Sanofi’s CEO, Paul Hudson, has unveiled a plan to rejuvenate the pharmaceutical group’s lagging valuation, but investors are skeptical. Following the announcement, shares in the French drug giant plummeted by 15%. The strategy involves increasing research and development (R&D) spending to bolster the development of new drugs, resulting in a projected decline in earnings for 2024. Sanofi also intends to spin off its consumer health unit by the fourth quarter of 2024.
The decision to prioritize the search for new blockbuster medicines is a logical move for Sanofi, as the industry as a whole is facing the expiration of patents on top-selling drugs, leaving them vulnerable to competition. Ernst & Young estimates that approximately $200 billion worth of branded drugs are at risk. However, investors’ concerns are justified given Sanofi’s historically below-average returns on R&D investments. Analysts at Berenberg estimate that between 2016 and 2022, Sanofi only achieved an average annual return of 6%, compared to the sector average of 10%.
This underperformance is reflected in the stock’s price-to-earnings multiple, which is currently lower than that of its competitors. By divesting its consumer healthcare business, Sanofi hopes to improve its valuation. Analysts predict that the division will achieve an operating profit of €1.6 billion this year. If valued at a multiple of 15.6 times, as Haleon’s comparable business is, it could be worth €25 billion. The remaining Sanofi business is expected to generate an operating profit of €11.4 billion, which, valued at a multiple of 15.1 times 2023 EBIT, could be worth €172 billion. Together, the two segments could be valued at €197 billion, representing a significant increase of 76% compared to Sanofi’s current market capitalization.
However, the challenge lies in convincing investors to accept the short-term sacrifices necessary for long-term success. Sanofi’s plan requires patience and trust from shareholders, as it envisions a temporary decline in earnings before a “strong rebound” in 2025. The market’s negative reaction to the announcement indicates a reluctance among investors to embrace this medicine with confidence.
It remains to be seen whether Sanofi’s prescription will ultimately revive the company’s valuation. The path to finding new blockbuster drugs is undoubtedly a crucial one, considering the impending expiry of patents within the industry. However, the success of this strategy hinges on the ability to deliver robust returns on R&D investments. For now, it seems that investors are not willing to endure the short-term pain for the promise of long-term gain.
More detail via Reuters here… ( Image via Reuters )