Sanofi: Strong domestic portfolio keeps Street positive amid pricing pain

The Sanofi stock has rebounded close to 15 per cent from its lows in June. The firm’s growth momentum continues as expected, and this is evident from its June quarter performance. The 9.4 per cent year-on-year (YoY) growth was better than the industry growth rate of 9 per cent. This was largely driven by its domestic portfolio.

The company’s four key products —Lantus, Amaryl M (both for diabetes), pain relief medication Combiflam, and anti-allergic Allegra — which feature among the top 100 pharma brands, posted robust performance.

The anti-diabetic portfolio, with Amaryl and its line extensions Toujeo and Lantus, contributes about 30 per cent to domestic sales. Analysts at Elara Capital say the company’s portfolio being skewed toward the high-growing chronic products, coupled with its leadership position in basal insulin, gives it an edge over its peers.

Besides, Sanofi derives 18 per cent of its revenues from price-controlled products that are now seeing price hikes (about 4.9 per cent hike in April 2019). Analysts at Centrum Broking expect Sanofi to maintain the growth momentum on the back of new product launches. They also expect the firm to take up a 10 per cent price increase in non-DPCO products.

Exports contribute 30 per cent to Sanofi’s revenues. The 25 per cent growth in exports during CY18 was led by volume growth, and aided by a 10 per cent rise in the euro against the rupee (given most exports are directed towards Europe).

The company expects to maintain volume growth, even though the favourable currency movement may not repeat in CY19.

However, concerns remain over rising raw material costs, which continued to be higher during the June quarter — continuing the trend seen in the March quarter. Earnings before interest, tax, depreciation, and amortisation thereby missed analyst estimates and declined 4 per cent YoY.

This has led analysts to tweak their forward estimates. Centrum Stock Broking has reduced earnings estimates by 6.5-12.0 per cent for CY19/20, adjusting for higher material cost.

Motilal Oswal Financial Services, too, has cut its earnings estimates by 4-6 per cent for CY19/20. However, broad-based growth in legacy and smaller brands, along with evenly spread growth at the portfolio level in terms of volume, price hikes and new launches, makes them positive on the stock.

Analysts also expect domestic-oriented pharma companies to attract higher valuation compared to those having a US exposure.

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