* Value or trap? Stepping aside, likely consensus downgrades — The onus on
Lantus (diabetes is 35-40% of group EBIT) to drive growth has risen given recent
pipeline/divisional disappointments. Despite assuming strong Lantus pricing in 2014
and growth post biosimilar entry in 2015, a €0.5bn cost savings programme being
announced at FY results and buybacks of €3bn per annum, our 2014-16 EPS
forecasts remain up to 9% below consensus. This reflects lower sales, mix
developments and FX. We downgrade 2013-20E EPS by up to 20%; 2014-19E EPS
CAGR of 8%, versus the sector on 10%. We set our target price in the middle of our
PE- (€68 = 12x 2015E vs sector’s 13x) and DCF-based (€83.50) valuation. Our
preferred Buys are Novartis, Roche, Novo and Bayer, and BMS in the US.
* Significant operating leverage unlikely — We forecast a 5-year sales CAGR of
3%. Gross margin analysis, coupled with expense guidance, points to EBIT margins
rising from 30% in 2014 to 31% in 2016 (32-34% longer term). We are up to 200-
300bps below consensus, and note the significant payaways to Regeneron on key
pipeline assets are not being properly reflected by cons. With the tax rate set to rise
we forecast a net income CAGR of just 5-6%, ex-buybacks. We introduce a webbased
Interactive Modelling Tool which offers the ability to flex key assumptions.
* Capital allocation decisions to consider — We estimate net debt at €7bn (<1x
EBITDA). Raising the Regeneron stake to >20% and recognising associate income
would cost €1bn and be 3% EPS accretive from 2015. Buying L’Oreal’s 9% stake
for €9bn could be 4-7% accretive from 2015, depending on buyback assumptions.
With Sanofi’s oncology franchise facing terminal decline we await information on
whether Ph I immunotherapy assets (CD19 and CD38) face accelerated
development, or external action is required to reestablish a presence.
* Ph III data in 2014 unlikely to move the needle — Positive data expected for
alirocumab (peak sales €1.3bn, NPV €2.5) but recent regulatory changes, and likely
reimbursement challenges, requires outcomes data (2018) to support aboveconsensus
forecasts. Ph III Dengue vaccine (NPV €1) data high-risk. With this note
we transfer coverage to Peter Verdult.