peer group and its own history, at 11 times forecast earnings for the next 12 months. A 4.3% dividend yield is also forecast.
‘Growth from [Dupixent] should help fund a recently increased research and development budget at Sanofi, bolstering the outlook for revenues beyond 2030,’ said Cox. ‘We see the valuation as very compelling for this pharmaceutical heavyweight, with a robust balance sheet and a fine record of profit and dividend growth.’
Given its valuation, it is not hard to see why top managers are betting so enthusiastically on this tanker turning.
| Key facts – Sanofi | |||
|---|---|---|---|
| Market capitalisation | €115bn | Price | €90.94 |
| Net debt | €9.71bn | Net debt/Ebitda | 0.7x |
| 52-week high/low | €104.32 / €80.60 | Return on capital employed | 9.7% |
| F’cst price to earnings | 11.1 | F’cst dividend yield | 4.4% |
| F’cst EPS growth | 4.3% | 12-mth share price | -7.2% |
Source: FactSet. EPS = earnings per share. Ebitda = earnings before interest, tax, depreciation and amortisation. Forecasts based on next 12 months.
A version of this story originally appeared in The Telegraph’s Questor column.
