ANALYSIS-Sanofi CEO under pressure to woo investors after spending shock

      Investors say change in tack caught them off guard

      CEO Hudson needs to explain pay-offs of drug trials

      Sanofi's R&D spend is below sector average

      French drugmaker trades below sector earnings multiples

    By Ludwig Burger
       Dec 5 (Reuters) - Sanofi's  CEO is under
pressure to tell investors how much more he will spend on
research and development (R&D) and what the likely pay-offs will
be, as he seeks to boost a pipeline of future drugs and restore
shareholder trust.
    Shares in the 108 billion euro ($117 billion) French 
pharmaceutical giant tumbled 15% on Oct. 27 when CEO Paul Hudson
unexpectedly abandoned 2025 margin targets in order to boost the
budget for testing new immunology and inflammation drugs.
    The market's shock reaction, compounded by a lack of details
of the spending push, overshadowed Sanofi's plan to list its
consumer unit, in line with an industry trend.    
    The British CEO, who was hired four years ago to revive the
company's drug pipeline, said the strategy promises better
earnings further down the line, but he would not disclose more
details until a Dec. 7 investor day.
    Investors have told Reuters that Hudson, whose current term
started last year and expires in 2026, needs to lay out more
precisely how much he plans to spend on each experimental drug
and the commercial opportunity they offer.
    "The first step is getting out there with the data and the
reasons to believe in these programmes," said Dan Lyons, a
portfolio manager at Janus Henderson Investors in Denver.
    He said he was surprised by the plunge in the shares - steep
even by the standards of current market jitters - but said the
announcement was unexpected and lacked explanations.
    The stock has underperformed rivals in recent years as
shareholders worry the company is too reliant on its bestseller,
anti-inflammatory drug Dupixent. 
    The shares trade at the equivalent of 11 times expected
earnings over the next 12 months, according to LSEG data,
compared with 15 and 16 for the European and global
pharmaceutical indices respectively.
    Before the surprise R&D news, Hudson was already under
pressure from losing out in the COVID-19 vaccine race and after
a once-promising breast cancer drug candidate flopped last year.
    But new drug launches this year, haemophilia treatment
Altuviiio, Beyfortus to prevent a common respiratory infection
in infants and type 1 diabetes treatment Tzield, had since then
rekindled some trust in Sanofi's development abilities. 
    Abandoning the 2025 goal was particularly contentious
because it broke with a tradition of meeting financial targets,
while asking for trust in a development track record which has
flaws, said fund managers including Markus Manns at Germany's
Union Investment.
    David Song, a portfolio manager and investment partner
at Tema ETF, said: "The narrative of Sanofi has been a margin
expansion, earnings-driven story for a lot of investors."
    Sanofi did not respond to a request for comment.
    Still, relative to sales, Sanofi's R&D budget of about 15.6%
last year is well below a sector average of 20%-22%, said Fabian
Wenner, wealth management analyst at Swiss bank Julius Baer.
    "Sanofi had to catch up, but the announcement was too sudden
a change for shareholders," he said, adding he too wanted a
detailed breakdown of expenses. 
    Union's Manns suggested that sharing costs with development
partners, a common practice in the industry, was a way to take
the edge off the R&D budget ramp-up.
    The drug candidates under particular scrutiny include
frexalimab against multiple sclerosis, eczema drug amlitelimab
to build on the success of mega-blockbuster Dupixent and a
pneumococcal vaccine, all to be tested in costly phase III
trials from next year.
    Janus Henderson's Lyons said he was seeking clarity on how
Sanofi plans to advance blood cancer drugs known as anti-CD38,
including Sarclisa, GenMab  and Johnson & Johnson's
 strong foothold with Darzalex.
    Tema ETF's Song said a one-year delay in earnings growth may
well be acceptable in exchange for the prospect of higher
profits beyond 2025.
    "Shouldn't investors give credit to managements who care
about long-term shareholder value creation?," said Song.     
($1 = 0.9206 euros)

Sanofi shares lag rivals since Hudson took over the reins
Sanofi PE ratio underperforms sector
 (Reporting by Ludwig Burger;
Editing by Josephine Mason and Emelia Sithole-Matarise)
 ((; +49 30 220133634;))


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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