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Event update: Sanofi India (Outperformer) - Strategic shift of global parent

Sanofi S.A. hosted a Capital Markets Day to unveil its strategy under the new global CEO, Paul Hudson. In our view, the new strategy of Sanofi India’s parent company is a meaningful shift from the earlier thought process. While this may not impact the company in the near term, it will likely have implications on Sanofi India’s medium to long term business outlook.

Shift in future R&D efforts – Sanofi has decided to eliminate all future R&D investments in Cardiac and Diabetes – this segment is ~14% of current global revenues. One of the clear R&D focus areas going forward seems to be oncology – where currently Sanofi isn’t very strong. From a Sanofi India perspective, it implies a potential lack of innovative launches in the core CVS / diabetes arena over the medium to long term. The current marketed portfolio should not be impacted. From a long term R&D (5-10 years) vision perspective, Sanofi highlighted that it expects ~70% of the candidates to be biologics – a clear indicator of the increasing salience of biologics in global pharma innovation.

Dupixent – Key focus product: Sanofi expects peak revenues of >10bn Euro across type 2 inflammatory diseases.  Currently Dupixent is approved for Atopic Dermatitis and Asthma. The company is working on multiple other indications. Notably, this drug hasn’t been launched in India yet.

Vaccine identified as a key growth driver – Expected to drive mid-to high single digit growth over next 5 years. From India perspective, this business is in the unlisted entity hence not relevant for listed company

Business restructuring – As per the new structure, Cardiac, Diabetes and Established products (off-patent products) have been clubbed in the General Medicines SBU. Effectively, the entire Sanofi India listed business will fall under this SBU. This should, in turn, enhance focus / coordination with the parent.

OTC business – Carved out into a separate entity; does open it to future M&A transaction. Some part of Sanofi India business will likely fall in this category and may get impacted by any M&A action. Mgt also signalled an intent to take Cialis (Tadalafil) and Tamiflu to the OTC route. In case Tamiflu OTC switch is achieved, it will some impact on Tamiflu Rx sales for Indian generics from next season onwards.

Huge focus on China – Interestingly, Sanofi mgt has picked out China growth as a key growth pillar – highlighting the value of Chinese Pharma market to MNCs in general and also the significant opportunity disparity with Indian market. Diabetes (Insulins) continues to be a key area of growth with overall 25 new launches in next 5 years. Mgt also cited >60% volume growth in 2020 due to tender wins in Plavix and Co-Aprovel – indicative of MNCs’ ability to remain significantly competitive even  in the new regime in China.

Significant focus on cost rationalization – Aiming for cost reduction across multiple operational facets. This should positively impact Sanofi India business too.

Rationalization of Established products portfolio – Aiming to reduce no of product families from 300 to 100 over next 5 years. This may have implications for Sanofi India business too

Valuations & view

While the shift in R&D focus away from C&D is a dampener, it is unlikely to affect Sanofi India’s near-term operations. A strong marketing presence in India, strategy to aggressively invest in growth, and strong presence in fast growing segments (diabetes and CVS) make Sanofi one of the more promising MNC pharma companies in India. We maintain Outperformer given attractive valuations and steady improvement in operating performance. The stock trades at 33x CY20E PER, which are at discount to those of MNC peers like Glaxo. Slowdown in exports and continued regulatory interventions in domestic market remain key risks. Maintain Outperformer with a target price of 7,368 (35x FY21E EPS).