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It takes a long time and a lot of effort to turn a tanker. Shareholders in French pharma giant Sanofi 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 of these Elite Investors, all among the top 3pc of equity managers monitored by financial publisher Citywire, are backing Sanofi. Their enthusiasm for the stock is so strong that not only has Citywire awarded Safoni its top AAA Elite Companies rating, but the company also ranks as the most popular in Europe based on its level of smart-money backing.
A recent jump in the popularity of the shares with top managers comes as Sanofi works on plans to spin off its consumer business, billed as a major step in Hudson’s transformation of the group which could fetch up to €20bn before 2024 is out.
“Management has been simplifying the business mix in recent years, selling their 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,” says Andrew Cox, an Elite manager backing Sanofi through his Guardian International Equity Select fund.
Of particular focus for the group are immunology medicines, rare diseases and extensions of its strong vaccines franchise.
Already the group is having success with new drugs. A child respiratory treatment called Beyfortus that generated its first sales last year is expected to reach blockbuster status – sales of over €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 of between €2bn and €5bn, if approved, and three more with €5bn-plus potential.
One of the reasons new revenue streams are so important is Sanofi’s growing reliance on its hugely successful eczema and asthma drug Dupixent.
From a standing start in 2017, last year Dupixent accounted for about one quarter of sales 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. By 2027, analysts expect revenues from the drug to be close to a third of the group total at €18.1bn.
This will be a major contributor to forecast annualised sales growth of 7pc over the period. Yearly profit growth is expected to be marginally behind at 6pc reflecting the R&D rise.
The fear of over reliance 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 both with the peer group and their own history at 11 times forecast earnings for the next 12 months. A 4.3pc dividend yield is also forecast. British investors, who can buy Sanofi shares through most brokers, must fill out the correct paperwork to minimise the impact of dividend withholding tax.
“Growth from [Dupixent] should help fund an recently increased research and development budget at Sanofi, bolstering the outlook for revenues beyond 2030,” says Cox. “We see the valuation as very compelling for this pharmaceutical heavyweight with a robust balance sheet and fine record of profit and dividend growth.”
This column agrees that the valuation looks compelling based on the prospect that the tanker will turn.
Questor says: buy
Ticker: EPA:SAN
Share price: €90.94
Algy Hall is editor of Citywire Elite Companies