(News Bulletin 247) – The pharmaceutical group lost 18.9% last Friday. But several analysts believe that this violent market reaction has been exaggerated and believe that the stock has potential.

It was the big shock wave in the market at the end of last week. The pharmaceutical group Sanofi saw its action plunge by 18.9% on Friday, the heavyweight of the Parisian stock market showing a historic decline. And to think that a little over ten years ago the company surpassed Total on the CAC 40 and became the largest capitalization on the Paris Stock Exchange…

Since its fall on Friday, the company has only very moderately recovered on the stock market. The stock gained 3.3% on Monday, 1.9% on Tuesday and is currently up 1.2% on Wednesday.

Let us recall the causes of the violent stock market sanction suffered by Sanofi. The group disappointed expectations a little in the third quarter but above all unveiled a new strategic plan “Play to Win”, which caught the market cold.

As part of this plan, the company indicated that it intended to strengthen its R&D investment spending to revive its growth, while generating savings of 2 billion euros between the end of 2024 and the end of 2025.

Due to these more intense R&D expenses and less favorable taxation, Sanofi expects its net income per share of activities, its main profitability indicator, to decline in 2024 “at the bottom of the range single digit”, i.e. between 1% and 4%. However, analysts were counting on an increase of 6% next year, according to a consensus cited by Oddo BHF.

Second negative element: the group explicitly renounced its objective of operating margin of 32% in 2025. This while the market hoped that the company could reach and even exceed this target.

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The lack of growth drivers to replace Dupixent

Hence the drop in Sanofi shares of almost 19%. “While this reaction may seem very severe at first glance, it is in reality the difficulties in delivering on several aspects of its business for several years, as well as the prospects which are dimming in the short term that the market is sanctioning. “is an almost knee-jerk reaction to a speech which no longer convinces due to the failures or the lack of clear success in the actions undertaken for several years”, Invest Securities dissected on Tuesday.

The design office highlights, among these negative elements, the current absence of a mature relay to succeed Dupixent, Sanofi’s blockbuster drug which constitutes its great source of growth, but whose first patents begin to expire in 2027, according to Invest Securities. And from this point of view, the results of Sanofi’s recent company acquisitions to try to strengthen its product portfolio have been “mixed”, notes Invest Securities.

The group will therefore work hard on R&D to develop products that will support its growth. “But this option assumes a time-to-market of several years for possible new drugs identified by this bais. This strategy therefore does not meet the need for short-term relay to renew the portfolio of marketed products. On average, it takes between 8 and 10 years to bring a candidate that enters the clinic to the market, with a failure rate of between 90-95%,” Invest Securities slices.

Attract attractive targets

Other research firms are more confident in Sanofi’s prospects. On Tuesday, HSBC bank confirmed its buy advice on the stock while adjusting its price target to 110 euros from 120 euros, a target which grants a potential of more than 25% to the stock.

The Sino-British bank judges that investors “overreacted” last week. “The market may not be completely confident in the returns on R&D (…) in a context of higher interest rates,” recognizes the establishment.

But HSBC considers that the intensification of Sanofi’s R&D spending could allow it to attract potential promising targets for mergers and acquisitions operations.

It should be remembered that takeovers of innovative companies constitute an important pillar of growth in the pharmaceutical sector and that Sanofi has recently seen several takeover opportunities pass under its nose to the benefit of its competitors.

“The main challenges for attracting targets in a highly competitive situation are to present a strong balance sheet, limited headwinds, and a healthy R&D culture. (Sanofi) already ticks the first two boxes, given its contained headwinds in terms of patents, its limited legal battles and its healthy balance sheet. By increasing the rate of R&D spending the company could signal to innovative biotechs that its corporate culture is favorable to innovation”, develops the bank.

Getting closer to Swiss groups in R&D

Furthermore, HSBC welcomes the group’s decision to split its Consumer Health division (Doliprane, Allegra, non-prescription medicines), which will be listed on the stock exchange by the end of 2024. The bank considers that this operation will constitute a catalyst who will carry out the group’s action. This division represents approximately 12% of Sanofi’s assets for an enterprise value of 21 billion euros.

The independent research firm AlphaValue judged on Friday that Sanofi was “a victim of (unjustified) market panic”. The “short-term pain” comes from the focus on R&D which, along with the 2024-2025 cost reduction program, should bode well for Sanofi’s organic growth and margins in the longer term. Overall, investors must remain vigilant, because the value lost today should soon be recovered,” he warned.

The research office notes that the group spends less than its Swiss competitors (Roche, Novartis) on R&D, in terms of expenses compared to turnover (15% for the French group compared to 19% for the Swiss). And closing the gap, Sanofi should improve its long-term organic growth prospects, AlphaValue believes, adding that the company’s targeted savings will allow it to reduce its cost base. Thus, the company considers Sanofi’s decisions “pragmatic”.

“Short-term pain” but “long-term gain?”, Stifel asked on Monday. “Fundamentally, Sanofi is asking for complete confidence in the pipeline (products in development, Editor’s note) under construction, with more information coming on December 7, 2023 during the R&D day in New York,” explains the bank.

“Today we know the price the company intends to pay and we hope that tomorrow we will know more about the expected return on investment,” she adds. If Stfiel says he understands the group’s decision, the bank believes that Sanofi could have better prepared people’s minds and considers that investors will ask for proof before placing their trust in the company in the coming months. As a result, Stifel went from buy to neutral on the value, while waiting to have more “clarity on the expected growth sequence beyond 2024”.