Bitter pill to swallow: Margin worries ahead for Sanofi

Analysts believe the performance of the firm's domestic business has been lower than expected

The Sanofi stock has been on a downtrend since its highs in February, given the pressures on pricing in the domestic market. Analysts believe the performance of the pharmaceutical company’s domestic business has been lower than expected, because of price cuts and potential correction in the channel inventory.

The company has cut prices of one of its top brands Amaryl (and extensions), which is used in treating diabetes. 

Vishal Manchanda of Nirmal Bang Institutional Equities Research has revised his estimates for (calendar year) CY19 and CY20 lower due to potential price controls happening in some of its core assets and also accounting for the change in gross margins. 

One of the reasons for the pressure in gross margins is due to the sharp rise in exports. The share of exports to revenues has risen from 26 per cent last year to 30 per cent this year, on the back of a 25-per cent year-on-year growth. 

Given the higher cost of raw materials associated with exports, the rise in this segment has weighed on gross margins. The company has guided for maintaining its export volume for the current year, while on the domestic front, it expects to grow in line with the Indian pharmaceutical market. Analysts expect a growth of 9-10 per cent for both the segments. 

The Street will keep an eye out for the trend in exports, as Sanofi is one of the few multinational companies to have a significant share of revenues coming from the export market. While the company has a five-year contract for the supply of products, there is a risk of revenues from this segment coming under pressure after the contract period. Given this, the company has indicated it will review its manufacturing strategy.

In addition to the diabetes segment, which is its key growth driver and has done much better than the overall domestic growth, how the segment growth pans out will be crucial. Any price cuts could dampen sentiment. While the stock continues to be attractively priced, investors should not rush into an investment, given the near-term headwinds.