SANOFI India Ltd - A richly valued MNC Pharma Co

Hi All

I thought this company - SANOFI India Ltd. - deserves a separate thread on this esteemed forum so sharing my analysis on this company below.

Before I begin, a standard disclaimer that the below does NOT constitute investment advice rather it is for knowledge purpose only.

I. Product Profile : SANOFI’s top 5 brands have grown at 11.5% CAGR over last 5 years to make up 43% of total AIOCD sales. Focus areas for the company are Anti diabetic, respiratory, cardiac & pain relief drugs. 3/4th of the sales are in domestic market while rest is exports.

II. Margins Profile : (refer the below chart for Margins trend of SANOFI India Ltd.)

Companies which have consistency in Gross & EBITDA margins, as does SANOFI India, are more likely to have some degree of pricing power meaning they can pass on the impact of cost increases to their customers. This is a plus for SANOFI.

Another positive is that SANOFI doesn’t spend a lot on R&D. Expense on R&D as a %age of sales is only ~0.4% in the long term trend and only 0.03% in FY19. Company didn’t spend anything on R&D in FY20 which is a positive given that Pharma companies spend so much on R&D to develop new products.

However, the low R&D expense could change in the future given that SANOFI India is focusing on Branded drug formulations and manufacturing. If it sources the IP from its French parent, it might need to pay royalties as a %age of sales as well.

Another positive is that the company is debt free & cash rich : D/E ratio is only 0.05 as of FY20. And as a result of the sale of Ankleshwar facility to Zentiva in FY20, cash on books makes up 41% of total Assets (more on this deal below) !

II. Returns Profile : SANOFI’s ROE is a function of Net Profit Margin since Assets turnover and Leverage is constant throughout the last 10 years; since margin profile is stable, ROE is expected to be ~18% with an upside possible if Sanofi decides to lever up (I am not counting on it though since the Company has lots of cash right now).

But 18%-20% is not what we investors get as we have to buy at the Market Price - so at a CMP of ~₹7,890 (as of 10th July) our “Effective ROE” or Earnings Yield, would be less than 3% which is very poor and is a sign of froth in the markets generally.

III. Cash Conversion Cycle : SANOFI’s cash conversion performance is also commendable - it’s able to collect receivables in ~22-23 days and boasts an impressive Inventory turnover of 6+ times over last 3 years resulting in a negative cash conversion cycle of ~(24) days. A negative conversion cycle means healthy terms of trade for SANOFI where it sells & collects from customer much sooner than it pays to its suppliers.

IV. Growth Profile : A dampener

Given ROE of 18% & a retention ratio of 40% , SANOFI’s Sustainable Net Profit Growth in the future will be ~8%. Deceleration is already visible in SANOFI’s sales from 12% 3 year CAGR in FY15 to 9% in FY19 (pre-COVID) and only 5% in FY20. Similar deceleration is visible in EBITDA as well though Net Profit is artificially inflated because of the corporate tax cuts in FY19.

So going forward, the growth rate will be a function of new product launches like the diabetic drug Toujeo and what traction they get in the market. Also, SANOFI is working on stage 3 trials of a COVID vaccine in India along with GSK.

V. Valuations : The stock is trading at a hefty P/S of 6.3X, TTM P/E of 33.2X, trailing P/B of 8.6X! If we look at the historical trend below, FY20 valuation ratios are very very high in comparison to previous 9 years.

These valuation multiples look too pricey given that Net Profit growth (excluding impact of tax cut) has been decelerating and is now expected to be in the range of 8%. The company has also sold its Ankleshwar unit & distributed special dividends to shareholders (₹240 per share over the last 2 years) Going forward, the company is going to shift focus from 3rd party bulk generics to branded formulations which are better margin products. Only time will tell how much growth will they drive.

VI. Sanofi - Advent - Zentiva deal :

  • In 2008, SANOFI (France) had bought Zentiva for $2.6B to build generic drug capability.
  • In 2018, SANOFI (France) sold Zentiva to Advent (a PE firm) for $2.2B.
  • In 2019, SANOFI (India) decided to sell its Ankleshwar manufacturing facility to Zentiva (India) for ₹261 crores to shift focus on SANOFI Branded products.

VII. Related Party Transactions : SANOFI’s Achilles Heel

Almost all MNC Pharma companies enter into long term contracts between their Global subsidiaries, located in tax efficient jurisdictions, and their local Indian subsidiaries. SANOFI India is no different. In terms of RPTs, SANOFI has extended a loan of ₹445 crores to a Privately held company, SANOFI Healthcare India Pvt Ltd. at a generous interest rate of 7.5% pa (reduced by 2% in FY20 itself). The interest rate and loan tenure is at Board’s discretion.

SANOFI also has a purchase & supply contract with SANOFI-Aventis Singapore Ltd. In FY20, 26% of revenues & 61% of Cost of sales were with SANOFI-Aventis. Also, RPTs account for a whopping ~70% of Trade receivables & ~50% of Trade Payables as of FY20. Such RPTs are rarely ever favorable towards minority shareholders & are driven by the whims & interest of Global parent in most cases.

VIII. Sum up :

  1. SANOFI is a good company to own with stable margins, debt free, cash rich, IP driven business with favorable terms of trade - but the latest sale of Ankleshwar unit puts future growth plans into uncertainty & past growth trends are not supportive of the premium valuations the stock is getting currently.
  2. Company is shifting focus from low margin bulk generics to high margin branded drugs which is a plus.
  3. Related Party transactions account for big proportions of the P&L and Balance Sheet which is a negative for minority shareholders as they don’t get much say over such transactions.

Inviting views of all members on this company.

Disclosure : Invested just tracking quantity

9 Likes

Any effect of 29 essential Drugs list on sanofi?

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Sharing notes from last year’s analyst call, company does 1 annual call a year

17-03-2021 (analyst meet)

  • Certain diabetic drugs were launched through a different Sanofi entity because it was in-licensed from another company and had certain conditions attached
  • Listed company’s focus will be on insulin products for diabetic therapies and consumer healthcare business
  • MR strength (2200 including supervisors)
  • Growth in CY20 has been at 8% vs 4% IPM growth due to increased prices (no volume growth)
  • Digitization efforts is engage better with the physicians with a hybrid model, trying to replicate Sanofi global digitization efforts in India
  • Field force has only come back in January after the pandemic lockdown was enforced
  • Loan given to Sanofi Healthcare is until April 2022
  • Oncology launches will not be under listed company
  • Domestic formulation is higher margin business, exports is mostly into contract manufacturing for group companies (lower margin). Looking to grow both domestic and exports
  • The India chronic business portfolio has lower margins compared to other companies (<60%); this is because of traded products (imports from outside India are ~35% of domestic portfolio; eg: insulin), own manufactured products margins are higher
  • Therapies will be focused on chronic, especially diabetes
  • No additional CAPEX (only maintenance CAPEX). Have additional space in Goa to expand if required
  • India rankings have gone down from 18 in 2017 to 22 in 2019. Not present in all therapies, company only looks at market share and tries to grow in therapies of focus. All the focused therapies, they are top-5
  • Top-10 brands contribute ~70% of domestic sales and growing at high single digits

Disclosure: Not invested

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Thanks for mentioning the concall notes!

I think launching diabetes product from a private subsidiary is a big negative! I am assuming that the private subsidiary might be leveraging the same sales force!

On the onco front, it was expected that the launches will be from the private subsidiary if one looks at their global structure!

Did they mention anything about new product launches in Diabetes and Consumer space from the listed entity?

I was looking to invest in Sanofi since the company trades 30X earnings multiple with consistently high dividend payout however launching even diabetes product product with private subsidiary leaves little scope of growth!

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Recently Bloomberg Quint also did an article raising question marks for foreign MNC pharma having two entities in India, one that is listed and one unlisted.

This should not happen and is not minority shareholder friendly.

Disc: Sold my holdings in Sanofi.

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02-03-2022 (analyst meet)

  • Insulin portfolio volume growth is ~5%, launched insulin glargine in tougeo in pre-filled reusable cartridge format (first in the world).
  • Both lantus and tougeo are sourced from Sanofi Healthcare (private related party)
  • 2% sales growth despite 200 cr. drop in export sales divested earlier, on a comparable basis growth is 13%. Core domestic business size is ~2240 cr.
  • Export accounted for 13% of CY21 sales (~350 cr.)
  • Accelerate diabetes growth + build certain brands in consumer portfolio + maintain competitive positioning of established product portfolio (50% of domestic sales)
  • Lantus price control impact: NLEM list has not been formalized yet and is not visible on their numbers
  • Allegra and combiflam are brands of key priority
  • 18% of current portfolio is under NLEM

They don’t talk about potential product launches.

I am also not convinced by management explanations, this is the problem with most MNC pharma. Sanofi’s only commitment is they will launch new variants of insulin (like tougeo) through the listed entity. Even these are manufactured by Sanofi Healthcare, the private unlisted arm.

Thanks Harsh for the information that insulin is manufactured in their private subsidiary!

When I had done my research on India MNC pharma, this was the biggest negative! Abbott was the only company which was consistent in product roll out and selection between its publicly listed company and private company.

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Huge dividend of inr 490 per share. Almost 7 percent dividend yield

Record date is may 4th probably to arrest fall in stock price given poor recent performance. Unlisted entity is a huge red flag if it is same domestic market

I think even the drugs in the listed entity have enough headroom for growth going ahead. The stock has corrected mainly due to its main diabetic drug Lantus coming under price control . However going ahead there should be steady growth in the company’s sales and profits (probably much better than FMCG companies). I think it is worth adding now or after it becomes ex-dividend. As long as they dont remove any drugs from the listed entity - I will stay invested . At 30 p/e adjusted for one-off , I think this is a no-brainer for next couple of years where there is so much volatility and uncertainty.

Disc: Invested and added

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Can u pls elaborate on how and what is this consistency in Abbott which is missing in Sanofi. Thanks

If I recall correctly Abbott has 4 divisions in India
a) Listed - Mainly into Pharma
b) Abbott Nutrition - Milk and Nutrition Products
c) Abbott Medical Equipment
d) Abbott Diagnostics

So there is no overlap in any company.

I remember seing a cough syrup by Abbott via its unlisted entity…searched for it and found below…so seems for pharma there is overlap in case of Abbott also…

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Any notes or updates on Sanofi India AGM, please share it

Thanks in Advance