I’m bullish on Sanofi (NASDAQ:SNY) as I see the corporate undervalued as in comparison with each the corporate’s financials and opponents (EU pharma friends). Valued at an estimated 2023 P/E of under x13, the market costs Sanofi like a worth entice. Instead, I argue the corporate needs to be priced at GARP. Based on a residual earnings valuation mannequin, anchored on analyst EPS consensus, I see greater than 50% upside. My goal worth for the stock is $77.11/share.
Sanofi is a number one world pharmaceutical firm, with robust analysis and innovation capabilities. The Company researches, develops, manufactures and distributes prescription prescribed drugs and vaccines. Sanofi focuses on areas akin to uncommon ailments, immunology, diabetes, oncology and cardiovascular well being. Notable best-selling prescribed drugs of the corporate’s portfolio embody Aubagio, Lantus, Lovenox, Plavix, Allegra, Doliprane, and Dupixent. Sanofi operates three main segments: prescribed drugs which accounts for about 70% of the corporate’s complete income, vaccines with about 17%, and shopper healthcare with about 13%. Geographically, Sanofi’s greatest market is the United States with about 225% of complete gross sales, adopted by Europe with about 25% and the remainder of the world accounting for the rest.
I consider Sanofi is deeply undervalued, because the biotechnology firm is buying and selling at an anticipated 2023 P/E of x12 and a P/B of x1.7. EV/EBITDA is under x9. Sanofi is buying and selling at an approximate 25% low cost to European pharma friends, anchored on each P/E and P/B. Notably, these are multiples often ascribed to worth traps, which I see as extremely unjustified. With a long run CAGR from 2022 to 2029 of about 8%, as estimated by analyst consensus (Source: Bloomberg Terminal), I argue that Sanofi ought to trade at a GARP valuation. Accordingly, this could indicate a a number of growth of at the very least 50%.
The GARP argument is supported by a powerful drug pipeline. Notably for the following 24 month, investors should expect extra visibility for brand new pharma initiatives together with Fitusiran, Efanesoctocog Alfa, and Rilzabrutinib, which could kindle an upside transfer for the corporate’s shares. Moreover, I consider the market nonetheless underestimates the gross sales potential of Sanofi’s key development driver Dupixent, which is estimated to greater than double 2021 gross sales quantity to attain greater than >€13 billion peak gross sales.
Dupixent is an injectable medication developed to deal with atopic dermatitis. The drug was initially authorised by the FA in March 2017 and has shortly grown to change into one of many world’s best-selling drugs–continuously surpassing analyst expectations. For pharma-experts and readers, right here is a superb article to study extra in regards to the drug and its success: Dupixent drives Sanofi to hike its full-year profit forecasts.
Sanofi’s financials look very engaging. In 2021, the corporate generated $46.3 billion of revenues and $7.8 billion of internet earnings (roughly 17% margin). For the identical interval, Sanofi expensed greater than $6.7 billion of R&D investments, or about 15% of complete revenues. I additionally like Sanofi’s stability sheet. As of March 2022, the corporate recorded $13.6 billion of money and quick time period investments in opposition to $25.5 billion of complete debt. Given that Sanofi recorded working cash-flows of $12.4 billion in 2021, the corporate’s approximate $12 billion net-debt place needs to be no concern to traders. In reality, I see Sanofi’s monetary place as greater than robust sufficient to justify each engaging shareholder distributions and M&A optionality. Going ahead, analysts are optimistic on Sanofi. For 2022, 2023, 2024 and 20224, consensus estimates Sanofi’s revenues at $4.3 billion, $43.9 billion, $45.85 billion and $48 billion. Respectively, GAAP internet earnings is estimated at $8.3 billion, $8.7 billion, $9.5 billion and $10.5 billion, which signifies a CAGR of >8%. (Source Bloomberg Terminal, July 22)
Residual Earnings Valuation
While Sanofi’s multiples relative to friends level to a powerful undervaluation, allow us to now have a look at Sanofi’s valuation in additional element. I’ve constructed a Residual Earnings framework primarily based on the analyst consensus forecast for EPS ‘until 2025, a WACC of 9% and a TV development price equal to nominal GDP development. Although the efficient price of capital for Sanofi is significantly under 9% (about 8.3% in accordance with the Bloomberg terminal as of twenty-two. July 2022), I believe an adjustment upwards to 9% is cheap with a purpose to replicate a conservative valuation.
In addition, the long-term development assumption equal to zero may undoubtedly be an underestimation, in my view, however I choose to be conservative. If traders may need to take into account a special situation, I’ve additionally enclosed a sensitivity analysis primarily based on various WACC and TV development mixture. For reference, purple cells indicate an overvaluation, whereas inexperienced cells indicate an undervaluation as in comparison with Sanofi’s present valuation.
Based on the above assumptions, my valuation estimates a good share worth of $77.11/share, implying a 53.7% upside potential primarily based on accounting fundamentals.
Although I believe Sanofi is considerably de-risked on the present valuation of about x12 P/E, an funding isn’t with out threat. The major threat, as for each pharma firm, is aggressive strain to innovate efficiently and to legally defend and defend mental property. Apart from that, traders ought to take into account the final threat sources akin to administration execution of strategic ambitions, operational effectivity and currency publicity.
In my opinion, Sanofi is an underappreciated gem. A worldwide pharma firm with robust innovation capabilities buying and selling at a x12 PE is simply too engaging to disregard. Compared to friends, as calculated by Seeking Alpha, the corporate is about 30 to 40 p.c undervalued. This is barely lower than my private calculated undervaluation of about 50%. I provoke protection with a purchase advice and set a $77.11/share goal worth.