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Below estimates; focus remain on power brands  

Sanofi India’s  results  for  2QCY22  (below  our  estimates)  with  revenues  declining  by 9.6% YoY and flat QoQ to Rs 6.1 bn and PAT de?grew by 32.5% YoY and flat QoQ to Rs  1.2 bn (EPS of Rs 52.3 per share). Higher RMC impacted gross margins contraction by  236bps  YoY  and  330bps QoQ  to  54.3%  and  increased  overhead  expenses  impacted EBITDA margins down by 828bps YoY and 447 bps QoQ to Rs 23%. Going forward, price increase of 10.76% as per WPI since April 2022 and will benefit Sanofi’s earnings ahead as ~18% of the sales is driven by NLEM products. This will also soften the impact due to  Lantus  coming  under  price  control.    We  remain positive  on  Sanofi  given  strong  brands Diabetes portfolio (~40% of domestic revenues). Maintain BUY with a revised  TP of Rs8,500 (30x EPS of CY23).

Slowdown in IPM impacted revenue growth 

Revenue decline in 2Q can also be attributed to muted performance in IPM, moreover  impact  of  product divestments  for  Sanofi  in  the  past  one  year  i.e.  sa of  Universal Medicare brands and Soframycin + Sofradex.  During CY21, we  saw Covid?19 variants (Delta in 1H and Omicron in 2H) which resulted in erratic growth in few brands/therapy (Combiflam, Allegra, Clexane) for Sanofi. 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)

Concern on Lantus coming under DPCO price control 

The one major risk ahead for Sanofi is the impact of inclusion of Lantus under DPCO price control as part of 3rd revision of NLEM. However, we believe there is a fair chance for Lantus to be excluded from the final list, which would be a positive surprise for Sanofi India.  Based  on  our  calculations,  ~10?12%  impact  on  prices which  can  affect  EPS estimates for CY22E. We have not yet factored this risk in our estimates as we await final NLEM list with price revisions which is yet to come.

New introductions are on the way 

As Sanofi’s parent has received biosimilar version for other insulin brands in regulated markets, possibly we expect Sanofi to introduce the product in India too, this will also aid the hit if Lantus comes under price control. Going forward Insulin Aspart and Lispro are also expected to launch in India. 

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. Risk  factor could be, expansion of NLEM list to add new products like Lantus, combination drugs  coming  under  price  control,  capping  of  trade  margins,  Government  policymeasures (Brand versus Generics) and currency fluctuation.  The stock trades at 24x and 21x EPS of Rs 258 and Rs283 for CY22/23E respectively.  We maintain our BUY rating on the stock with a target price of Rs 8,500 (30x EPS of CY23E).

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