Sanofi S.A. is a French multinational pharmaceutical company headquartered in Gentilly, France, as of 2013 the world's fifth-largest by prescription sales. The company was formed as Sanofi-Aventis in 2004 by the merger of Aventis and Sanofi-Synthélabo, which were each the product of several previous mergers. It changed its name to Sanofi in May 2011. The company is a component of the Euro Stoxx 50 stock market index.

Investment Rationale

We added Sanofi to the CC equity list with a price target of €95.

Bull case Price Target - €120

Bear case - €87

Our recommended Price Target - €95

We like Sanofi because it is trading at a discount to its peers. The discount is due to a court rejecting the sale of the drug ‘Praluent’ in the US because of patent issues with a US company selling a similar drug. Sanofi has appealed this court decision to ban its flagship drug. The shares of Sanofi have recovered in the interim because till the court of appeal makes a decision, Sanofi was allowed to continue selling the drug in the US.

Obviously, because of this uncertainty, the shares are trading at attractive levels compared to their peers.

Valuation

* Earnings per share consensus for 2017 is €6/share.

* Sanofi is trading on a P/E of 25x

If we had to assume that Sanofi trades on its average long term P/E of 20x and issues are solved, we expect the shares to trade closer to a price target of €120 per share.

In the short term however, the trade ban remains an issue and we will know whether or not the court of appeal will vote in favour of Sanofi in H217. Praluent is material to the Group because it is expected to account to 20% of sales by 2022.

The market is uncertain of how the court will decide. However, Sanofi’s argument is that the amount of patients who need this drug has continued to increase and it doesn’t make sense that patients are made worse off. They also are looking into the possibility of paying patents to the US company with the patent in order to be able to continue selling the drug in the US.

What’s a positive is that the market knows all of this there is no surprise. If the court votes in favour of Sanofi the share will rally. Also, we believe the downside is priced in. JP Morgan which are pricing in that the court will not vote in favour of the deal have a price target on Sanofi of €87.

The positives:

* ongoing cost savings

* share buyback

* momentum from new launches

* growth through acquisition

* increased growth prospects

If the court case votes against Sanofi, we have a price target of €87 which is slightly below the current market price indicating the worst case scenario is priced in. On the other hand, if the court of appeal gives the go ahead to Sanofi we expect the price to rally to €120. Vote can go either way, however, upside is much larger than the downside at this stage.

In a market where valuations are tight given the strong rally in the markets, a stock like this can generate significant alpha in a portfolio. Treat as a satellite in a portfolio.

 

This article was issued by Kristian Camenzuli, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.  

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