Is Sanofi SA (ADR) (SNY) Overvalued at Current Levels?

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Sanofi SA (ADR) (NYSE:SNY) valuation is a point of concern on the street, given the headwinds the drug maker is facing. The stock continues to trade at multiples that do not reflect the threat posed by generic and biosimilar competition. Even though the company boasts of a solid pipeline of drugs, seven out of ten of its major products no longer enjoy patent protection.

Is Sanofi SA (ADR) (NYSE:SNY) overvalued at the current trading levels? It is a question that continues to evoke mixed reaction among investors. Poor returns on capital in the recent past are another nagging concern that continues to clobber the stock’s sentiments.

Revenue Base under Threat

Sanofi generates 80% of its income from the pharmaceutical business. It is becoming increasingly difficult for the company to protect its key revenue base, given the proliferation of generic and biosimilar drugs. The pharmaceutical giant’s blockbuster drugs have started to register declining sales their market share having come under pressure as alternatives fill the market.

Lantus, which is the company’s lead drug for diabetes, registered a 20% decline in revenue last year in North America and 10% globally. Sales could continue to drop given that Eli Lilly and Boehringer plan to launch a biosimilar for the drug, which should pile more pressure. It seems the threat posed by generic competition, has yet to be factored into the stock’s valuation, given the high multiple it continues to boast.

Soaring Competition

Generic and biosimilars pose the biggest threat to Sanofi SA (ADR) (NYSE:SNY) prospects and valuation on the street. Rising health care costs have left governments with no other option than spending big on generics. Given the ripple effect that these cheap alternatives are having, valuation concerns should be the order of the day for the drug maker.

Over the next ten years, biosimilars could trim spending in the healthcare sector by between $40 and $250 billion. Most of these savings will eat into the profits of the likes of Sanofi as their blockbusters come under immense pressure.

The only way out of the current mess is spending big on R&D to come up with new drugs able to shrug the emerging threat. Given that Sanofi spends less than its competitors it faces the threat of being caught flat foot as biosimilars take over. Last year, the company lost €250 million to generic competition.

Shaky Financials

Sanofi SA (ADR) (NYSE:SNY)’s revenues have been on an upward trajectory over the past three years. Net revenues should grow by 6% this year to €36.6 billion, even though they were down by 4% in the first quarter. Net income and operating income, on the other hand, have been on a downtrend amidst growing costs and taxes. In the first quarter earnings before taxes were down by 14%.

Growing competition means Sanofi only way out of the standoff is spending big on research and development all in the effort of bolstering its drug portfolio with blockbusters. However, the same could come at a price as it could eat into already suppressed margins.

Bottom Line

If first quarter earnings is anything to go by then Sanofi SA (ADR) (NYSE:SNY) faces an unprecedented future. Weakness in the core business because of expiring patents is starting to become a reality. Valuation concerns have started to ring the warning bells given the uncertainty the company faces going forward.

Sanofi profitability metrics is the lowest among peers further raising serious concerns about the actual value of the stock. The drug maker is trading at multiples that do not reflect the real threat posed by generics and lack of investment in new medicines.

Uncertainty over expected growth, the threat posed by biosimilars and shaky financials all but raises doubts about Sanofi SA (ADR) (NYSE:SNY)’s current valuation.

Viraj Shah

Viraj Shah has completed M.Com (Finance) and is currently pursuing his CFP. He tracks US markets along with other global markets like India very closely. He is very passionate about stocks, real estate, and technology. He also believes that money can always be made in the market.

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