Sanofi Posts Slightly Weak First Quarter, but Wide-Moat Segments Continue to Perform Well

Sanofi SNY reported first-quarter results that fell short of both our and consensus expectations, but we don’t expect any significant changes to our fair value estimate for the company. Further, Sanofi’s wide moat divisions of diabetes, vaccines, consumer, and rare disease drugs posted solid gains, reaffirming our overall wide moat rating for the firm.

Within diabetes (the company’s largest drug franchise), Lantus once again drove strong growth, with sales increasing 21% operationally versus the prior-year period. While we are seeing some pricing pressure in China, Lantus’ pricing power in the U.S. remains strong. Also, based on Novo’s NVO decision to price its competing drug degludec at a 60%-70% premium to Lantus in Europe, we believe pricing power for Lantus will improve in Europe.

Outside of the diabetes segment, the majority of Sanofi’s other well-positioned divisions posted steady gains, with the exception of the animal health group. The vaccine group benefited from a longer flu season, while the rare disease drug group managed to regain much of its market share lost due to manufacturing problems. We expect continued robust growth for both divisions. However, the 3% yearover- year decline at the animal health division is a concern as we believe Frontline’s brand power is eroding, which may hurt this division’s competitive advantage. Management is working on new product launches in the animal health space which should help mitigate Frontline’s branding weakness.

The company posted 7% growth in emerging markets in the quarter, slightly below our expectations. However, these markets tend to show a high degree of volatility so we don’t expect to significantly change our 10% five-year compound growth rate for these regions. Further, price cuts in China for certain drugs seemed abnormally high in the quarter and we expect future pricing power to slightly improve.On the new product front, Sanofi is making good strides. We remain particularly bullish on Lyxumia, which should be able to leverage Lantus’ market leading presence by adding onto Lantus use. In addition, Sanofi’s multiple sclerosis platform should be able to eventually offer two potential significant revenue contributors with Aubagio and Lemtrada.

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