Like almost all Big Pharmas, French biopharma Sanofi (NASDAQ:SNY) has had a number of key drugs lose patent protection over the last few years, resulting in a massive drop in earnings and revenue. Consequently, its shares have under-performed both the broader markets and the healthcare sector in general, as shown by the chart below. 

SNY Chart

To improve top line growth and return to profitability, Sanofi's CEO Christopher Viehbacher has increasingly leaned on the company's clinical pipeline to replace lost revenues. And with the recent approval of Cerdelga for the treatment of Gaucher disease type 1 by the Food and Drug Administration, this plan appears to be bearing fruit. 

While it wouldn't be prudent to say for sure how any stock will perform, I believe it's worthwhile to consider the risks associated with an investment. With that in mind, here are three reasons why Sanofi's stock may stumble moving ahead. 

Reason No. 1
Sanofi's biggest growth driver is its diabetes products, with Lantus by far being the most influential. In the second-quarter, diabetes product sales grew by 16.2% and Lantus sales continued their strong growth with a year-over-year increase of 16.3%. 

Even so, Sanofi's diabetes franchise is facing some serious threats going forward. First, Lantus is set to lose patent protection in February 2015. In anticipation of this event, Sanofi has successfully completed the necessary late-stage trials for its long-acting version of Lantus called Toujeo and filed for regulatory approvals in the U.S. and EU.  

Lantus's stunning profitability and growth profile haven't gone unnoticed in the industry, however. Novo Nordisk (NYSE:NVS) has developed its own long-acting insulin product Tresiba, with an anticipated commercial launch in the U.S. in 2016. 

Eli Lilly (NYSE:LLY) has also gotten in on the act by testing its experimental long-acting insulin peglispro against Lantus in head-to-head clinical trials. Lilly reported last week that peglispro showed consistent superiority over Lantus in hemoglobin A1c score for Type 1 diabetics. In short, Sanofi's long-standing dominance over the diabetes market might begin to erode in the wake of increasing competition. 

Reason No. 2
Sanofi and its partner Regeneron (NASDAQ:REGN) have been overflowing with optimism for their long-awaited PSCK9 inhibitor, alirocumab, indicated for hypercholesterolemia of late. And given its megablockbuster potential and strong clinical results, there is certainly good reason to tout this drug to potential investors.

Nevertheless, alirocumab is likely to face competition almost immediately from Amgen's (NASDAQ:AMGN) own PSCK9 inhibitor named evolocumab, which is currently under regulatory review in the EU and U.S.

With both drugs posting impressive clinical trial results and looking at similar regulatory timetables, I think it's difficult to estimate how market share ultimately shakes out in this case. 

Reason No. 3
Emerging markets presently make up over 20% of Sanofi's pharma sales and have been one of the few areas of growth in recent quarters. This reliance on emerging markets for top line growth puts the company at particular risk of economic slowdowns in key countries like China and exposes them to the ongoing fluctuations in exchange rates. Indeed, Sanofi saw a notable 5.7% decline in net sales in 2013 due to declining currencies in emerging markets. 

While management has stated that they believe people will continue to buy their products regardless of the economic climate in emerging markets, Sanofi's sales may be affected nonetheless.  

Foolish final thoughts
The pattern that seems to be emerging in healthcare following the patent cliff is that the salad days of nearly monopolizing a profitable market might be over. As soon as PSCK9 inhibitors began to look like promising treatments for high cholesterol and PD-1 inhibitors for various cancers, Big Pharmas jumped in with both feet in the hopes of being the first to market. The net result is that there will probably be an excess of these next generation drugs on the market in the coming years.  

Keeping with this theme, I think it's only natural that Sanofi's global dominance in the diabetes insulin market begins to wane following the expiration of Lantus's patent next year. Top notch competitors like Novo Nordisk and Eli Lilly have been waiting in the wings to take advantage of this event and they appear to have the goods to gain market share. Time will tell. 

Overall, I think Sanofi is on the right track to recover from the patent cliff, but the road ahead isn't expected to be smooth sailing either.  


George Budwell has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.