Sanofi's back-to-growth strategy fails to impress analysts

Sanofi CEO Olivier Brandicourt

If Sanofi ($SNY) CEO Olivier Brandicourt wanted to win over analysts with Friday's pronouncements about the company's future, he must be disappointed now. A slew of investment firms cut their price targets and several downgraded the shares, as the French drugmaker's strategy for future growth was outweighed by warnings about stagnant earnings for the next few years.

At its "meet the management" confab on Friday, Sanofi focused on its plans to offset slumping diabetes sales--plans that, on the surface, seem logical enough. The company said it would consider selling or spinning off two businesses, animal health and European generics, cut €1.5 billion in costs, and use the resulting cash to invest in deals and R&D.

The slim down as a route to growth is a familiar approach these days, with Merck & Co. ($MRK), Novartis ($NVS), GlaxoSmithKline ($GSK), Pfizer ($PFE) and several smaller drugmakers selling off or trading business units to bulk up where they're strong and get rid of the rest.

But as Bernstein analyst Tim Anderson wrote in a Monday note--"Quelle Horreur!" featured prominently in the title--that approach might not work for Sanofi. The two units it's considering divesting will account for about 10% of net income this year, the firm estimates. Sanofi says it would look at replacing those units with a deal the size of its 2011 Genzyme acquisition, or about $20 billion--and that might not be enough.

"It is not clear to us whether swapping out one business for another of similar size would lead to much of a net change," Anderson wrote. And Sanofi says it's not interested in a megamerger, or in the current parlance, a "transformational" deal. Bernstein downgraded the stock and cut its price target to €91.

Leerink Partners, meanwhile, called Sanofi's Friday presentation "a hard and disappointing message," and cut its own price target to $97.50. The firm lowered its expectations for Sanofi's top-seller, the diabetes med Lantus, thanks to pricing and competition, cut its forecast for sales of the new GLP-1 drug Lyxumia, and pulled the underperforming inhaled insulin Afrezza from its revenue tally altogether.

Goldman Sachs, Jefferies Group and JPMorgan Chase put even lower targets on Sanofi shares--at €81, €85 and €87, respectively.

For now, Brandicourt is new enough to the job to be able to blame some of Sanofi's problems on his predecessor, Chris Viehbacher, who got the ax about this time last year after a similar slate of bad news about the company's diabetes franchise. As the Financial Times reports, Brandicourt lamented "a series of mis-steps" in Sanofi's recent past that left it out of the hot immuno-oncology field--missteps he hopes to remedy by investing in the field, beginning with a $2.2 billion venture with favorite partner Regeneron ($REGN).

"We are not saying we will become leader ... but it means participating in a meaningful way," he told the newspaper in an interview. "We think we can leapfrog and catch up very quickly ... I know people are doubtful but we will make sure we prove them wrong."

But as Anderson points out, Sanofi's R&D history is spotty. Some newer launches aren't doing so well--consider Afrezza and its trickle of revenue for the third quarter. And Lantus biosimilars are still big threat. "The stock remains cheap relative to peers, but its uninspiring growth profile--along with a lead franchise in flux and a weaker R&D track record--says this is warranted," Anderson noted.

- read the FT story (sub. req.)

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