Sanofi Earnings: Lowered Long-Term Guidance Hits Stock, but Update Is In line With Our Fair Value

We are holding firm to our Sanofi SAN fair value despite the stock’s pullback, likely in reaction to lowered long-term margin guidance. In tandem with slightly lower-than-expected third-quarter results, Sanofi withdrew its 2025 operating margin target of 32%. While the market had largely expected the firm to hit the 2025 guidance, we were skeptical of the guidance and had forecasted more of a continuation of the current margin (close to 300 basis points below 32%) through 2025. We view the market pullback as overdone, making the stock more undervalued.

Sanofi cited pricing pressures in the older general medicines business and increased pipeline spending for pulling the 2025 operating margin guidance. The older drugs in the general medicines business hold poor pricing power, and the continued pressures in the segment are not surprising. Further, while the increased outlook for R&D spending will pressure margins, the investments should help yield long-term growth and reinforce the firm’s moat.

Sanofi also announced the planned divestment of its consumer healthcare business, which follows a similar strategy of J&J and GSK. We believe the divestment may create minor value, as the market tends to assign higher valuation metrics to consumer healthcare companies, partly due to the fairly consistent earnings streams. We don’t see the divestment as hurting the remaining Sanofi organization, as we see only limited synergies between the units.

Following the increased R&D investment in 2024, the core pharma business looks well positioned for growth over the following five years because of the strong growth potential of immunology drug Dupixent, limited generic pressures, and a growing pipeline. Even with annual sales over EUR 10 billion, Dupixent holds strong growth potential in expanding market share in atopic dermatitis and asthma while also gaining new indications. Sanofi’s 2024 Dupixent guidance of almost EUR 13 billion (up almost 20%) is encouraging.