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Morningstar | Sanofi Posts 4Q Showing Continued Shift Toward Specialty Care Drugs as Shares Look Undervalued

Sanofi reported fourth-quarter results slightly below both our and consensus' earnings projections, but we don't expect any major fair value estimate changes based on the minor underperformance. We continue to view the stock as undervalued as the investment community appears to underappreciate the firm's transformation from a focus in primary care toward specialty care where drug pricing power is stronger and operating margins are higher. Sanofi's current and growing position in areas of critical care with specialty drugs also reinforces our wide moat rating for the company.

In the quarter, specialty care drugs represented the largest sales franchise (just over a quarter of sales) and grew over 20% after excluding acquired Bioverativ drugs. We expect this strong growth rate will moderate over the next year, but we continue to expect robust growth from immunology drug Dupixent as the drug expands its indications and gains more traction in the recent approval in moderate to severe asthma. Also, we expect the recently approved drug Cablivi in a rare blood disorder (ATT) should add further gains for this segment.

The strong growth in specialty care is helping mitigate the generic pressures in the insulin market where the company's top drug Lantus fell by over 25%. We expect continued declines for Lantus, especially in the U.S. where competitive pressures are the most intense. However, the drug's U.S. sales now only represent close to 4% of total sales, which should mean less of a headwind going forward.

On the expense side, Sanofi is work toward controlling expense growth and expects only 1% yearly operating expense growth over the next several years, which we think is achievable given their current cost structure and the move toward specialty care, which tends to need less sales and marketing support.

For a complete review of Sanofi's pipeline and currently marketed portfolio, please see our annual pipeline report titled "Annual Drug Pipeline Report: Moats Remain Secure as Innovation Counters Pricing and Generic Headwinds, but M&A Accelerating."