Barron's : Sanofi Is on the Mend

Sanofi Is on the Mend

The French pharmaceutical company, in its strategy update, said it was on track to deliver 18 new products by 2020.

French pharmaceutical company Sanofi could be just what the doctor ordered at a time when European equities are suffering badly from numerous global ills.

Sanofi (ticker: SAN.France), one of the world’s biggest drugmakers, is itself on the mend after a hard year. It started 2016 in better shape than a year ago, when it was in urgent need of a new CEO and a strategy to counter the growing competition faced by its lucrative diabetes business.

In May, the U.S. patent expired on its blockbuster Lantus diabetes drug, which accounts for over 16% of the company’s total sales, allowing competitors to nab market share with cheaper generic equivalents. The potential impact of that threat was made clear at the end of October, when Sanofi reported third-quarter results. Despite lifting net profit by 37%, to 1.63 billion euros ($1.78 billion)—helped largely by its Genzyme biotech business—it said its diabetes-treatment sales would probably shrink by 4% to 8% through 2018.

Sanofi hopes the Toujeo diabetes drug it launched early last year will help it recover some of the income Lantus has lost, but it has a long way to go. Credit Suisse analysts reckon it could generate $2 billion in sales every year by 2018.

A much-needed strategy update in November failed to reassure investors.

CEO Olivier Brandicourt, who took the helm in April, said sales were expected to rise by a modest compound average growth rate of 3% to 4% at constant currencies through 2020.

On the plus side, he promised to create a leaner company, spinning off some activities to focus on a smaller number of businesses, freeing up €1.5 billion in cost savings in the process. The company plans to pump €6 billion into research and development by 2020.

Overall, it was a tough pill for investors to swallow. Sanofi stock plunged by almost 7% on the day the update was announced.

United Kingdom–based Polar Capital fund manager Nick Davis believes that pressure on Sanofi’s shares has given it a more attractive market valuation and that many investors overlook its upside potential. Its shares have fallen around 25% since early August. Davis says Sanofi’s strength is its capacity to launch new drugs. “You have to take a three- to five-year view. Sanofi’s product pipeline is improving, and it has some high-profile launches coming up.”

In its strategy update, the company said it was on track to deliver 18 new products by 2020, of which it forecasts six would generate annual sales of between €12 billion and €14 billion by 2025.

Last month, it entered talks with Boehringer Ingelheim to swap its animal-health business for most of the German group’s consumer health-care business.

If it comes off, the move would net Sanofi €4.7 billion and make it the global revenue leader in over-the-counter medicines, ahead of Germany’s Bayer (BAYN.Germany) and British drug company GlaxoSmithKline (GSK.UK).

Davis says Sanofi fits well with his bottom-up investment approach. He prefers to focus on companies rather than taking a position based on shifting market sentiment.

“Sentiment flies around more than reality and investors are either more buoyant or more depressed than the real world. The truth is in the middle. In 2012, everyone was against investing in Europe because of the sovereign debt crisis. In 2015, monetary easing had them excited about it again,” he says. He favors well-managed businesses that aren’t closely correlated with macroeconomic factors and offer total investment returns of at least 10%.

AS WITH OTHER PHARMACEUTICAL companies, Sanofi’s fortunes aren’t closely tied to the broader economy. Health-care spending remains a priority for governments and individuals, and is generally one of the last costs to be sacrificed when money gets tight. “The problem with investing according to economic cycles is that they’re hard to predict. Pharmaceutical companies have long product cycles, but you can follow them more easily,” Davis says.

It takes several years to develop new drugs and have them authorized. Once on the market, they have patent protection for 20 years. That means companies and investors can pinpoint crunch points for earnings.

“Economic cycles can throw up surprises, but with pharma, you know what problems are coming up, and companies have years to address that,” Davis says.

Credit Suisse analyst Rebekah Harper has Sanofi at Outperform with a €100 target price. She says its stock is trading at a 28% discount to the estimated 2016 enterprise value/net present value of its European Union major pharma peers.

She estimates that Sanofi’s adjusted price/earnings ratio will be 13.37 for 2015, rising slightly to 13.46 this year and falling to 12.49 in 2017.

“Sanofi still offers significant value on enterprise value/net present value versus EU major pharma peers, but the new CEO will need to convince already-wary investors that he can either make good the diabetes-sales shortfall, or drive margin acceleration hard to close this valuation gap,” she says.

Sanofi shares closed on Friday at €76.20.

>>> Weekly Update

Weekly Market Update: Central Bankers and Higher Crude Stem the January Sell-Off

After three weeks of punishing declines, global markets may have found a bottom. Traders keyed on what appears to have been Wednesday's important intraday technical reversal for both stocks and oil prices. On that day trading volumes surged, negative market internals spiked, the VIX reached levels not seen since last summer ahead of a 400+ point reversal in the Dow. By Thursday many suggested sentiment was also improving upon markets hearing the distant sound of the central bank cavalry riding to the rescue. Mario Draghi promised the ECB would look at more easing at the next policy meeting, while there were rumors that the Bank of Japan could launch another helping of QE at the policy meeting next week. The PBoC was less sanguine, however they promised to expand use of a new medium-term instrument to provide markets with liquidity, and separately fixed the yuan reference rate higher for the tenth consecutive session on Friday, putting the yuan at its strongest rate to the basket since January 6th. The other big positive catalyst was crude, which found a short-term bottom below $28. Both WTI and Brent dipped into the $27 handle on Wednesday upon Feb options expiration, then rallied hard through the close on Friday. Prices gained more than 20% in 48 hours, with both WTI and Brent closing out the week above $32. Global elites gathered in Davos, where nearly every interviewee was asked at least once whether they saw recession in the offing (most hedged or said not really). In the background, Q4 earnings season slogged on with managements offering up cautiously optimistic outlooks based on more of same in terms of tempered economic growth. US stock indices posted their first weekly gains in a month: after losing over 500 points through Wednesday morning, the DJIA rallied to end up 0.7% on the week, the Nasdaq rebounded to post a 2.3% gain, and the S&P added 1.4%.

China's economy slowed in the final quarter of 2015 to +6.8%, the weakest quarter of growth since the crisis in 2009, as Beijing continues to push its economic transition to a consumer economy. The full-year 2015 China GDP figure was +6.9%, the weakest growth rate since 1990. December industrial production saw its weakest y/y growth in 25 years, while December fixed-asset investment expanded at the slowest pace since 2000. The anemic slate of economic data prompted hopes for yet another round of stimulus from the authorities, in the form of RRR cuts or spending programs. The PBoC said it would begin expanding use of mid-term lending facilities (MLFs) to add liquidity, and a PBoC economist commented that the MLF facility could be a substitute for RRR cuts, which somewhat confused markets.

The ECB took no action at its policy meeting this week, but ECB President Draghi said the committee would review and possibly reconsider monetary policy at the next meeting in March, when the latest round of ECB staff forecasts will be published. He repeated several times that the ECB has not only been highly successful with its prior unconventional monetary policy actions, but that it still has plenty of tools left to help it achieve its mandate. Draghi justified his more dovish stance by warning that conditions have changed since December, specifically citing the 40% decline in oil prices since that time, an increasing possible correlation between inflation expectations and lower oil prices, and the chance that 2016 inflation levels will drop even lower due to the commodity price implosion. EUR/USD saw lower lows this week, testing below 1.0800, but was still constrained at the upper bound by the 1.0990 level.

The Bank of Japan's upcoming policy meeting is scheduled for next week and expectations were building for the bank to introduce more QE in light of market conditions. The yen has strengthened notably since the start of the year, with USD/JPY dropping from the 120.50 area in late December to as low as 116.00 this week. Preliminary January manufacturing PMI data dropped to a three-month low, as the new orders component slowed to a six-month low and inflation-gauging input prices fell for the first time in over three years. At Davos, BoJ Governor Kuroda said that deflationary pressures were a real risk, but also cautioned that he did not believe the global economy was on the brink of a deflationary wave and highlighted that underlying Japan inflation was still above 1.0% and that inflation expectations were still well anchored. Kuroda hinted that the BoJ has room for more QE, if needed, but the bulk of his comments were dismissive of any need for more stimulus.

In the eye of the storm on Wednesday, Fed fund futures had significantly repriced the probability of more FOMC rate increases this year. Futures pointed to less than 1% probability of four Fed rate hikes in 2016, with just a 30% chance of a March rate hike, compared to 53% a month ago. Recall that the dot chart released at the December Fed meeting predicted four interest rate hikes in 2016. Fed fund futures priced a 40% chance of no further rate hikes this year. By Friday, the futures contracts had eased off those levels. The benchmark 10-year yield after touching 1.93% recovered back above 2.05% by weeks end.

While the jobs picture certainly argues in favor of more Fed policy tightening, the inflation front is much less rosy. After trending downward for more than a year, two key inflation gauges - the five-year, five-year forward inflation break-even rate and the yield premiums on regular USTs over TIPS - both tumbled to their lowest levels since April 2009. In a report out on Wednesday, US CPI inflation unexpectedly slipped lower m/m in December, after November's flat reading. Analysts said the softness in the sequential data was mostly due to lower energy costs. Meanwhile the y/y readings were stable. In the 12 months through December, core CPI rose 2.1%, the largest gain since 2012, after climbing 2.0% in November.

At Davos, Saudi Aramco's chairman made extensive comments about the oil market and Saudi Arabia's role in it. He said the Saudis would be able to withstand low oil prices for a long time, given they have the lowest cost of production and the ability to increase production at will. He also said oil prices have overshot to the downside and will likely rise by the end of the year. Also at Davos, the head of Russia's Direct Investment Fund said Russia may be ready to cooperate with OPEC, given how low prices have fallen.

The IMF cut its global growth forecast for the third time this year. Citing weakness in the developing world, the IMF said the world economy would grow 3.4% in 2016, down from an October forecast of +3.6%. It downgraded the 2016 outlook for developing economies to 4.3% growth from a forecast of 4.5% in October. The IMF trimmed its forecast for US economic growth to 2.6% this year from 2.8%, noting the prospect of higher interest rates. It kept its 2016 forecast for China's economy unchanged at 6.3%.

Wall Street earnings reports continued roll in this week. Morgan Stanley greatly improved its performance in the bank's fourth quarter, roundly beating both earnings and revenue expectations. Morgan grew both earnings and revenue on a y/y basis. Bank of America's fourth-quarter results were mixed, with earnings up nearly 10% y/y, beating expectations, even as revenue slightly undershot. On the conference call, executives disclosed that 2% of the bank's overall loans were to the energy industry. Goldman Sachs had a mixed report, with provisions for its RMBS legal settlement eating approximately 75% of its quarterly profit, while revenue fell slightly on a y/y basis. Goldman's key book value per share metric rose 5% y/y.

Three big Dow components held back the index late in the week. IBM reported its 15th straight quarter of contracting revenue, with sales at all three of the firm's major business lines lower y/y. The firm's FY16 forecast was weaker than expected. GE's revenue total in its fourth quarter missed analysts' expectations, although total profit beat and both profit and revenue were up modestly on a y/y basis. The firm's oil & gas revenue fell 16% y/y, but most of the other industrial businesses saw good growth. American Express tanked as investors tore into the firm's FY16 forecast. The new guidance range beat expectations, but only because it includes an expected $1 billion gain on the sale of its Costco credit card portfolio, which implies that underlying growth will be weaker than expected.

>>> US Close Dow+1.33% S&P+2.03% Nasdaq+2.66% Russell+2.34%

Closing Market Summary: Indices End Volatile Week Higher

The stock market ended a volatile week on a sharply higher note thanks to a broad-based rally. The tech-heavy Nasdaq (+2.7%) outperformed both the S&P 500 (+2.0%) and the Dow Jones Industrial Average (+1.3%). The Friday spike was fueled by factors like:

  • A rebound from near-term oversold conditions
  • Speculation regarding additional monetary easing in Europe and Japan; and
  • An extension of yesterday's rally in oil

Equities began 2016 on a difficult note. Eight of the ten sectors in the S&P 500 entered today's trading session showing losses on the week, but all ten sectors entered with month-to-date losses between 13.0% (materials) and 0.5% (utilities). The heavy selling pressure experienced since the beginning of 2016 represent the worst start to a new year and even with today's spike losses in the Nasdaq, Dow Jones Industrial Average, and S&P 500 range between 8.3% and 6.7%.

Global markets have grappled with growth concerns to begin the year, and overnight indices found some relief as speculation regarding continued easing measures from the Bank of Japan followed yesterday's remarks from European Central Bank President Mario Draghi who stated that the central bank "will need to review and therefore possibly reconsider" its monetary policy stance in March.

Crude oil has gotten off to an even worse start than equities, with WTI crude declining more than 20.0% at its lowest point. However, the energy component rallied overnight, building on its gain from yesterday, climbing more than 9.4%. WTI crude backed away from its high, but still advanced 8.5% to $32.05/bbl.

In front of the pack energy (+4.3%), technology (+2.8%), telecom service (+2.4%), and financials (+2.0%) outperformed while industrials (+0.8%), health care (+1.6%), consumer staples (+1.6%), and  consumer discretionary (+1.7%) trailed.

The top-performing energy sector was aided by oilfield services giant Schlumberger (SLB 65.20, +3.75), which climbed 6.1% after reporting a Q4 earnings beat on in-line revenue. The stock was also helped after the company announced a $10 billion dollar share buyback. Meanwhile, Dow components Chevron (CVX 83.54, +2.49) and Exxon Mobil (XOM 76.57, +2.47) slightly underperformed the broader sector with gains of 3.1% and 3.3%, respectively.

For its part, the top-weighted technology sector was led by large-cap constituent Apple (AAPL 101.42, +5.12), which advanced 5.3%. This followed bullish commentary from Piper Jaffray, who advised investors to purchase shares before the company's earnings release next week, citing a possible 50.0% upside on the stock. To be fair though, fellow tech large-caps Microsoft (MSFT 52.29, +1.81), Alphabet (GOOGL 745.46, +18.79), and Facebook (FB 97.94, +3.78) also attracted heavy buying interest with advances between 2.6% and 4.0%.

In the Dow Jones Transportation Average (+1.3%), rail giants Union Pacific (UNP 69.99, -1.01) and Norfolk Southern (NSC 68.59, -1.48) showed relative weakness posting the worst losses in the composite. The two companies fell 1.4% and 2.5%, respectively. On the other hand, the Kansas City Southern (KSU 67.41 +2.87) outperformed after reporting above consensus Q4 earnings of $1.23 per share. The stock rallied 4.5% to top the composite.

Elsewhere, the consumer discretionary space (+1.7%) ended its day near the bottom of the board. However, sector heavyweights Amazon (AMZN 596.38, +21.36) and Disney (DIS 96.90, +2.88) were able to climb off midweek lows to top the group. The two names gained 3.7% and 3.1%, respectively. Meanwhile, Starbucks (SBUX 59.17, +0.14) inched off its session low, ending just above its flat line after issuing below consensus Q2 guidance in its earnings report. During today's trade, Starbucks surrendered its 50-day moving today (59.38).

Treasuries spent their session climbing off their opening lows that were brought on by a rally in equities. The benchmark note settled just below its flat line with its yield rising one basis point to 2.05%. 

Market participation was true to recent form with more than a billion shares changing hands at the NYSE floor. Additionally, advancing issues at the NYSE outpaced decliners by nearly 9 to 1. 

On the economic front, today's data included the December Existing Home Sales and December's Leading Indicators.

  • Existing home sales surged 14.7% month-over-month in December to a seasonally adjusted annual rate of 5.46 million units from 4.76 million in November (consensus 5.12 million)
    • This was the largest monthly increase ever recorded.
    • December closed out the strongest year of existing home sales (5.26 million) since 2006 (6.48 million).
    • We wouldn't expect a repeat of such strong growth in January, partly because there is a scarcity of available inventory.
    • At the December sales pace, the inventory of unsold homes stood at a 3.9-month supply, which is the lowest since January 2005. A 6.0-month supply is typically maintained during normal periods of buying and selling.
    • The median existing home price for all housing types increased 7.6% year-over-year to $224,100, which marked the 46th consecutive month of year-over-year gains. The median existing single-family home price was up 8.0% to $226,000.
  • The Conference Board's Leading Economic Index declined 0.2% in December following an upwardly revised 0.5% increase (from 0.4%) for November (consensus -0.1%)
    • Notably, it was said in the release that the Leading Economic Index increased 0.7% in the second half of 2015, which was much slower than the 2.0% growth seen in the first half of the year.
    • The December downturn was paced by negative contributions from the ISM new orders index (-0.1) and building permits (-0.1), as well as average weekly initial claims (-0.07) and stock prices (-0.05).
    • Those areas offset a 0.22 percentage point contribution from the interest rate spread.
    • Separately, the Coincident Economic Index increased 0.1% in December while the Lagging Economic Index increased 0.2%.

There is no economic data on tap for Monday.

  • Russell 2000 -10.2% YTD
  • Nasdaq -8.3% YTD
  • Dow Jones -7.6% YTD
  • S&P 500 -6.7% YTD

FT : Kasper Rorsted brings intellectual curiosity to Adidas

Kasper Rorsted brings intellectual curiosity to Adidas

Dane revived Henkel during 8 years as chief executive

As end-of-term reports go, Kasper Rorsted’s is not too bad. When the news broke on Monday that the 53-year-old Dane was leaving Henkel to become the new boss at Adidas, Henkel lost €1bn of its market value. Adidas gained a similar amount.
It is not hard to see why. During his eight years as chief executive, Mr Rorsted has revivified Henkel, pushing up revenues, driving further into emerging markets and improving margins. Under his stewardship, the German consumer goods group’s market capitalisation quadrupled to more than €36bn.

Investors in Adidas — which has lost ground against its arch-rival Nike in the battle for domination of the global sportswear market — are hoping that Mr Rorsted can pull off the same trick again.
“He’s an optimizer, which is just what they need,” says one investor. “And he’s a doer. He’s not someone who spends ages sitting around strategising.”
On the face of it, the multilingual Mr Rorsted and the world’s second largest sportswear company are a good match. The dynamic manager — who played handball for Denmark’s national youth team — is a keen athlete, who skis frequently in winter, and starts each day with an hour of running or in the gym.
He is also a passionate fan of Bayern Munich, Germany’s most successful football team, which just happens to be sponsored — and part-owned — by his future employer.
Another bonus is that moving from Henkel’s home in Düsseldorf to Bavaria — Adidas is headquartered in Herzogenaurach — will bring Mr Rorsted closer to the family home in Munich, where his wife and the younger two of his four children are based.
Picking a chief executive from a different industry is not without risks, as many companies have found to their cost. But Mr Rorsted has managed to switch sectors before.
After studying in Copenhagen and at Harvard Business School, he spend his early career in technology. He did stints at Oracle and Compaq and became Hewlett-Packard’s managing director for Europe, the Middle East and Africa, before being let go by then chief executive Carly Fiorina.
The episode was a rare blip in a largely seamless rise. Within a month of leaving HP, Mr Rorsted had 11 job offers from tech companies — and one from Henkel. He took the latter’s offer, because he could see a clear path to the top job, and set about getting to know his new company.
His grand tours of Henkel’s businesses around the world as he sought to understand the industry became the stuff of company legend. On one trip he spent five weeks on the road in China; on another, six weeks in the US.
People who know him say the son of a university professor has huge intellectual curiosity. “At business reviews he’s like a machine,” says one colleague. “He just fires off question after question after question.”
Insiders at Henkel suspect that this intellectual restlessness may have spurred him to join Adidas. Outsiders see it as a natural move after eight years in charge, especially after Henkel’s interest in Procter & Gamble’s haircare business was trumped last summer by Coty’s bid for P&G’s beauty assets.
Five days on from the announcement of Mr Rorsted’s move, Henkel’s shares have largely recovered their lost ground. Adidas’s investors will be hoping that Mr Rorsted’s boost in their company’s shares is more enduring.

>>> Merck sees deal opportunities as biotech funding gets tighter

Merck sees deal opportunities as biotech funding gets tighter - RTRS


DAVOS, Switzerland, Jan 22 (Reuters) - U.S. drugmaker Merck & Co MRK.N is eager to do deals to bring in promising experimental medicines and believes a recent correction in biotechnology stocks should throw up new opportunities.

"Prices have come back somewhat. That is a positive thing," Chief Executive Kenneth Frazier told Reuters in Davos on Friday.

"In particular, some of the early-stage companies are struggling to get the next round of financing as people start to be a little less willing to pay for the promise of growth, so that gives us opportunities."

Frazier said he was looking for small and medium-sized "bolt-on" deals to bring in new drugs, although such transactions could still be sizeable.

"At our size, I would say a $10 billion or $20 billion deal would qualify as a bolt-on," he said in an interview on the sidelines of the World Economic Forum annual meeting.

With a strong balance sheet, Merck has plenty of room for manoeuvre when it comes to capital allocation, leading some analysts to speculate it might also step up share repurchases.

Frazier said finding value-creating acquisitions of external science ranked as his "number two" priority, coming behind funding for ongoing research but ahead of returning cash to shareholders.

Last year, Merck did a record number of deals, though most were on the small side. Its last major deal was an agreement to buy antibiotics specialist Cubist for more than $8 billion in December 2014.

Merck is not alone in chasing promising acquisitions. The wider healthcare sector saw its biggest deal-making streak ever in 2015, with global transactions totalling $673 billion, according to Thomson Reuters data.

The downturn in biotech stocks has been driven in part by fears among investors of a political backlash against high drug prices.

Frazier said much of the anger surrounding the issue had been sparked by "a few bad actors" exploiting market failures to extract excessive profits. But he acknowledged there were also wider concerns about the affordability of medicines.

"Right now we are in the middle of a presidential election season and the rhetoric level is pretty high," he said.

"But I do think people in Congress hear from their constituents at home about the challenges they have with paying for their drugs and so I think there will be pressure to do something."