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Is Sanofi's Stock a Buy?

By Mark Prvulovic – Dec 4, 2019 at 11:05AM

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With new promising results for its diabetes drug, is Sanofi a good investment right now?

Investors looking for a large-cap pharmaceutical investment have a number of options to choose from. One of them is Sanofi (SNY 0.83%), a company with a fairly diverse drug portfolio that has been getting plenty of attention due to its diabetes treatments, a market that's especially lucrative right now.

Despite an earlier piece of bad news from the U.S. Food and Drug Administration (FDA) rejecting one of Sanofi's diabetes drugs, prospects for the company now look better following some new clinical results. Let's go into some of the details surrounding Sanofi's drug candidates, how the company looks overall, and whether investors should consider adding Sanofi to their portfolios.

A person holding a bottle of pills on a table.

Image source: Getty Images.

A potential diabetes breakthrough?

Considering the size of the diabetes market, with more than 425 million people living with the condition around the world, it's understandable that investors would pay close attention to companies developing treatments in this area. Sanofi is one of the leading players in the sector; its main diabetes drug, Lantus, has been a solid revenue driver for the company for years.

In 2018, Lantus brought in $3.95 billion for Sanofi. However, this figure has fallen by more than $1.17 billion from the previous year as competition from other diabetes drug makers, such as Novo Nordisk (NVO 0.53%), continues to ramp up. So Sanofi has been working on a couple of next-generation diabetes treatments to shore up its floundering Lantus sales.

On this end, there's been mixed news. Earlier this year, Sanofi received the closest thing to a rejection letter from the FDA in regard to its diabetes candidate Zynquista, which was developed to treat type 1 diabetes. While this was a setback, Sanofi recently announced strong phase 3 trial results for another diabetes drug, Toujeo, in treating children and adolescents aged six and older with type 1 diabetes.

With sales of Lantus slowing down, Sanofi's diabetes business is banking on its up-and-coming drug to make up the difference. Revenues for Toujeo came in at $930 million for 2018, not fully making up for the $1.17 billion decline in Lantus sales over the same period but getting close to doing so.

The full picture of Sanofi's pipeline

While the market for diabetes treatments remains highly alluring for investors, it's easy to forget that diabetes remains a relatively small portion of Sanofi's drug portfolio, despite the amount of attention this area has been getting. Sanofi's current pipeline of upcoming drug totals 85 different drugs, with 51 in early clinical trials and another 34 in phase 3 or seeking approval. To put it into perspective, only two drug candidates are in the diabetes space, whereas other areas such as oncology and immuno-inflammation have 28 and 18 drugs, respectively.

Sanofi's top-performing drug in terms of growth is Dupixent, a treatment prescribed for moderate to severe cases of eczema (irritation of the skin). Sales have increased by an impressive 142% over the past year, with revenues climbing to $628 million for Q3 2019. In comparison, sales for Sanofi's overall diabetes drugs are down by 18% since Q3 2018.

Diving deeper into the financials

Although a number of Sanofi's drugs have seen more modest growth rates, the overall financial picture hasn't been all that impressive. Total sales for the quarter came in at $10.46 billion, flat from the $10.46 billion reported in Q3 2018. Overall vaccine sales, a historically strong revenue driver for the company, have gone down by 6.7% over the past year, while its diabetes segment is shrinking rather than growing. 

The reason sales for Sanofi haven't been worse, however, is that its emerging markets segment has been picking up the slack. Overall emerging market revenue came in at $3.07 billion, up by 9.7% since last year. Latin and Central America saw growth rates of 21.4%, while China's growth came in at 13.7%. 

While international growth such as double-digit growth rates in countries like China is a good sign, investors need to remember that many other large-cap pharmaceutical companies are boasting similar figures.

Looking at the competition

One company that Sanofi is closely compared to is Novo Nordisk. Besides being similar in size and having a broad drug candidate portfolio, Novo Nordisk is directly competing with Sanofi in the diabetes market with its own drug, Tresiba. In fact, Novo Nordisk's diabetes business segment has been one of the company's fastest-growing businesses, accounting for 84.2% of its overall sales. This already differentiates the two significantly: Sanofi is far more diversified in its revenues, while Novo Nordisk is much more focused on its diabetes treatments.

Sanofi does seem to be trading at a pricier valuation, with a 33.9 P/E ratio in comparison to Novo Nordisk's 22.9. Taking a look at both companies' revenues side by side, however, investors would realize that a pricier valuation doesn't always mean a company is better, especially in terms of fundamentals. Over the past eight years, Sanofi's revenue figures have been falling, down 12.2% from its Q4 2011 highs. Novo Nordisk's revenue, while smaller than Sanofi's, has been consistently growing and has increased by 42.1% over the same period.

Is Sanofi a buy?

Sanofi definitely has plenty of potential with a strong, well-rounded portfolio of drug candidates. However, considering that it's facing stiff competition in the high-growth diabetes market and its revenue growth isn't that great in comparison to some of its competitors, I'm not sure I'd say Sanofi is a buy.

That's not to say that Sanofi is a bad company necessarily. But investors can find better options in the large-cap pharmaceutical sector to buy right now. Perhaps if prices fell to a cheaper valuation, investors should consider checking it out, but until then, go ahead and shop around.

Mark Prvulovic has no position in any of the stocks mentioned. The Motley Fool recommends Novo Nordisk. The Motley Fool has a disclosure policy.

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