Market Cap (USD Mil) 129,426
52-Week High (USD) 55.94
52-Week Low (USD) 44.50
52-Week Total Return % 5.5
YTD Total Return % -9.4
Last Fiscal Year End 31 Dec 2012
5-Yr Forward Revenue CAGR % 2.4
5-Yr Forward EPS CAGR % 2.8
Price/Fair Value 0.75
2011 2012
2013(E) 2014(E)Price/Earnings 8.2 11.4 14.5 12.8
EV/EBITDA 10.4 12.0 10.3 9.3
EV/EBIT 11.8 13.6 16.8 13.6
Free Cash Flow Yield % 10.0 6.8 5.0 6.6
Dividend Yield % 1.8 3.6 3.3 3.8
2011 2012
2013(E) 2014(E)Revenue 35,058 35,957 33,563 34,947
Revenue YoY % 9.4 2.6 -6.7 4.1
EBIT 7,357 7,670 6,324 7,789
EBIT YoY % -6.9 4.3 -17.6 23.2
Net Income, Adjusted 8,794 8,101 6,571 7,429
Net Income YoY % -4.6 -7.9 -18.9 13.1
Diluted EPS 4.48 4.15 3.35 3.80
Diluted EPS YoY % -6.1 -7.4 -19.2 13.3
Free Cash Flow -4,882 6,597 5,080 6,948
Free Cash Flow YoY % -177.0 -235.1 -23.0 36.8
Alnylam Under Review as Sanofi Alliance Brings Commercial Expertise and Cash
See Page 2 for the full Analyst Note from 13 Jan 2014
Damien Conover, CFA Director
damien.conover@morningstar.com +1 (312) 696-6052
Alex Morozov, CFA Director
alex.morozov@morningstar.com 31 20 751 1351
Research as of 13 Jan 2014 Estimates as of 07 Nov 2013 Pricing data through 04 Feb 2014 Rating updated as of 04 Feb 2014
Investment Thesis 22 Aug 2013
Sanofi's wide lineup of branded drugs and vaccines and robust pipeline create strong cash flows and a wide economic moat.
Growth of existing products and new product launches should help offset patent losses.
Sanofi's existing product line boasts several top-tier drugs, including long-acting insulin Lantus. The drug's ability to work well for an entire day sets Lantus apart from other insulins. In addition, the drug appears to have overcome reports of a cancer side effect that surfaced in mid-2009, and we expect it will post strong growth for several years. Further, given the complexity in marketing and manufacturing insulin, we don't expect major generic competition following the drug's 2015 patent loss. Besides Lantus, Sanofi's vaccines, consumer products, and animal health treatments should also continue to post strong growth as these products are less susceptible to patent losses.
Sanofi has compiled a robust group of late-stage pipeline products that complement its existing lineup and should help mitigate patent losses. We expect continued strength in the multiple sclerosis area with potential blockbusters Aubagio and Lemtrada emerging from the late-stage pipeline. In addition, diabetes drug Lyxumia looks to be a strong complement to the company's well-entrenched diabetes franchise.
The company also harnesses its research and development group to bring new drugs to emerging markets. While pricing in emerging markets is not usually as strong as in developed markets, the company can still leverage its investment in developing new drugs for developed markets by bringing the drugs to emerging markets.
The rapid economic growth in emerging markets has created new geographic markets for Sanofi's drugs.
A history of acquisitions and robust cash flow from operations means Sanofi could take advantage of further growth opportunities through external collaborations. While we expect that Sanofi's acquisitions will slow in the near term following the Genzyme deal, we expect that over the long term Sanofi will continue to make acquisitions in the branded pharmaceutical and biotechnology
Sanofi develops and markets pharmaceuticals with a concentration in oncology, cardiovascular disease, central nervous system disorders, diabetes, and vaccines. The company offers a diverse array of drugs with its highest revenue generator, Lantus, representing over 10% of total sales.
About 25% of total revenue comes from the United States and 25% from Europe. Fast-growing emerging markets represent the majority of the remainder of sales.
Profile Vital Statistics
Valuation Summary and Forecasts
Financial Summary and Forecasts
The primary analyst covering this company does not own its stock.
Currency amounts expressed with "$" are in U.S. dollars (USD) unless otherwise denoted.
Historical/forecast data sources are Morningstar Estimates and may reflect adjustments.
(EUR Mil)
Contents
Investment Thesis Morningstar Analysis
Analyst Note
Valuation, Growth and Profitability Scenario Analysis
Economic Moat Moat Trend Bulls Say/Bears Say Credit Analysis
Financial Health Capital Structure Enterprise Risk Management & Ownership Analyst Note Archive Additional Information Morningstar Analyst Forecasts Comparable Company Analysis Methodology for Valuing Companies
Fiscal Year:
Fiscal Year:
1
2 2 2 2 3 4
5 5 6 7 8 - 9 13 15
Morningstar Analysis
Alnylam Under Review as Sanofi Alliance Brings Commercial Expertise and Cash 13 Jan 2014
We're putting Alnylam under review following the announcement of a broader alliance with Sanofi for the firm's RNA-based genetic medicines. Not only will Sanofi pay $700 million for a 12% equity stake in Alnylam (translating to an $80 per share purchase price), but also it will take a much more active role in the development and commercialization of Alnylam's rapidly growing rare- disease pipeline. We expect to significantly raise our fair value estimate for Alnylam, after incorporating cash payments from Sanofi as well as stronger commercial potential for ALN-TTRsc, now that Sanofi will share in development and commercialization of the product in key markets. For Sanofi, we don't expect any major fair value estimate changes based on the deal, although the increased investment in the pipeline strengthens Sanofi's pipeline and moat. Overall, we think the deal is an excellent fit for both firms and the structure--allowing Alnylam to continue to function as an independent company--will help preserve Alnylam's innovative culture.
The general terms of the deal allow Alnylam to retain rights to its genetic medicines in North America and Europe, while Sanofi will have opt-in rights to commercialize products in the rest of the world. The first opt-in will be for patisiran;
the firms had already formed an Asia-focused collaboration for the amyloidosis drug, which recently entered Phase III of development. However, Sanofi will take a more active role in Alnylam's second amyloidosis program, ALN-TTRsc, where it will have codevelopment and cocommercialization rights in North America and Europe. In addition, Sanofi can choose between global rights to porphyria program ALN- AS1 and codevelopment/commercialization rights to hemophilia program ALN-AT3; we expect the decision to be made following proof of concept data, likely in 2015. Finally, Sanofi will have global rights to one additional future program.
Valuation, Growth and Profitability 30 Oct 2013 We are maintaining our fair value estimate of $65 per share (using an exchange rate of EUR 0.73 per $1 as of Oct. 30).
We project a five-year average annual revenue growth rate of 5%, largely driven by Lantus, new products, and the Genzyme acquisition offsetting products losing patents.
Following a sharp patent cliff in 2013, Sanofi faces relatively mild patent losses, and diverse operations in vaccines, animal health, consumer products, and emerging markets should lead to steady growth over the long term. Also, as the firm continues to cut costs, we expect minor margin improvement. Further, we estimate the company's weighted average cost of capital at 8%, which is in line with the company's peer group.
Scenario Analysis
The key uncertainties for Sanofi are Lantus' growth potential and the potential success of the company's pipeline. In a more bullish scenario, we increased our Lantus projections by 10% and increased the pipeline contribution by 50%.
Under this scenario, our fair value estimate would increase to $70. Conversely, if we assume greater generic competition to Lantus, causing the drug to drop 60% from our projections, the fair value estimate would fall to $59.
Economic Moat
Patents, a powerful distribution network, economies of scale, and diverse operations support Sanofi's wide moat.
Patent protection keeps Sanofi's competitors at bay for
several years while the company charges prices that enable
returns on invested capital significantly above its cost of
capital. A powerful sales force gives Sanofi access to drugs
developed externally, as smaller companies typically need
a partner to help market the new drug. Also, Sanofi's unique
entrenched position in the insulin market further reduces
the threat of generic competition even after patents expire
due to the high upfront costs needed to achieve the
economies of scale for low cost insulin production. Further,
the company's diverse operations in vaccines and consumer health care add two moaty segments that are supported by low cost production and branding power, respectively. Also, Sanofi's large geographic exposure to many countries (including emerging markets) provides a wide safety net compared with the peer group.
Moat Trend
While many big pharma firms are facing declining moat trends, Sanofi's diverse operations, strong exposure to emerging markets, and entrenchment in the insulin and rare-disease biologic markets keep the company's moat trend stable. As is the case with other pharmaceutical firms, Sanofi faces several industry headwinds, including an increasingly risk-sensitive FDA, stronger buyer power from managed-care companies, and an even more price-sensitive U.S. government. Unlike its peers, Sanofi's businesses in vaccines, animal health care, and consumer products help offset challenges to the drug group. The company's leading position in emerging markets should also help mitigate some of the competitive pressures in the U.S. The company's leadership in the insulin and rare-disease biologic markets exposes Sanofi to less-pronounced generic threats; we
believe eventual generic competition will not destroy
branded sales to the same extent as generic small
molecules, given the marketing and manufacturing
complexity associated with these drugs.
Bulls Say/Bears Say
Bulls Say Bears Say
3 Several products in the company's pipeline address diseases where there are no current treatments or use a novel mechanism of action, which should allow for strong pricing power.
3 The FDA rejection of the new competing insulin degludec should mean Sanofi will have the best-in- class insulin in the most important market for several years.
3 With an industry leading position in the insulin market, Sanofi's Lantus is poised for robust growth as the diabetic patient population grows due to increasing obesity trends and more sedentary lifestyles.
3 Sanofi's strong entrenchment in China could come under duress as Chinese officials are aggressively reviewing pharmaceutical marketing practices.
3 The patents on Lantus expire between 2014 and 2015 and while significant generic competition is not expected due to complexities of insulin manufacturing, a major push by generic firms could be detrimental to a key product for Sanofi.
3 Although Lantus has only been associated with an
increased incidence of cancer, new studies could
emerge showing a stronger causality link between
Lantus and cancer.
2013(E) 2014(E) 2015(E) 2016(E) 2017(E)
Cash and Equivalents (beginning of period) 6,559 9,655 11,641 14,058 16,520
Adjusted Available Cash Flow 2,368 3,417 3,786 3,803 4,081
Total Cash Available before Debt Service 8,927 13,072 15,427 17,861 20,601
Principal Payments -3,667 -3,124 -6,637 -2,650 -1,192
Interest Payments -610 -545 -445 -390 -360
Other Cash Obligations and Commitments — — — — —
Total Cash Obligations and Commitments -4,277 -3,669 -7,082 -3,040 -1,552
EUR Millions
% of Commitments
Beginning Cash Balance 6,559 33.4
Sum of 5-Year Adjusted Free Cash Flow 17,453 89.0
Sum of Cash and 5-Year Cash Generation 24,012 122.4
Revolver Availability — —
Asset Adjusted Borrowings (Repayment) — —
Sum of Cash, 5-Year Cash Generation, Revolver and Adjustments 24,012 122.4
Sum of 5-Year Cash Commitments -19,620 —
SNY Sector Universe
Business Risk 2 4.9 5.1
Cash Flow Cushion 7 5.4 6.1
Solvency Score 3 4.4 5.0
Distance to Default 2 3.3 3.8
Credit Rating AA- A- BBB+
Five Year Adjusted Cash Flow Forecast (EUR Mil)
Credit Analysis
Cumulative Annual Cash Flow Cushion
Cash Flow Cushion Possible Liquidity Need
Adjusted Cash Flow Summary
Credit Rating Pillars Peer Group Comparison
Source: Morningstar Estimates
Note: Scoring is on a scale 1-10, 1 being Best, 10 being Worst
Financial Health & Capital Structure
Although Sanofi has done a good job of deleveraging its balance sheet following its $20 billion purchase of Genzyme in 2011, we believe its credit trajectory has a negative bias.
At the end of June, Sanofi held EUR 14.7 billion in debt (1.2 times trailing 12-month EBITDA) and EUR 8.7 billion in cash and investments on its balance sheet. Only EUR 4.2 billion of that cash and investments is considered a current asset, though, while the balance is in noncurrent financial assets, including a 16% stake in Regeneron valued at EUR 2.7 billion at the end of June. Sanofi management has indicated a willingness to boost its stake in Regeneron to about 30%, which would cost another EUR 3 billion at recent prices and exchange rates. If Sanofi takes that step, we would not be surprised to see it try to fully acquire Regeneron in the long run, which could be a downgrade catalyst for Sanofi.
Additionally, Sanofi management may be interested in purchasing L'Oreal's stake in Sanofi (about EUR 9 billion), should it come to market in early 2014. Based on potential investment activities during the next year (raising the stake in Regeneron to 30% and buying back L'Oreal's stake in Sanofi), we do not anticipate downgrading Sanofi's credit rating. However, if a full acquisition of Regeneron appears likely in the near term or Sanofi doesn't plan to deleverage significantly after those potential investment activities, we would probably cut our credit rating.
Significant debt maturities include EUR 4.0 billion due
within the next year, which is just covered by the firm's
current cash position. Current debt maturities include EUR
1.6 billion in commercial paper borrowings (or $2.1 billion
on the firm's $10 billion U.S. program); Sanofi also has a
EUR 6 billion commercial paper program in France with no
outstanding liabilities. If it needs additional liquidity, Sanofi
can access EUR 10 billion in available credit facilities. Of
the remaining EUR 11 billion of its outstanding debt, another
nearly EUR 8 billion comes due before 2018. We estimate
Sanofi will generate about EUR 7 billion in free cash flow
Credit Analysis
annually through 2017. So although about half of that is earmarked for dividends each year, we expect Sanofi will have plenty of excess cash flow and financial resources to tap to cover its existing debt obligations.
Enterprise Risk
Sanofi faces the standard risks in the pharmaceutical
industry, including delayed approvals or nonapprovals from
regulatory agencies, an increasingly tough managed-care
environment, and patent losses. In addition, since a large
percentage of sales come from Lantus, the company faces
additional product specific risks from upcoming competitive
launches from Eli Lilly and Novo Nordisk.
Name Position Shares Held Report Date* InsiderActivity
NA NA NA NA NA
Top Owners % of Shares
Held % of Fund Assets Change
(k) Portfolio Date
Dodge & Cox Stock Fund 1.04 2.71 — 31 Dec 2013
Vanguard Windsor II Fund 0.49 1.51 12,466 30 Sep 2013
Franklin Income Fund 0.38 0.63 — 30 Sep 2013
Dodge & Cox Balanced Fund 0.20 1.94 — 31 Dec 2013
Robeco US Premium Equities 0.11 1.84 327 31 Dec 2013
Concentrated Holders
Fidelity Select Pharmaceuticals Port 0.07 7.68 — 31 Dec 2013
Chou Europe — 7.41 — 30 Sep 2013
STEREUR — 6.63 — 31 Dec 2013
Kinetics Medical Fund — 5.69 — 30 Sep 2013
pb Healthcare Fund — 5.09 — 31 Dec 2013
Top 5 Buyers % of Shares
Held % of Fund Assets
Shares Bought/
Sold (k) Portfolio Date Barrow, Hanley, Mewhinney & Strauss LLC. 0.81 1.74 16,267 30 Sep 2013
Robeco Investment Management, Inc. 0.33 1.09 1,697 30 Sep 2013
Hotchkis & Wiley Capital Management LLC 0.18 1.11 1,152 30 Sep 2013
Honeywell International, Inc. 0.04 1.35 1,042 30 Sep 2013
Neuberger Berman LLC 0.10 0.15 928 30 Sep 2013
Top 5 Sellers
Montag & Caldwell, LLC 0.27 2.79 -2,491 30 Sep 2013
Fidelity Management and Research Company 0.28 0.06 -1,678 30 Sep 2013
Managed Account Advisors LLC 0.13 0.27 -1,150 30 Sep 2013
Dreyfus Corp. 0.01 0.03 -827 30 Sep 2013
Lazard Asset Management LLC 0.04 0.13 -751 30 Sep 2013
Management 22 Aug 2013
Management & Ownership
Management Activity
Fund Ownership
Institutional Transactions
*Represents the date on which the owner’s name, position, and common shares held were reported by the holder or issuer.
Sanofi's increasingly wise deployment of capital has led us to increase the company's stewardship rating to exemplary.
Since Chris Viehbacher took over as CEO in late 2008, the company's major acquisitions and use of capital have generated strong returns and increased its competitive position. From an acquisition standpoint, the Medley, Chattem, Merial, and Genzyme acquisitions all have generated returns on capital employed above the weighted average cost of capital within fewer than four years.
Additionally, the Genzyme acquisition shows how Sanofi avoided overpaying for the company (a typical Big Pharma error) by using contingent value rights, or CVR, to appease Genzyme. Further, Viehbacher's decision to significantly cut underperforming pipeline drugs early in his tenure has led to a much stronger pipeline and less wasted capital along the way. Based on a strong and growing track record, we believe Viehbacher will redeploy the enormous amounts of cash flow generated by the company toward increased dividend payments and value-creating acquisitions.
Regarding management background, Viehbacher brings
strong management credentials with 20 years of experience
at GlaxoSmithKline in finance and general management. In
addition, Viehbacher ran Glaxo's French business
operations in the mid- and late 1990s, giving him a strong
understanding of Sanofi's home country. In May 2010, Serge
Weinberg took over as chairman of the board from veteran
Jean-Francois Dehecq. While Weinberg lacks a robust
pharmaceutical background, we like the splitting of the CEO
and chairman roles to avoid conflicts of interest. The board
comprises 16 members, 10 of whom are considered
independent.
Analyst Notes
Sanofi Posts Weak 3Q Due to Vaccine Supply Issues, but Solid Lantus Growth Sets Up Robust Outlook 30 Oct 2013 Sanofi reported third-quarter results that fell slightly below both our expectations and those of consensus, partly due to a vaccine manufacturing issue. However, Sanofi appears to have resolved the manufacturing issue and we don't expect any major changes to our fair value estimate, which represents a premium to the current stock price. We continue to believe the investment community underappreciates Sanofi's insulin Lantus (18% of total sales), which posted 21% year-over-year growth in the quarter, further validating our bullish stance on the drug. As Sanofi's patent losses finally begin to diminish, we expect continued Lantus strength will lead to robust long-term growth.
On the pipeline, the company is making strides, which increases our confidence in the company's wide moat. We remain most bullish on next-generation insulin U300 and cholesterol-lowering drug alirocumab as both drugs will likely enter very large markets with leading efficacy and clean side effect profiles, which should set up strong pricing power. Additionally, the company's emerging multiple sclerosis franchise should further propel long-term growth as a large portion of these patients fail on current treatments and are seeking new drugs. While Biogen's Tecfidera will likely take the majority of new MS patients, we believe Sanofi's unique MS drugs Aubagio and Lemtrada will take over 10% of a $15 billion market by 2020.
Turning to the quarter, increased generic competition and vaccine supply interruptions caused an amplified impact on the bottom line. While the top line was largely flat year over year, the bottom line fell 9%. However, since the vaccine interruption seems temporary and the majority of the patent losses have annualized, we expect a return to growth on both the top and bottom lines in 2014, led by the company's insulin franchise. We expect Lantus and the eventual
transition to next-generation insulin U300 will drive 8%
annual EPS growth over the next three years.
Growth (% YoY)
3-Year
Hist. CAGR 2010 2011 2012
2013 20145-Year Proj. CAGR
Revenue 5.4 4.2 9.4 2.6 -6.7 4.1 2.4
EBIT -0.6 1.1 -6.9 4.3 -17.6 23.2 8.5
EBITDA -0.6 1.0 -6.1 3.8 19.2 10.9 9.8
Net Income -1.4 8.9 -4.6 -7.9 -18.9 13.1 2.7
Diluted EPS -1.7 9.2 -6.1 -7.4 -19.2 13.3 2.8
Earnings Before Interest, after Tax -2.9 6.3 6.1 -18.8 -18.7 17.5 3.6
Free Cash Flow 67.7 353.3 -177.0 -235.1 -23.0 36.8 5.2
Profitability
3-Year
Hist. Avg 2010 2011 2012
2013 20145-Year Proj. Avg
Operating Margin % 22.3 24.7 21.0 21.3 18.8 22.3 24.3
EBITDA Margin % 25.3 27.8 23.8 24.1 30.8 32.8 33.0
Net Margin % 25.5 28.8 25.1 22.5 19.6 21.3 21.6
Free Cash Flow Margin % 8.1 19.8 -13.9 18.4 15.1 19.9 19.5
ROIC % 14.1 16.8 14.0 11.4 9.0 10.6 11.1
Adjusted ROIC % 24.2 29.7 23.4 19.6 15.5 17.4 18.7
Return on Assets % 6.1 6.6 6.7 5.0 3.5 4.9 5.8
Return on Equity % 10.3 10.8 11.3 8.8 6.1 8.4 9.6
Leverage
3-Year
Hist. Avg 2010 2011 2012
2013 20145-Year Proj. Avg
Debt/Capital 0.18 0.13 0.22 0.20 0.21 0.20 0.19
Total Debt/EBITDA 1.48 0.93 1.85 1.68 1.53 1.31 1.20
EBITDA/Interest Expense 16.63 19.07 15.14 15.68 16.94 21.02 27.44
2011 2012
2013(E) 2014(E)Price/Fair Value 0.79 0.95 — —
Price/Earnings 8.2 11.4 14.5 12.8
EV/EBITDA 10.4 12.0 10.3 9.3
EV/EBIT 11.8 13.6 16.8 13.6
Free Cash Flow Yield % 10.0 6.8 5.0 6.6
Dividend Yield % 1.8 3.6 3.3 3.8
Cost of Equity % 8.0
Pre-Tax Cost of Debt % 3.2
Weighted Average Cost of Capital % 7.7
Long-Run Tax Rate % 24.8
Stage II EBI Growth Rate % 3.5
Stage II Investment Rate % 35.0
Perpetuity Year 20
EUR Mil Firm Value (%) Per Share
Value
Present Value Stage I 55,289 40.9 41.77
Present Value Stage II 29,417 21.8 22.22
Present Value Stage III 50,345 37.3 38.03
Total Firm Value 135,051 100.0 102.02
Cash and Equivalents 6,559 — 4.96
Debt -14,531 — -10.98
Preferred Stock — — —
Other Adjustments -5,435 — -4.11
Equity Value 121,644 — 91.90
Projected Diluted Shares 1,324
Fair Value per Share —
Morningstar Analyst Forecasts
Forecast Fiscal Year Ends in December
Financial Summary and Forecasts
Valuation Summary and Forecasts
Key Valuation Drivers
Discounted Cash Flow Valuation
Additional estimates and scenarios available for download at http://select.morningstar.com.
The data in the table above represent base-case forecasts in the company’s reporting currency as of the beginning of the current year. Our fair value estimate may differ from the equity value per share shown above due to our time value of money adjustment and in cases where probability-weighted scenario analysis is performed.
(USD)
2010 2011 2012
2013 2014Revenue 32,035 35,058 35,957 33,563 34,947
Cost of Goods Sold 8,717 10,902 11,118 10,874 11,006
Gross Profit 23,318 24,156 24,839 22,690 23,940
Selling, General & Administrative Expenses 7,567 8,536 8,947 8,723 8,930
Research & Development 4,401 4,811 4,922 4,885 4,915
Other Operating Expense (Income) -83 -4 -108 -243 -243
Depreciation & Amortization (if reported separately) 3,529 3,456 3,408 3,000 2,550
Operating Income (ex charges) 7,904 7,357 7,670 6,324 7,789
Restructuring & Other Cash Charges 1,943 1,626 1,333 500 250
Impairment Charges (if reported separately) — — — 550 523
Other Non-Cash (Income)/Charges — — — — —
Operating Income (incl charges) 5,961 5,731 6,337 5,274 7,016
Interest Expense 467 552 553 610 545
Interest Income 105 140 93 73 88
Pre-Tax Income 5,599 5,319 5,877 4,737 6,559
Income Tax Expense 1,242 455 1,134 1,146 1,627
Other After-Tax Cash Gains (Losses) — — — — —
Other After-Tax Non-Cash Gains (Losses) — — — — —
(Minority Interest) 1,110 1,311 224 -90 -2
(Preferred Dividends) — — — — —
Net Income 5,467 6,175 4,967 3,501 4,931
Weighted Average Diluted Shares Outstanding 1,305 1,327 1,320 1,324 1,321
Diluted Earnings Per Share 4.19 4.65 3.76 2.64 3.73
Adjusted Net Income 9,215 8,794 8,101 6,571 7,429
Diluted Earnings Per Share (Adjusted) 7.06 6.63 6.14 4.96 5.62
Dividends Per Common Share 1.62 1.62 1.62 1.62 1.84
EBITDA 6,961 6,731 7,337 9,281 10,684
Adjusted EBITDA 8,904 8,357 8,670 10,331 11,457
Morningstar Analyst Forecasts
Income Statement (EUR Mil)
Fiscal Year Ends in December Forecast
2010 2011 2012
2013 2014Cash and Equivalents 6,516 4,297 6,559 9,655 11,641
Investments — — — — —
Accounts Receivable 6,507 8,042 7,507 8,276 8,617
Inventory 5,020 6,051 6,379 6,405 6,483
Deferred Tax Assets (Current) — — — — —
Other Short Term Assets 2,000 2,401 2,355 2,355 2,355
Current Assets 20,043 20,791 22,800 26,691 29,096
Net Property Plant, and Equipment 8,155 10,750 10,578 10,746 10,938
Goodwill 31,932 38,079 38,073 37,523 37,001
Other Intangibles 12,479 23,639 20,192 17,192 14,642
Deferred Tax Assets (Long-Term) 3,051 3,633 4,377 4,246 4,118
Other Long-Term Operating Assets 924 807 — — —
Long-Term Non-Operating Assets 8,680 2,466 4,387 4,387 4,387
Total Assets 85,264 100,165 100,407 100,785 100,182
Accounts Payable 2,800 3,183 3,190 2,830 2,865
Short-Term Debt 1,565 2,940 3,812 3,812 3,812
Deferred Tax Liabilities (Current) — — — — —
Other Short-Term Liabilities 5,722 7,441 6,858 6,858 6,858
Current Liabilities 10,087 13,564 13,860 13,500 13,535
Long-Term Debt 6,695 12,499 10,719 12,000 11,250
Deferred Tax Liabilities (Long-Term) 3,808 6,011 5,932 4,746 3,796
Other Long-Term Operating Liabilities 9,714 11,682 11,036 11,036 11,036
Long-Term Non-Operating Liabilities 1,672 20 1,388 1,388 1,388
Total Liabilities 31,976 43,776 42,935 42,670 41,005
Preferred Stock — — — — —
Common Stock — — — — —
Additional Paid-in Capital 53,097 56,219 57,338 57,663 57,663
Retained Earnings (Deficit) — — — 318 1,649
(Treasury Stock) — — — — -270
Other Equity — — — — —
Shareholder's Equity 53,097 56,219 57,338 57,981 59,043
Minority Interest 191 170 134 134 134
Total Equity 53,288 56,389 57,472 58,115 59,177
Morningstar Analyst Forecasts
Balance Sheet (EUR Mil)
Fiscal Year Ends in December Forecast
2010 2011 2012
2013 2014Net Income 5,649 5,693 4,967 3,591 4,932
Depreciation 1,000 1,000 1,000 1,007 1,118
Amortization — — — 3,000 2,550
Stock-Based Compensation — — — — —
Impairment of Goodwill 4,129 4,553 3,907 550 523
Impairment of Other Intangibles — — — — —
Deferred Taxes -631 -1,378 -916 -1,055 -822
Other Non-Cash Adjustments -111 -34 -455 — —
(Increase) Decrease in Accounts Receivable -82 -257 368 -769 -341
(Increase) Decrease in Inventory -378 -232 -445 -26 -78
Change in Other Short-Term Assets — — — — —
Increase (Decrease) in Accounts Payable 28 -87 67 -360 35
Change in Other Short-Term Liabilities 155 61 -322 — —
Cash From Operations 9,759 9,319 8,171 5,938 7,916
(Capital Expenditures) -1,573 -1,782 -1,612 -1,175 -1,311
Net (Acquisitions), Asset Sales, and Disposals -1,733 -13,590 -282 — —
Net Sales (Purchases) of Investments 131 359 358 — —
Other Investing Cash Flows -208 312 -51 — —
Cash From Investing -3,383 -14,701 -1,587 -1,175 -1,311
Common Stock Issuance (or Repurchase) -303 -1,001 -177 325 -270
Common Stock (Dividends) -3,138 -1,372 -3,487 -3,183 -3,599
Short-Term Debt Issuance (or Retirement) 310 -145 -448 — —
Long-Term Debt Issuance (or Retirement) -1,476 5,428 -167 1,281 -750
Other Financing Cash Flows -40 -17 -72 -90 -2
Cash From Financing -4,647 2,893 -4,351 -1,667 -4,620
Exchange Rates, Discontinued Ops, etc. (net) 44 1 24 — —
Net Change in Cash 1,773 -2,488 2,257 3,096 1,986
Morningstar Analyst Forecasts
Cash Flow (EUR Mil)
Fiscal Year Ends in December Forecast
Company/Ticker Price/Fair
Value 2012
2013(E) 2014(E)2012
2013(E) 2014(E)2012
2013(E) 2014(E)2012
2013(E) 2014(E)2012
2013(E) 2014(E)Pfizer Inc PFE USA 1.05 10.8 14.2 14.2 7.3 8.7 9.4 11.6 7.5 16.3 2.2 2.2 2.5 3.1 4.0 4.1
Novartis AG NVS USA 0.98 12.1 — 14.4 14.3 — 11.4 16.8 — 16.7 2.8 — 2.5 3.4 — 3.1
Merck & Co Inc MRK USA 1.03 10.7 15.2 15.3 7.3 10.3 10.2 15.4 20.6 17.6 2.3 3.2 3.4 2.6 3.5 3.6
Average 11.2 14.7 14.6 9.6 9.5 10.3 14.6 14.1 16.9 2.4 2.7 2.8 3.0 3.8 3.6
Sanofi SNY US 0.75 11.4 14.5 12.8 12.0 10.3 9.3 14.7 20.1 14.5 1.7 1.7 1.6 2.7 2.9 2.7
Company/Ticker Total Assets
(Mil) 2012
2013(E) 2014(E)2012
2013(E) 2014(E)2012
2013(E) 2014(E)2012
2013(E) 2014(E)2012
2013(E) 2014(E)Pfizer Inc PFE USA — USD 14.8 18.7 9.4 22.5 18.7 14.0 17.8 25.0 10.1 7.8 11.3 4.6 3.6 3.0 2.8
Novartis AG NVS USA — USD 16.7 14.7 15.6 19.6 16.1 16.3 14.1 12.3 13.4 7.9 7.0 8.0 3.1 — 3.5
Merck & Co Inc MRK USA 106,132 USD 17.0 11.9 13.3 31.2 18.9 17.6 11.5 9.1 10.8 5.8 4.5 5.2 4.1 3.2 3.2
Average 16.2 15.1 12.8 24.4 17.9 16.0 14.5 15.5 11.4 7.2 7.6 5.9 3.6 3.1 3.2
Sanofi SNY US 100,407 EUR 11.4 9.0 10.6 19.6 15.5 17.4 8.8 6.1 8.4 5.0 3.5 4.9 3.6 3.3 3.8
Company/Ticker Revenue
(Mil) 2012
2013(E) 2014(E)2012
2013(E) 2014(E)2012
2013(E) 2014(E)2012
2013(E) 2014(E)2012
2013(E) 2014(E)Pfizer Inc PFE USA 58,986 USD -12.5 -12.8 -2.8 -1.0 -4.7 -0.7 0.0 -4.4 0.3 -19.7 58.4 -53.7 — 11.1 0.3
Novartis AG NVS USA 57,561 USD -3.3 2.2 2.8 8.5 -0.7 6.1 -5.6 -3.8 7.7 -25.0 -23.3 39.4 10.9 1.0 7.7
Merck & Co Inc MRK USA 47,267 USD -1.6 -6.1 -1.3 9.7 -9.8 4.1 1.4 -7.7 -1.0 -142.8 -303.6 4.3 9.7 1.0 —
Average -5.8 -5.6 -0.4 5.7 -5.1 3.2 -1.4 -5.3 2.3 -62.5 -89.5 -3.3 10.3 4.4 4.0
Sanofi SNY US 35,957 EUR 2.6 -6.7 4.1 4.3 -17.6 23.2 -7.4 -19.2 13.3 -235.1 -23.0 36.8 — — 13.3
Comparable Company Analysis
These companies are chosen by the analyst and the data are shown by nearest calendar year in descending market capitalization order.
Valuation Analysis
Returns Analysis
Growth Analysis
Price/Earnings EV/EBITDA Price/Free Cash Flow Price/Book Price/Sales
ROIC % Adjusted ROIC % Return on Equity % Return on Assets % Dividend Yield %
Revenue Growth % EBIT Growth % EPS Growth % Free Cash Flow Growth % Dividend/Share Growth %
Last Historical Year
Last Historical Year
Company/Ticker Net Income
(Mil) 2012
2013(E) 2014(E)2012
2013(E) 2014(E)2012
2013(E) 2014(E)2012
2013(E) 2014(E)2012
2013(E) 2014(E)Pfizer Inc PFE USA 16,476 USD 80.8 82.0 80.5 43.4 46.0 44.0 30.5 33.3 34.0 27.9 29.7 28.3 26.7 53.0 25.1
Novartis AG NVS USA 12,811 USD 67.4 71.7 71.9 24.0 27.3 27.8 21.0 20.4 21.0 22.3 21.3 22.0 20.1 13.7 18.8
Merck & Co Inc MRK USA 11,743 USD 65.2 74.9 75.0 37.0 36.2 36.8 22.3 21.4 22.6 24.8 23.8 23.3 17.1 17.1 20.2
Average 71.1 76.2 75.8 34.8 36.5 36.2 24.6 25.0 25.9 25.0 24.9 24.5 21.3 27.9 21.4
Sanofi SNY US 8,101 EUR 69.1 67.6 68.5 24.1 30.8 32.8 21.3 18.8 22.3 22.5 19.6 21.3 18.2 14.2 18.9
Company/Ticker Total Debt
(Mil) 2012
2013(E) 2014(E)2012
2013(E) 2014(E)2012
2013(E) 2014(E)2012
2013(E) 2014(E)2012
2013(E) 2014(E)Pfizer Inc PFE USA 37,460 USD 46.1 41.7 43.1 31.6 29.4 30.1 6.4 23.2 20.2 1.5 1.6 1.6 2.3 2.1 2.2
Novartis AG NVS USA 19,726 USD 28.6 23.4 19.8 22.2 19.0 16.5 19.1 22.5 26.4 1.4 1.0 0.9 1.8 1.7 1.7
Merck & Co Inc MRK USA 20,569 USD 38.8 46.3 44.5 28.0 31.7 30.8 24.5 20.1 18.6 1.2 1.4 1.3 2.0 2.1 2.1
Average 37.8 37.1 35.8 27.3 26.7 25.8 16.7 21.9 21.7 1.4 1.3 1.3 2.0 2.0 2.0
Sanofi SNY US 14,531 EUR 25.3 27.3 25.5 20.2 21.4 20.3 15.7 16.9 21.0 1.7 1.5 1.3 1.8 1.7 1.7
Company/Ticker Market Cap
(Mil) 2012
2013(E) 2014(E)2012
2013(E) 2014(E)2012
2013(E) 2014(E)2012
2013(E) 2014(E)2012
2013(E) 2014(E)Pfizer Inc PFE USA 203,765 USD 6.60 9.07 8.07 2.64 3.58 3.12 2.39 3.35 2.88 7.29 13.90 11.43 38.6 28.2 64.9
Novartis AG NVS USA 189,720 USD 3.32 2.81 3.92 1.16 1.29 1.43 0.88 0.98 1.11 1.37 1.39 1.93 63.4 71.5 67.1
Merck & Co Inc MRK USA 156,352 USD 7.62 8.43 8.15 2.30 2.78 2.65 1.94 2.40 2.28 5.43 12.23 11.57 82.9 108.1 95.1
Average 5.85 6.77 6.71 2.03 2.55 2.40 1.74 2.24 2.09 4.70 9.17 8.31 61.6 69.3 75.7
Sanofi SNY US 129,426 USD 4.97 7.29 8.81 1.65 1.98 2.15 1.18 1.50 1.67 1.72 2.53 3.05 63.9 90.9 73.0
Comparable Company Analysis
These companies are chosen by the analyst and the data are shown by nearest calendar year in descending market capitalization order.
Profitability Analysis
Leverage Analysis
Liquidity Analysis
Gross Margin % EBITDA Margin % Operating Margin % Net Margin % Free Cash Flow Margin %
Debt/Equity % Debt/Total Cap % EBITDA/Interest Exp. Total Debt/EBITDA Assets/Equity
Cash per Share Current Ratio Quick Ratio Cash/Short-Term Debt Payout Ratio %
Last Historical Year
Last Historical Year
3 Moat Valuation 3 Three-Stage Discounted Cash Flow 3 Weighted Average Cost of Capital 3 Fair Value Estimate 3 Scenario Analysis 3 Uncertainty Ratings 3 Margin of Safety 3 Consider Buying/Selling 3 Stewardship Rating
their fair value. A number of components drive this rating: (1) our assessment of the firm’s economic moat, (2) our estimate of the stock’s intrinsic value based on a discounted cash-flow model, (3) the margin of safety bands we apply to our Fair Value Estimate, and (4) the current stock price relative to our fair value estimate.
The concept of the Morningstar Economic Moat™ Rating plays a vital role not only in our qualitative assessment of a firm’s investment potential, but also in our valuation process.
We assign three moat ratings—none, narrow, or wide—as well as the Morningstar Moat Trend™ Rating—positive, stable, or negative—to each company we cover. There are two major requirements for firms to earn either a narrow or wide moat rating: (1) the prospect of earning above-average returns on capital; and (2) some competitive edge that pre- vents these returns from quickly eroding. The assumptions we make about a firm’s moat determine the length of “eco- nomic outperformance” that we assume in the latter stages
enterprise value and the value of the firm if no future net in- vestment were to occur. Said differently, moat value identi- fies the value generated by the firm as a result of any future net new investment. Our Moat Trend Rating reflects our as- sessment of whether each firm’s competitive advantage is either getting stronger or weaker, since we think of moats as dynamic, rather than static.
At the heart of our valuation system is a detailed projection of a company’s future cash flows. The first stage of our three- stage discounted cash flow model can last from 5 to 10 years and contains numerous detailed assumptions about various financial and operating items. The second stage of our mod- el—where a firm’s return on new invested capital (RONIC) and earnings growth rate implicitly fade until the perpetuity year—can last anywhere from 0 years (for no-moat firms) to 20 years (for wide-moat companies). In our third stage, we assume the firm’s RONIC equals its weighted average cost of capital, and we calculate a continuing value using a standard Morningstar Research Methodology for Valuing Companies
Analyst conducts company and industry research:
Financial statement analysis Channel checks Trade-show visits Industry and company reports and journals Conference calls Management and site visits 3 3
3 3
3 3
Strength of competitive advantage is rated:
None, Narrow, or Wide Advantages that confer an economic moat:
High Switching Costs (Microsoft)
Cost advantage (Wal-Mart) Intangible assets (Johnson & Johnson) Network Effect (Mastercard) Efficient Scale (Lockheed Martin)
Analyst considers past financial results and focuses on competitive position and future prospects to forecast future cash flows.
Assumptions are entered into Morningstar’s proprietary discounted cash-flow model.
The analyst then eval- uates the range of potential intrinsic values for the company and assigns an Uncertainty Rating: Low, Medium, High, Very High, or Extreme.
The Uncertainty Rating determines the margin of safety required before we would rec- ommend the stock.
The higher the uncer- tainty, the wider the margin of safety.
Analyst uses a discounted cash-flow model to develop a Fair Value Estimate, which serves as the foundation for the Morningstar Rating for stocks.
The current stock price relative to Morningstar’s Fair Value Estimate, adjusted for uncertainty, determines the Morningstar Rating for stocks.
The Morningstar Rating for stocks is updated each evening after the market closes.
QQQQQ QQQQ QQQ QQ Q
Fundamental Analysis
Economic Moat
TMRating
Company Valuation
Fair Value Estimate
Uncertainty
Assessment
3 Uncertainty Methodology 3 Cost of Equity Methodology 3 Morningstar DCF Valuation Model 3 Stewardship Rating Methodology
* Please contact a sales representative for more information.
Instead, we rely on a system that measures the estimated volatility of a firm’s underlying future free cash flows, tak- ing into account fundamental factors such as the diversity of revenue sources and the firm’s fixed cost structure.
We also employ a number of other tools to augment our valu- ation process, including scenario analysis, where we assess the likelihood and performance of a business under different economic and firm-specific conditions. Our analysts typically model three to five scenarios for each company we cover, stress-testing the model and examining the distribution of resulting fair values.
The Morningstar Uncertainty Rating captures the range of these potential fair values, based on an assessment of a company’s future sales range, the firm’s operating and fi- nancial leverage, and any other contingent events that may impact the business. Our analysts use this range to assign an appropriate margin of safety—or the discount/premium
prices receive our highest rating of five stars, whereas firms trading above our consider-selling prices receive our lowest rating of one star.
Morningstar Margin of Safety and Star Rating Bands
Price/Fair Value 2.75
2.50 2.25 2.00 1.75 1.50 1.25 1.00 0.75 0.50 0.25
Low Medium High Very High*
* Occasionally a stock’s uncertainty will be too high for us to estimate, in which case we label it Extreme.
• 5 Star
• 4 Star
• 3 Star
• 2 Star
• 1 Star
Uncertainty Rating
— 125%
105% — 80% —
— 95%
— 135%
110% —
70% —
— 90%
— 155%
115% —
60% —
— 85%
— 175%
125% —
50% —
— 80%
New Morningstar Margin of Safety and Star Rating Bands as of August 18th, 2011
Our corporate Stewardship Rating represents our assess- ment of management's stewardship of shareholder capital, with particular emphasis on capital allocation decisions.
Analysts consider companies' investment strategy and
valuation, financial leverage, dividend and share buyback
policies, execution, compensation, related party transac-
tions, and accounting practices. Corporate governance
practices are only considered if they've had a demonstrated
impact on shareholder value. Analysts assign one of three
ratings: "Exemplary," "Standard," and "Poor." Analysts judge
stewardship from an equity holder's perspective. Ratings
are determined on an absolute basis. Most companies will
receive a Standard rating, and this is the default rating in
the absence of evidence that managers have made
exceptionally strong or poor capital allocation decisions.
coverage list.
3 Encapsulates our in-depth modeling and quantitative work in one letter grade.
3 Allows investors to rank companies by each of the four underlying com- ponents of our credit ratings, including both analyst-driven and quantitative measures.
3 Provides access to all the underlying forecasts that go into the rating, available through our insti- tutional service.
different lenses—qualitative and quantitative, as well as fundamental and market-driven. We therefore evaluate each company in four broad categories.
Business Risk
Business Risk captures the fundamental uncertainty around a firm’s business operations and the cash flow generated by those operations. Key components of the Business Risk rating include the Morningstar Economic Moat
™Rating and the Morningstar Uncertainty Rating.
Cash Flow Cushion
™Morningstar’s proprietary Cash Flow Cushion
™ratio is a fundamental indicator of a firm’s future financial health The measure reveals how many times a company’s internal cash generation plus total excess liquid cash will cover its debt-like contractual commitments over the next five years. The Cash Flow Cushion acts as a predictor of financial distress, bringing to light potential refinancing, operational, and liquidity risks inherent to the firm.
3 3 3 3 3
3
The higher the rating, the less likely we think the company is to default on these obligations.
The Morningstar Corporate Credit Rating builds on the modeling expertise of our securities research team. For each company, we publish:
Five years of detailed pro-forma financial statements Annual estimates of free cash flow
Annual forecasts of return on invested capital
Scenario analyses, including upside and downside cases Forecasts of leverage, coverage, and liquidity ratios for five years
Estimates of off balance sheet liabilities
These forecasts are key inputs into the Morningstar Corporate Credit Rating and are available to subscribers at select.morningstar.com.
Morningstar Research Methodology for Determining Corporate Credit Ratings
Competitive Analysis
Cash-Flow Forecasts
Scenario Analysis
Quantitative Checks
Rating Committee
A AA
BBB
C
D
