Sanofi may underperform in near term; pricing control among key risks

The stock of pharma multinational Sanofi India has been hitting fresh 52-week lows over the past fortnight, shedding about 10 per cent from its July highs. The weak operating performance in June quarter of the 2022-23 financial year (Q1FY23) has led to the recent decline and the stock may underperform in the near term.

Revenues in the June quarter were down 11 per cent year-on-year (YoY) and 1 per cent sequentially, to Rs 700 crore, and missed the Street expectations. The decline was largely on account of divestment of its nutraceutical business and a few key brands. The company had divested antibiotic skin creams Soframycin and Sofradex to Encube Ethicals for Rs 137 crore on January 31, 2022.

In addition to this, Abdulkader Puranwala, of Elara Securities, believes that the revenue dip of 11 per cent YoY is likely on account of a drop in Sanofi’s insulin, which accounts for 30 per cent of India sales and cardiac (Clexane/Cardace) portfolios, which had surged in the 2021 calendar year (CY21) due to Covid-19. The brokerage believes that the divestment of the two brands could keep a check on the company’s revenues in the September quarter.

Among the key risks for the stock is pricing control for major products, such as insulin glargine, which is sold under the brand Lantus. Alka Katiyar, of Centrum Institutional Research, believes that a major risk for Sanofi is the impact of inclusion of Lantus under the drug price control as part of the third revision of National List of Essential Medicines (NLEM). She believes that there is a fair chance for Lantus to be excluded from the final list, which would be a positive surprise for Sanofi India. While the brokerage has not factored in the risk in its estimates, its calculation suggests a 10-12 per cent impact on prices which can affect the earnings per share estimates for CY23. What could soften the blow on earnings is the 10.76 per cent price increase effective April 1, 2022; 18 per cent of Sanofi’s revenues come from products under NLEM.

The company’s margin performance too was soft with higher raw material costs impacting gross margins that fell 236 basis points YoY and 330 basis points quarter-on-quarter (QoQ). The company had highlighted the risk in its CY21 annual report. Operating profit margins fell by a sharp 830 basis points YoY (450 basis points QoQ) to 23 per cent. The pressure on margins on account of negative operating leverage and fixed costs amid lower revenues is expected to continue in the coming quarters due to an inflationary environment, according to ICICI Securities.  

Beyond Q2FY23, brands, such as Lantus, Toujeo (insulin), Clexane (anticoagulant), Allegra (allergy) and Combiflam (painkiller) would drive growth, according to Elara Securities which has cut CY22/CY23 earnings by 8 per cent each, given margin pressures and lower interest income.

While brokerages have lowered their estimates going ahead, valuations post recent correction are at attractive levels. ICICI Securities has reduced its earnings multiple from 28 times to 26 times but has an ‘add’ rating as the price fall has made valuations reasonable. Investors should await regulatory decision on price control and revenue trajectory before considering the stock.