- At a discount of 30% to the SXDP and 15% to its long-term PE, despite strong earnings growth;
- Concerns about US regulatory impact are overblown, as the exposure of the vaccines business to the US is only 6% of revenue
- Possibility of an aggressive buyback announcement after the sale of the Opella business
Sanofi, in tandem with the broader Pharma sector, faced significant pressure following news that Trump selected Kennedy, a prominent vaccine sceptic, as the Secretary of Health and Human Services (HHS). Vaccines account for c.17% of group revenue (Fig 6) while only 32% of its Vaccine division revenues are exposed to the US (Fig 7). This makes only c.6% of Sanofi’s revenues susceptible to adverse regulatory actions arising from the selection of Kennedy to lead the HHS (Flu vaccine exposure to the US only 3%). Other than regulatory risk, concerns also arose about potential tariffs on pharmaceutical imports from Europe, as Sanofi’s main manufacturing base is in Europe, but we do not believe tariffs are likely affect pharma products due to their essential product status.
Looking at its recent 3Q results, sales grew 16% YoY, beating analysts’ estimates by 6% driven by a 26% growth in its vaccine division and 24% growth in its largest product by revenue, Dupixent, while EPS came in 15% ahead of analyst estimates, supported by lower R&D costs. The company also reiterated its guidance of at least a low single-digit percentage growth for 2024 (from the low-single-digit decline expected for 2024 a year ago) and positive news on its Tolebrutinib drug (Multiple Sclerosis) and Dupixent’s US approval in smoker’s disease, both deemed to have blockbuster potential, could help restore investor sentiment following the shares 14% retracement from the highs in September.
The company also confirmed the sale of 52% of its stake in Opella, for a "high-single-digit billion euro" amount, and we believe the company could use the cash for an aggressive buyback policy to more than offset the dilutive high-single-digit earnings impact from the sale of Opella, where a c.EUR5bn share buyback could have a mid-single-digit accretive impact at current spot. Sanofi also announced plans to invest c.EUR1bn to build a new insulin production base in Beijing, its fourth production and supply base in China, as part of a broader push to boost capacity in Asia.
Despite the strong earnings results and the possibility of an announcement of an aggressive buyback strategy, the company currently trades at a 15% discount to its long-term PE and a 30% discount to the SXDP (Figs 2&5). The stock is also close to support of the ascending channel recorded since 2018 while lagging the rebound of the broader Health Care sector after the recent sell-off (Figs 3&4). We look to play the upside via 1.5x June25 100 calls financed by 1x June25 84 puts at a net cost of 0.3% of underlying. (Spot ref 91.8, Fut. ref 90.2).