End of the sugar rush

Sanofi creates toxic combination for investors

Sanofi is creating a toxic combination for investors. The French drugmaker's shares plunged on October 28 after it said sales growth in diabetes drugs, a key focus, would stall next year. A reported boardroom rift heaps on extra uncertainty. The company needs to reassure shareholders.

Diabetes makes up 20 per cent of Sanofi sales, mainly due to insulin blockbuster Lantus. Yet Sanofi surprised the market by saying US pricing pressure would lead to flat sales next year, while most analysts had expected double-digit percentage rises. The result was a 10.6-per cent fall in Sanofi shares, erasing nearly $15 billion in market value.

Some of this was an accident waiting to happen. Sanofi and Danish rival Novo Nordisk have enjoyed a powerful position due to few alternatives and growing demand caused by an obesity epidemic. But President Obama's Affordable Care Act has encouraged health care providers to haggle harder. Consolidation among private-sector purchasers has amplified this effect.

Still, the suddenness and scale of the revision took analysts by surprise. And the question now is whether 2015 will mark the trough. New drugs, particularly the longer-lasting Toujeo, may help Sanofi regain pricing power. Yet the respite might not last long: copycat versions of Lantus are likely to arrive in 2016.

Back home, meanwhile, Chief Executive Chris Viehbacher's authority is being undermined by French media reports suggesting he has had to defend his position and ask for the board's support. His relocation to Boston is a point of contention, Les Echos says. If true, that is ludicrous. The company's first non-French CEO, he had presided over a near-90 per cent rise in the share price before Tuesday's drop. And if anything, the diabetes setback vindicates Viehbacher's strategy of expanding into rare diseases by buying Genzyme in 2010.

Citigroup estimates the diabetes shock could knock up to 10 per cent off 2015 earnings. Adjust for that and Sanofi's shares now trade at less than 15 times earnings, versus a European sector on about 16 times. Until the company offers investors better visibility on the future of its key drugs and its leadership, that discount is more than merited.