Sanofi loses $21bn in market value after scrapping profit target

Sanofi stock plunged on Friday, wiping €20bn off its market value, after it abandoned its 2025 profit target under a plan to list its consumer healthcare business to focus on its core innovative drugs business.

“Sanofi is reviewing potential separation scenarios, but believes that the most likely path would be through a capital markets transaction, by creating a listed entity headquartered in France,” the French drugmaker said in a statement.

Under a push to spend more on immunology and inflammation drug development, the company abandoned a target for a 32% operating profit margin for 2025 to focus on “long-term profitability”.

The news sent its shares down 15.5% at 12.35am GMT to their lowest level in more than eight months, with the market reaction increasing pressure on CEO Paul Hudson, who joined four years ago with a mandate to turn the company around.

Sanofi shares trade at a 12 month forward price-to-earnings ratio of 11, a discount to AstraZeneca’s 16 and global pharma index of 17, according to LSEG data.

Terence McManus, fund manager at Switzerland's Bellevue Asset Management, said the cuts to earnings ambitions over the next two years were “quite substantial”.

“Sanofi have traditionally had a low R&D productivity; it is yet to be seen whether the current management has been able to shift this narrative enough for investors to also back this investment.”

“There’s a lot to digest here,” said Barclays analysts in a note, adding that investors’ primary focus would be on the scrapped near-term earnings goals, tempering any favourable view of the consumer unit plan.

The announcement comes after larger consumer rival Kenvue was spun off from Johnson & Johnson earlier in 2023, and after the creation of Haleon by GSK and Pfizer in 2022. Bayer, led by a new CEO since June, has faced calls by several investors to split off its consumer business.

Sanofi expects 2024 adjusted earnings per share (EPS) to decline by a “low-single-digit” percentage, citing also a higher tax on top of a “significant” but unspecified increased in development expenditures. EPS would see a strong rebound in 2025 but not enough to sustain the previous margin target.

Consumer stand-alone

CEO Hudson said the core innovative drugs business had improved enough to soon do without the more predictable cash flows from consumer products. He had put the consumer business on course to become a stand-alone division within months of taking the helm in 2019.

“Our recent pipeline news flow, added to our strong progress that we’ve made in advancing our strategy, gives us a unique opportunity to further invest in our long-term growth,” he said.

Analysts have said the drug market debuts of a type 1 diabetes treatment acquired as part of the $2.9bn takeover of Provention Bio, haemophilia A treatment Altuviiio, and antibody therapy Beyfortus to prevent a common respiratory infection in infants, are important tests of the company's marketing prowess.

They have also been seen as a chance for Hudson to regain investor confidence following disappointing trial results of a once-promising breast cancer drug candidate in 2022.

Earlier in October, Sanofi purchased rights to a drug candidate against bowel inflammation by Teva for up to $1.5bn, facing off with Roche and Merck in a development race in a class of drugs known as an anti-TL1A antibodies.

The timing of the potential consumer listing, which Sanofi said would be in the fourth quarter of 2024 or later, would be set to maximise shareholder value.

The focus of higher spending on clinical drug trials would be on immunology and inflammation, Sanofi said, as it seeks to follow up on the success of its major growth driver, eczema and asthma drug Dupixent, jointly developed with Regeneron.

When asked to justify the higher spending in an analyst call, Hudson said that pushing late-stage trials of new immunology drugs such as frexalimab and amlitelimab would create “massive value”.

“These are not inexpensive things to but they are opportunities too good to miss.”

The development push covers vaccines and drug candidates against multiple sclerosis as well as inflammatory skin and lung diseases.

For 2023, the Paris-based drugmaker still expects adjusted earnings per share to grow by a “mid-single-digit” percentage rate, excluding the effect of currency swings.

Sanofi said it is targeting cost savings of up to €2bn from 2024 until 2025-end, of which most will be reallocated to fund innovation.

The company reported a 10.4% decline in its third-quarter business operating income, or adjusted earnings before interest and tax, of €4.03bn, slightly below the average analysts' estimate.

Reuters