MannKind Corp. (MNKD)

[COO2002COO]

Update: Sanofi Will Deliver Growth, But Later Than Expected

Summary

A good quarter was obfuscated by the announcement that pricing pressures in the US will stall growth of the Diabetes division.

As Diabetes delivers probably more than 34% of Sanofi's profits, investors sold off their shares in early trading.

I continue to be optimistic for the French drug maker in the long term, but recognize that investors will have to wait a bit longer for stronger growth.

Today, Sanofi (NYSE:SNY) (OTCQB:SNYNF) posted quarterly results. Great performance in Latin America (sales up 23.7% at CER) was partly offset by the impact of generic competition in Japan. Overall sales grew 5.1% in the quarter and 5% for the 9-month period. Business EPS grew 10.3%, stronger than Business net income (9.4% growth), reflecting the impact of share repurchases. (All figures at constant exchange rates.) Business EPS for the quarter was €1.47 and €3.81 for the 9-month period. Sanofi continued to feel the strong Euro, especially as far as the Argentine Peso, Japanese Yen and Russian Ruble are concerned. Exchange rate movements had a negative effect of 1% in the quarter and of 4.2% YTD. I expect currency translation to provide a tailwind in the fourth quarter, reflecting the steep fall of the EUR/USD exchange rate at the end of Q3.

What spooked investors, causing a 7% sell-off right at the start, was presumably not the alleged tension between BOD and CEO, but the following paragraph in the earnings release:

Sanofi has recently concluded payor negotiations in the U.S. and has secured favorable formulary positions for Lantus® with key payors. The level of rebates required to maintain these positions has increased significantly due to aggressive discounting by competitors. The rebates will not change the Group's Business EPS guidance for 2014. The increased rebates in the U.S. and the impact of the Affordable Care Act will continue in 2015. Sanofi expects to mitigate this impact on the Diabetes division in 2015 through the launches of Toujeo® and Afrezza® as well as continued strong growth in Emerging Markets. Therefore, global sales of the Diabetes division are expected to be broadly stable in 2015.

The Diabetes division is responsible for 28% of Sanofi's sales and I estimate its contribution to profits to be higher than 34%. If growth stalls in Diabetes, the other divisions will need to grow strongly in order to deliver the anticipated 5.6% sales growth for the group in 2015. Considering that YTD sales have grown 5% with a strong 12.3% contribution from Diabetes, analysts will certainly revise downwards their estimates. While my basic investment thesis for the company won't change because of this headwind (of which Sanofi has endured and mastered a great many recently), in the near term I expect slower growth as well. That said, at its current level of roughly 13 times my (already revised) Business EPS estimate for 2015, the stock seems to be undervalued, as the French drug maker has very strong positions in growing economies around the globe and is well positioned to deliver income growth for many years to come.

http://seekingalpha.com/article/2604525-update-sanofi-will-deliver-growth-but-later-than-expected