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Strong earnings; NLEM uncertainties over

Sanofi’s Q4CY22 revenue and PAT came above our estimates. Revenue at Rs5.8bn declined by 2% YoY and 3% QoQ, due to the divestment of Universal Medicare business and two brands Soframycin + Sofradex (part of base biz till last year). Gross margin improvement by ~300bps YoY mainly driven by a favorable mix at 58.2%. EBITDA margin improved by 635bps on YoY at 24.8% on lower overheads cost. Furthermore, the adjusted PAT increased by 29% YoY to Rs1.2bn led by better operating performance and lower input and overheads cost. The long overhand on the stock appears to get over as Sanofi’s largest product Lantus came under the revised list of NLEM, which we believe to have less incremental risk on its earnings. We maintain BUY with a revised target price (TP) of Rs6,580.

Lower IPM growth impacted the revenue

Revenue decline in 4Q can also be attributed to muted performance in IPM, moreover impact of product divestments for Sanofi in the past one year i.e. sale of Universal Medicare brands and Soframycin + Sofradex. However, Sanofi’s leading therapy of Diabetes continued to do well, led by renewed marketing efforts nationally for Toujeo Insulin which is seeing better traction (new cartridge launched, 300 IU dosage).

Impact on Lantus after inclusion in NLEM revised list 2022

Sanofi’s Lantus is currently priced at Rs794 (100 IU 3ml injection), as against the average of similar brands drug pricing of ~Rs 730 (Rs 7.3 per IU), which implies that Sanofi will have to take at least 8% hit on its pricing for Lantus.

Multiple divestment plans completed; as start of fresh base

Over the last two years, Sanofi has made multiple divestments including Zentiva exports business in 2020 which have affected its overall sales growth. Share of exports in Sanofi’s total revenues have reduced considerably from ~30% in CY19 to ~14% in CY21.

Valuation and risk

Sanofi aims to accelerate growth in its diabetes portfolio, and is focusing on selective brands. Its established presence in the chronic therapies, likely growth in insulin products and portfolio expansion in cardiology could also add to the growth ahead. The long overhand on the stock seems to be over as Sanofi’s largest product insulin Glargine came under the revised list of NLEM, which we believe to have less incremental risk on its earnings. However, near-term impact remains on its earnings. The stock corrected ~30% in 1 year, which provide attractive valuation. The stock trades at 22x and 21x EPS of Rs 251 and Rs266 for CY23/24E respectively. We maintain our BUY rating on the stock with a revised target price of Rs6,580 (25x average EPS of CY23E/24E).

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