Sanofi India: Sell

The stock of Sanofi India, the Indian subsidiary of French pharma giant Sanofi S.A, gained over 20 per cent in the last two months. This was largely due to two developments.

One, there were expectations that the price ceiling for its key anti-diabetes and cardiovascular brands would be lifted.

This was after the price regulator National Pharma Pricing Authority (NPPA) scrapped the guidelines to calculate the ceiling price for drugs outside the national list of essential medicines (NLEM).

However, the NPPA has not altered the ceiling price of 108 anti-diabetes and cardiovascular drugs despite them being outside the NLEM.

Considering the restriction on the maximum price that Sanofi can charge its leading brands, the company’s profitability over the next three quarters could be impacted.

Second, in November, Sanofi India made public its decision to sell a portion of its commercial premise located at Nariman Point in Mumbai for ₹134 crore.

The stock gained over ₹85 since the announcement; this is possibly in anticipation of a special one-time dividend, even though the sales proceeds per share works out to just ₹40.

At ₹3,533, the Sanofi India stock trades at almost 34 times and 29 times its 2014 and 2015 expected earnings.

This translates into over 20 per cent premium to the Sun Pharma stock valuation.

This premium does not seem justified for two reasons.

One, Sun Pharma’s operating profit margin of about 46 per cent is more than twice the 20 per cent margin reported by Sanofi India.

Second, unlike Sun Pharma, which has managed to consistently grow ahead of the industry and improve margins, Sanofi’s operating profit margin may continue to remain under pressure over the next few quarters, due to the recent price cuts. So, investors can go ahead and book profit in the stock.

In July, the NPPA capped the maximum price that drug makers can charge for the 108 drug non-NLEM formulations.

Sanofi India was the worst impacted by this move, as its cardiovascular drug brands cardace and clexane, and anti-diabetes brand cetapin were brought under price control.

These accounted for almost a third of the company’s sales. Sanofi had to take a steep price cut of about 30-50 per cent on these three large brands.

However, in a surprise move, the drug price regulator withdrew the guidelines used to fix the ceiling price for the non-NLEM drugs in September.

Following this, it was expected that the ceiling on the selling prices of the 108 anti-diabetes and cardiovascular drugs, including Sanofi India’s drug brands, would be lifted too.

However, the price regulator has not withdrawn the price curbs on these 108 drugs.

Given that high-margin domestic sales account for three-fourth of the company’s revenue, the steep price cuts could lower the company’s operating profit by about 30 per cent.

In the latest September quarter, which reflected only the partial effect of the price cuts, Sanofi’s operating profit margin declined by 5 percentage points to 20.2 per cent, compared with the same period last year. Its net profit fell over 19 per cent to ₹62 crore.

This is despite the company having managed to arrest the decline in sales to less than a per cent for the period, possibly helped by higher export sales.

For the second year in a row, domestic revenue is expected to remain modest, thanks to the price cuts.

Higher export sales and further depreciation of rupee against the US dollar, if it happens, may only partially compensate for the weakness in the domestic business.