“Sanofi’s unexpected market value plunge highlights the high stakes of dropping its 2025 profit target, signaling a potential strategic shift that leaves investors questioning the company’s future growth prospects.”
Sanofi, the French drugmaker, experienced a sharp drop in its stock value, losing 20 billion euros ($21 billion), after announcing that it would abandon its 2025 profit target. The company plans to focus on its core innovative drugs business and list its consumer healthcare business. Sanofi is considering various separation scenarios, with the most likely option being a capital markets transaction to create a listed entity based in France.
The decision to abandon the 2025 profit target is part of a strategy to increase investment in immunology and inflammation drug development. The company aims to prioritize long-term profitability and has scrapped its goal of achieving a 32% operating profit margin by 2025.
The market reaction to Sanofi’s announcement has put CEO Paul Hudson under pressure. Sanofi shares dropped 15.5% to their lowest level in over eight months. However, Sanofi’s stock is currently trading at a discount compared to its peers, with a forward price-to-earnings ratio of 11, compared to AstraZeneca’s 16 and the global pharma index’s 17.
Investors and analysts have expressed mixed views on Sanofi’s decision. Some believe that the company’s historically low research and development productivity may hinder its ability to generate adequate returns on increased investments. Others acknowledge that Sanofi’s focus on innovative drugs and potential spin-off of its consumer unit could create opportunities for long-term growth.
Sanofi’s decision to list its consumer healthcare business follows similar moves by other companies in the industry. Kenvue was spun off from Johnson & Johnson earlier this year, while Haleon was created by GSK and Pfizer in 2022. Bayer has also faced calls from investors to separate its consumer business.
Sanofi expects adjusted earnings per share to decline in 2024, citing increased development expenditures and higher taxes. However, the company anticipates a strong rebound in earnings in 2025, although it will not be enough to meet its previous profit margin target.
CEO Paul Hudson believes that Sanofi’s core innovative drugs business has improved enough to operate without the predictable cash flows from consumer products. He sees an opportunity to further invest in long-term growth, supported by recent pipeline developments and progress in advancing the company’s strategy.
Sanofi’s focus on immunology and inflammation drug development includes the marketing of recently acquired treatments for type 1 diabetes and haemophilia A, as well as antibody therapy for respiratory infections in infants. The company also aims to increase its presence in the development of drugs for bowel inflammation.
Despite the abandonment of the 2025 profit target, Sanofi still expects adjusted earnings per share to grow by a mid-single-digit percentage rate in 2023. The company plans to achieve cost savings of up to 2 billion euros ($2.11 billion) from 2024 to 2025, with most of the savings allocated to fund innovation.
Overall, Sanofi’s decision to focus on its core innovative drugs business and list its consumer healthcare business has had a significant impact on its stock value. The market reaction reflects the challenges faced by CEO Paul Hudson in turning the company around. However, the long-term prospects of Sanofi’s strategy will depend on its ability to generate returns on increased investments in drug development.