The first-ever negative-yielding euro bonds were issued by a couple of nonstate-owned companies, Henkel and Sanofi (SNY, Financial), the Financial Times reported on Sept. 6.
(Sanofi, annual filing)
Meanwhile, the $98 billion French multinational pharmaceutical company reported its first-half fiscal-year results on July 29.
According to its filing, Sanofi delivered sales and profit loss of 4.2% to 15.9 billion euros ($17.79 billion) and 3.4% to 2.2 billion euros. Sanofi’s ADR shares closed flat, up 0.07%, that day while the broader market, Standard & Poor's 500, closed up 0.16%.
Valuations
According to GuruFocus, Sanofi’s ADR shares had a price-earnings (P/E) multiple of 21 times (industry median of 28.5), price-book (P/B) value of 1.6 (industry median 3) and price-sales (P/S) ratio of 2.56 times (industry median of 2.8). The pharmaceutical company also had a dividend yield of 4.36% with a payout ratio of 92% and a buyback ratio of 0.90%.
Market performance
According to GuruFocus, Sanofi had a total return of 7.4% for the past five years while the broader market provided 16.4%. The company also has had a -6.56% return for its shareholders year to date while the latter provided 7.8%.
“We expect 2016 full-year business earnings per share to be broadly stable relative to 2015 at constant exchange rates barring major unforeseen adverse events. If exchange rates for the final two quarters were to be identical to the average rates for June 2016, we estimate that this would have a negative effect in the region of 4% on 2016 full-year business earnings per share.” –Â Sanofi, quarterly filing
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(Sanofi, annual filing)
Sanofi
Sanofi was founded in 1973 and is headquartered in Gentilly, France.
It is a leading global health care company, focused on patient needs and engaged in the research, development, manufacture and marketing of therapeutic solutions (1). The pharmaceutical company is the fifth-largest pharmaceutical group in the world and the third-largest in Europe in terms of sales as of fiscal year 2015.
The company mainly operates in three business segments: pharmaceuticals, vaccines via Sanofi Pasteur and animal health via Merial (2).
In December 2015, Sanofi and Boehringer Ingelheim were in talks to swap businesses. The deal was to trade Sanofi’s Merial business, then valued at 11.4 billion euros, with Boehringer Ingelheim’s 6.7 billion euro Consumer Healthcare (CHC) business. Boehringer Ingelheim was also to add 4.7 billion euros cash in the deal. The trade, however, would not include Boehringer Ingelheim CHC in China.
The closing of the transaction is expected by year-end 2016.
“In signing these contracts, we are meeting one of the key strategic goals of our roadmap 2020, namely to become a leader in consumer health care and a leading diversified global human health care company. This business swap will bring a complementary portfolio to our consumer health care activity with highly recognized brands, allowing for mid- and long-term value creation and enhancement of our market penetration in some major countries.” –Â Olivier Brandicourt, M.D., chief executive officer, Sanofi
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According to Reuters, the trade would put Sanofi in the No. 1 spot in the fragmented consumer health care marketplace while Boehringer would become the world's second-largest animal health company.
In review, Sanofi’s then Merial contributed 6.8% – 2.5 billion euros – to its aggregate net sales. Boehringer Ingelheim’s then CHC business contributed 10% – 1.51 billion euros – in total sales. Meanwhile, Sanofi had 3.4 billion euros in CHC sales in 2015.
Merial also had a three-year average (fiscal year 2013 to fiscal year 2015) sales growth of 5.6% and an average operating margin of 24.4%, according to annual filings.
In the first half of this year, the Merial segment grew 10.1% in sales while delivering operating profit growth and operating margin of 12.7% and 30.5%.
Nonetheless, Sanofi would enhance its position in several of its strategic categories – Pain Care, Allergy Solutions, Cough & Cold Care, Feminine Care, Digestive Health and Vitamins, Minerals and Supplements – after the swap.
Pharmaceuticals segment
Sanofi’s pharmaceuticals segment covers research, development, production and marketing of medicines. The pharmaceuticals portfolio consists of flagship products plus a broad range of prescription medicines, generic medicines and consumer health products. The segment also includes immune-oncology drug research and development with Regeneron Pharmaceuticals (REGN, Financial) and anti-hypertensive and anti-atherothrombosis drug sales agreement with Bristol-Myers Squibb (BMY, Financial), both of which are promising.
The segment contributed 80%, 29.8 billion euros, in Sanofi’s fiscal year 2015 aggregate sales. The segment also had a 7.5% sales growth with an operating margin of 27%.
In the first half of this year, the pharmaceuticals segment lost 4.9% while delivering operating profit growth and operating margin of -8.3% and 28.1%.
Vaccines segment
In Sanofi’s filing, the vaccines segment is wholly dedicated to vaccines, including research, development, production and marketing. This segment also included Sanofi Pasteur MSD's joint venture with Merck (MRK, Financial) in Europe.
The segment contributed 12.8%, 4.74 billion euros, in Sanofi’s fiscal 2015 aggregate sales. The segment also had a 19.4% sales growth with an operating margin of 30%.
In the first half of 2016, the vaccines segment grew 3.5% while delivering an operating profit growth and operating margin of 4.2% and 12.3%.
Overall, Sanofi had a five-year (2011-2015) sales and profit growth of 1.7% and -4.75%.
Research and development pipeline
(Sanofi’s Pipeline, quarterly filing)
Cash, debt and book value
As of June 30, Sanofi had a total cash of 6.076 billion euros. The company also had a total debt of 17.28 billion euros with a 0.32 debt-equity ratio. Sanofi had a book value of 54.3 billion euros.
Cash flow
(Sanofi first half 2016 cash flow, quarterly filing)
In the first six months of fiscal 2016, Sanofi grew its cash flow from operations by 1.58% to 3.99 billion euros year on year while its free cash flow lost 17.6% to 2.5 billion euros.
Despite this, Sanofi was still able to hand out 5.16 billion euros, 203% of its free cash flow, in net shareholder payouts (3). In the past three years (fiscal years 2013 to 2015), Sanofi paid out 113% of its free cash flow in dividends and share repurchases.
Conclusion
Sanofi’s initiative of swapping its animal health business for increasing its dominance in the CHC is worth criticizing. As pointed out earlier, the Merial segment delivered good growth and margin in its business operations in recent years. Nonetheless, Sanofi’s new chief, Olivier Brandicourt, M.D., seemed determined to streamline Sanofi’s operations and focus more on its pipeline and possibly further merger/acquisitions later on.
(Google Finance)
Sanofi also appeared to demonstrate a healthy balance sheet and has been generous to its shareholders in terms of dividends and share repurchases not just in the past three years but also for the past decade.
Several analysts have weighed in their recommendations for Sanofi’s shares. Most of them were upbeat except for JPMorgan’s Underweight recommendation and Piper Jaffray’s Neutral on the stock.
In terms of its five-year historical earnings multiple averages and a possible 4% reduction in earnings per share figure compared to last year’s, I arrived at a value of $34 per ADR share. This suggested that despite the share price slump that has already been handed to Sanofi, it still is not a good buy opportunity at its present share price.
In summary, Sanofi ADR shares are a HOLD.
Notes
- Read Sanofi’s 20-F 2015.
- In accordance with the presentation requirements of IFRS 5, the consolidated income statement line item “net sales” does not include the net sales of the Animal Health business (Merial). Instead, percentage of aggregate sales was the term used.
- Dividends plus sharebuybacks.
Disclosure: I do not own any shares mentioned in this article except for Bristol-Myers Squibb but may initiate a position in Sanofi.
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