Sanofi 2018 Form 20-F Summary
Business context and reporting period
Sanofi is a France-based global healthcare company with Pharmaceuticals, Consumer Healthcare and Vaccines businesses. This is its annual report for the fiscal year ended December 31, 2018—not a standalone fourth-quarter filing. Financial statements are prepared under IFRS as issued by the IASB and adopted by the EU, and reported in euros. The consolidated financial statements received an unqualified audit opinion.
Key financial metrics
| Metric | 2018 | 2017 |
|---|---|---|
| Net sales | €34.463 billion | €35.072 billion |
| Gross profit / margin | €24.242 billion / 70.3% | €24.608 billion / 70.2% |
| Operating income / margin | €4.676 billion / 13.6% | €5.804 billion / 16.5% |
| Net income attributable to Sanofi equity holders | €4.306 billion | €8.416 billion |
| Basic EPS | €3.45 | €6.70 |
| Business net income (non-GAAP) | €6.819 billion | €6.943 billion |
| Business EPS (non-GAAP) | €5.47 | €5.52 |
| Net cash from operating activities | €5.547 billion | €7.379 billion |
| Net debt (non-GAAP) | €17.628 billion | €5.161 billion |
Reported sales declined 1.7%, but increased 2.5% at constant exchange rates (CER) and 0.6% at CER and constant structure. Currency movements reduced reported sales by 4.2 percentage points. Gross margin edged up 0.1 percentage point; operating margin fell 2.9 points.
Operating cash flow before working-capital changes was €6.827 billion. Working capital absorbed €1.280 billion, including a €701 million increase in inventories. Investing cash outflow was €12.866 billion, principally reflecting €12.994 billion of acquisitions; financing provided €3.934 billion. Cash and cash equivalents were €6.925 billion at year-end. Undrawn confirmed credit facilities totaled €8 billion, with no financial-ratio covenants disclosed. Long-term debt was €22.007 billion and total debt was €24.586 billion.
The proposed 2018 dividend is €3.07 per share, subject to shareholder approval; management stated this represents 56.1% of business net income. The filing does not provide a standalone Q4 revenue or earnings figure in the supplied text.
Material changes versus prior period
- Sales growth at CER was led by Specialty Care, especially Immunology, and Rare Diseases; declines in Diabetes and Established Prescription Products offset much of that growth. Pharmaceuticals sales were €24.685 billion, Consumer Healthcare €4.660 billion and Vaccines €5.118 billion.
- Dupixent sales rose to €788 million; Rare Blood Disorder contributed €897 million after the Bioverativ and Ablynx acquisitions. Lantus sales fell 19.0% CER to €3.565 billion; total Diabetes sales declined 10.4% CER.
- Management attributed the 48.8% fall in reported attributable net income largely to the €4.643 billion after-tax Animal Health divestiture gain recorded in 2017. Excluding that business, net income increased to €4.423 billion from €3.894 billion. Business net income declined 1.8%.
- Operating income declined 19.4%, reflecting higher R&D, acquisition-related amortization, impairment and restructuring costs. Restructuring charges rose to €1.480 billion from €731 million; impairment of intangible assets rose to €718 million from €293 million.
- Net debt rose by €12.467 billion and gearing reached 29.9%, from 8.9%, mainly because of the Bioverativ and Ablynx acquisitions. The company issued €8 billion of euro bonds and $2 billion of US-dollar bonds in 2018.
- Generic and biosimilar competition was associated with a €1.749 billion reported sales decline across affected products. Currency effects and changes in consolidation, including Bioverativ and the Zentiva divestment, complicate year-on-year comparisons.
Outlook, commentary, risks and unusual items
- Management expects continued generic erosion in 2019, potentially affecting a substantial portion of 2018 sales of the named exposed products. It also expects further declines in US net selling prices for insulin glargines as rebates are used to maintain coverage.
- Management said operating cash flows and existing cash resources should be sufficient for foreseeable working capital and debt repayment. Medium-term annual property, plant and equipment investment was expected to average about €1.7 billion, assuming no scope changes.
- R&D expense was €5.894 billion, or 17.1% of sales, versus 15.6% in 2017. Sanofi terminated 13 development-stage molecules and discontinued 25 research projects in its portfolio review. Pipeline and launch outcomes remain uncertain.
- The Bioverativ acquisition cost $11.6 billion (€9.4 billion); Ablynx cost approximately €3.9 billion. Zentiva was divested for €1.9 billion enterprise value, producing a €510 million pre-tax gain. The 2018 income statement also included €430 million of Bioverativ intangible amortization, €183 million impairment of Lemtrada rights, and a €283 million provision for restructuring the Regeneron immuno-oncology collaboration.
- Major risks include pricing and reimbursement pressure, generic/biosimilar entry, patent disputes, product liability and regulatory matters, R&D failure, reliance on key products and partners, manufacturing or supply disruption, currency exposure, customer credit risk, and cyber/data-protection risks. Sanofi reported a $25 million SEC settlement in 2018, without admission of wrongdoing, and agreed to two years of self-reporting on enhanced internal controls; the related DOJ investigation was closed without action.
- Dengvaxia faced label changes following safety analyses, weak sales and political/regulatory consequences; the Philippines revoked its license in early 2019. Other notable contingencies include insulin pricing and marketing investigations, Taxotere and Depakine litigation, patent disputes involving Praluent and Dupixent, and the CVR trustee claim. The company said litigation outcomes are uncertain and some potential loss ranges are not disclosed.
- Environmental remediation provisions were approximately €680 million at year-end 2018. Sanofi reported €62 million of 2018 remediation spending. It also disclosed that IFRS 16, effective in 2019, was expected to add €1.2–€1.6 billion of lease liabilities at transition.
Investor verification priorities
- Reconcile reported versus CER and constant-structure sales, including the effects of foreign exchange, acquisitions and divestitures.
- Assess whether growth from Dupixent, Rare Diseases and Rare Blood Disorder can offset continued Diabetes and mature-product erosion, particularly Lantus and Renvela/Renagel.
- Review acquisition returns, integration progress and the effect of acquisition-related amortization, impairments and increased leverage on cash generation and business net income.
- Examine 2019 generic/biosimilar erosion, insulin rebates, Praluent pricing/access and the timing and outcomes of material patent, product-liability and government proceedings.
- Confirm approval and payment of the proposed €3.07 dividend, the impact of IFRS 16 adoption, and the adequacy of liquidity and debt-maturity coverage.