It's been a rough couple of years to be an investor in French pharma giant Sanofi (SNY 1.96%). The company has seen its revenue and profits flatline over the last few years, causing its stock to follow suit. Shares of Sanofi have badly trailed both the S&P 500 and the healthcare sector in general, as judged by the Health Care SPDR ETF (XLV 1.12%), over the past five years.
The company has also faced some leadership challenges over that time period, as tensions in its boardroom eventually lead to its CEO being shown the door in late 2014. A new CEO, Olivier Brandicourt, took over the top seat earlier this year and has been tasked with putting the company back on a path toward growth, which is no small task considering the competitive and regulatory challenges ahead of the company.
In an effort to get Sanofi's stock back in Wall Street's good graces, Brandicourt recently laid out a strategic roadmap that will serve as the company's playbook between now and 2020. His plan started up by summarizing the situation that he faces quite nicely:
The pharmaceutical industry is undergoing a transformation unlike anything we've previously seen. Continued consolidation in the sector has created a more competitive environment over the last few years and, at the same time, science has never been more exciting.
Faces challenges head-on
Sales growth at the company has been stagnant in recent years, and it's likely that trend may continue into the near future. Its cash-cow diabetes division, which for years has brought in billions in revenue and profits thanks to the success of its long-acting insulin Lantus, is facing some serious challenges. Pricing pressure mixed with a more competitive landscape from the likes of competing insulins and biosimilars are now a major threat to its flagship drug, which will make it hard for the company to grow its top line in the coming years.
To help combat this weakness, Sanofi plans to rely heavily on six new major drugs launches that are expected to occur between now and 2020. These drugs include Toujeo, its next-generation long-acting insulin, as well as Praluent, its recently approved PCSK9 inhibitor used to help manage cholesterol levels. When combined with a handful of other expected blockbusters, Sanofi believes it should be able to drive peak sales of roughly $13 billion to $15 billion from these six drugs.
On the surface, those numbers sound great, as they appear to be real needle-movers when compared to its $43 billion in trailing-12-month revenue. However, when you factor in the weakness from its existing product portfolio, the company only expects to grow its top line by an uninspiring 3% to 4% per year between now and 2020.
With such sluggish top-line growth expectations, Sanofi is certainly looking for cost savings opportunities to help get its bottom line moving in the right direction. Sanofi currently believes it can cut around $1.7 billion in costs by 2018, mostly through layoffs, and it plans to plow that money right back into the business by adding resources to its research and development team. All told, the company expects to expand its research and development budget to $6.5 billion annually by 2020.
Still, when adding the expected increase in sales to the cost savings, Sanofi does not believe it will move its bottom line much over the next two years, but it plans to get its growth mojo going again by 2018. If that happens, then management believes its margins will begin to expand by 2018, which should lead to earnings per share growing faster than sales.
Beyond rejiggering its own internal structure, the company is also looking to explore "strategic options" for Merial, its animal health division, as well as its European generics business. Although Merial is one of its stronger divisions, Sanofi believes there is simply not enough synergy between its animal health and its primary pharmaceutical businesses, which is why it has put the company on the chopping block. The same goes for its European generics business, which is currently facing an increase in competitive pressures.
When considering that both of these business lines are currently producing more than $1 billion in annual revenues, it's likely that a successful sale of either would certainly provide Sanofi with a meaningful amount of capital that it could redeploy in its core businesses.
We saw this exact same maneuver work well at another pharma giant a few years ago. Pfizer (PFE -0.23%) spun off its animal health division, Zoetis, in early 2013, which brought in several billions to Pfizer pockets. Pfizer then returned that money to its shareholders via share repurchases.
Is Sanofi now a buy?
While I for one always find it useful when a management team lays out a long-term plan, I must say, I find it hard to get excited by Sanofi's roadmap. While I think all of these moves will help the company get back on track, I personally find it hard to get excited about stagnant growth over the next two years, which makes me think its stock will have a hard time beating the market from here.
There are certainly worse places you could invest your money than Sanofi, and with the stock trading around 15 times trailing earnings and offering a meaningful dividend yield, I don't foresee a lot of downside, but I for one feel there are plenty of other healthcare companies I'd rather put my money in, so for that reason, I'll continue to watch this story unfold from the sidelines.