What Are the Catalysts for Sanofi’s Valuation?
Is Sanofi at a discount on an EV-to-EBITDA basis?
As of March 3, 2016, Sanofi (SNY) was trading at a forward enterprise value (or EV) to earnings before interest, tax, depreciation, and amortization (or EBITDA) multiple of 8.66x. The company has been trading at a discount when compared with Eli Lilly (LLY), AstraZeneca (AZN), Pfizer (PFE), and Merck & Co. (MRK). These companies were trading at EV-to-EBITDA multiples of 13.03x, 10.34x, 8.96x, and 9.6x, respectively.
Probable reasoning for discounted valuation
In the last four years, excluding 2013, Sanofi has been growing steadily by 2%–3%. With changing market dynamics for the diabetes market, there has been fierce competition in the segment. Pharmaceutical companies are continually developing new anti-diabetic products.
The cost containment measures adopted by the government have resulted in additional pricing pressures on these diabetes drug manufacturers. Such underperformance of this major segment could be one of the factors in the company’s discounted valuation.
During 2015, Sanofi’s Diabetes segment continued to underperform, as sales were off by 6.8%. This underperformance is expected to continue in the near-term. Sanofi expects its global diabetes drug sales to be down by 4%–8% from 2015–2018. For further information on diabetes drugs, please refer to How Can Sanofi Maintain Its Leadership in the Diabetes Field?
Comparing the industry’s EV-to-EBITDA
According to Bloomberg Intelligence, the estimated median EV-to-EBITDA for the industry should be 10.25x, whereas the average should be 12.02x. At 8.66x, Sanofi’s EV-to-EBITDA multiple seems to be at a discount. For the past two years, the company’s average multiple has been around 9.28x.
With fierce competition in the industry and less-than-average industry sales growth, it seems to be fair at current levels. However, robust growth in the Rare Disease segment by Genzyme and the Consumer Healthcare (or CHC) business can result in an improved multiple. For detailed information on the CHC business, please refer to Can Consumer Healthcare Drive Sanofi’s Revenue?
Risk-averse investors can choose to invest in ETFs rather than in individual stocks. One such option is the PowerShares International Dividend Achievers ETF (PID), which has 1.24% of its total holdings in Sanofi.
In the next article, we will discuss the analyst recommendations obtained from the Bloomberg survey for Sanofi and its peers.
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