Come Wednesday, February 10, French drugmaker Sanofi-Aventis (ADR: SNY), maker of blockbuster bloodthinner Plavix will announce Fourth Quarter results for 2009. We came across SNY in a “January Effect” review of sectors. In short, the “January Effect” – more than adequately referenced elsewhere on the web – basically states that how stocks do in January predicts how they will do the rest of the year.
There’s a little more to it than that, but it’s not really relevant here. Looking a bit deeper; at the sector level rather than the index level, one of the better performing – albeit still at a loss for the month – sectors in January was Healthcare. Subsequently looking at the stocks in this sector, and grouping them against known competitors, we can find which stocks are undervalued at some level of comparison such as P/E ratio, to their peers.
European pharmas in the Healthcare sector include Sanofi, trading at 8.4 times expected 2010 earnings per share, which is underperforming its three main competitors Roche, GlaxoSmithKline, and Novartis. In December, Sanofi announced the acquisition of Chattem which gives it a presence in the somewhat lucrative OTC market in the United States.
Evidently, Chattem is a strategic acquisition partly to give Sanofi some respite from end of patent exclusivity losses of several of its main drugs such as Plavix, Taxotere and Lovenox to generic rivals (the latter to a low-price version made by competitor, Novartis). How much this will help offset those losses is debatable. However, Sanofi also earned an over 500m Euro windfall from H1N1 vacine sales during the latter part of 2009, and is continuing to do so somewhat in 2010. Among new pipline drugs is a triple-negative Breast Cancer drug currently in phase III fasttrack clinical trials in partnership with BiPar Sciences.
Sanofi stock has been in an uptrend following the general wider market trend since March 2009, and reached a high of $41.55 in mid-January, sharply declining since then. The last closing price price of $35.51 presents around a 50% discount to the GI-calculated Intrinsic value of $68.59. Downsides are the generic competitors looming with patent expiries between 2009 and 2013 and the apparent tailing-off of H1N1. However, Sanofi’s management appears to be cutting costs while at the same time repositioning and diversifying to take advantage of new pipelines and markets. I do not currently have a holding, but will personally be following Sanofi very closely.
