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December 10, 2012 6:50 pm
Being average can feel much better than average, if you start from below average. Consider Sanofi. The market reckons the French pharma group’s shares are worth about 12 times this year’s earnings, in line with its peers GlaxoSmithKline, Novartis, Pfizer and Merck. A few big pharma companies trade higher (Roche, say) and one (AstraZeneca) notably lower, but 12 times is the standard.
Sanofi, though, was on a single-digit multiple to start the year, so arriving at normality translates to a year-to-date return of 32 per cent – leading the pharma sector. What has changed? It is not a matter of returning to industry-standard growth rates: Sanofi has not. In its most recent quarter, were it not for help from currency, its sales and net income would have dropped 3 and 16 per cent, respectively.
The key point is that all the really bad stuff – which, in the pharma industry, means patent expiries – is in the past, not the future. The last of Sanofi’s old-fashioned, small-molecule blockbuster drugs lost US patent protection in August. Patent losses are still causing violent and unpredictable sales declines across the portfolio but, rationally or not, investors are much happier when all the awful stuff they know is going to happen is already happening. Given this, only a modest pinch of good news is needed to move a stock up smartly. In Sanofi’s case, this has come mostly from the diabetes portfolio (which may get bigger if Sanofi acquires Bayer’s blood glucose meter business, for which it is reportedly bidding).
AstraZeneca investors, looking at their company’s multiple (eight) and hoping for a similar reversion to the mean, are likely to be disappointed. Its two biggest-selling drugs, Nexium and Crestor, do not go generic in the US until 2015 and 2016. If its sales were to collapse sooner, AstraZeneca could be a much better stock.
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