(Reuters) - Sanofi (SASY.PA) shares tumbled more than 15% after the French drugmaker abandoned its 2025 profit target under a plan to list its consumer healthcare business while boosting its development spending plans to shore up its core innovative drugs business.
"Sanofi is reviewing potential separation scenarios, but believes that the most likely path would be through a capital markets transaction, by creating a listed entity headquartered in France," Paris-listed Sanofi said in a statement on Friday.
Under a push to spend more on immunology and inflammation drug development, the company abandoned a target for a 32% operating profit margin for 2025 to focus on "long-term profitability".
The shares were down 15.5% at 0838 GMT at their lowest level in more than eight months.
Terence McManus, fund manager at Switzerland's Bellevue Asset Management, told Reuters that although the spin-off would be welcomed by investors, the cuts to earnings ambitions over the next two years were "quite substantial".
"Sanofi has traditionally had a low R&D productivity, it is yet to be seen whether the current management has been able to shift this narrative enough for investors to also back this investment."
"There's a lot to digest here," said Barclays analysts in a note, adding that investors' primary focus would be on the scrapped near-term earnings goals, tempering any favourable view of the consumer unit plan.
The announcement comes after larger consumer rival Kenvue (KVUE.N) was spun off from Johnson & Johnson (JNJ.N) this year, and after the creation of Haleon (HLN.L) by GSK (GSK.L) and Pfizer (PFE.N) in 2022. Bayer (BAYGn.DE), led by a new CEO since June, has faced calls from several investors to split off its consumer business.
Sanofi expects 2024 adjusted earnings per share (EPS) to decline by a "low-single-digit" percentage, citing also a higher tax on top of a "significant" but unspecified increase in development expenditures. EPS would see a strong rebound in 2025 but not enough to sustain the previous margin target.
CONSUMER STAND-ALONE
CEO Paul Hudson said the core innovative drugs business had improved enough to soon do without the more predictable cash flows from consumer products. He had put the consumer business on course to become a stand-alone division within months of taking the helm about four years ago.
"Our recent pipeline news flow, added to the strong progress that we've made in advancing our strategy, gives us a unique opportunity to further invest in our long-term growth," said Hudson.
Analysts have said the drug market debuts of a type 1 diabetes treatment acquired as part of the $2.9 billion takeover of Provention Bio, haemophilia A treatment Altuviiio, and antibody therapy Beyfortus to prevent a common respiratory infection in infants, are important tests of the company's marketing prowess.
They have also been seen as a chance for CEO Hudson to regain investor confidence following disappointing trial results of a once-promising breast cancer drug candidate last year.
Earlier this month, Sanofi purchased rights to a drug candidate against bowel inflammation by Teva (TEVA.TA) for up to $1.5 billion, facing Roche (ROG.S) and Merck & Co (MRK.N) in a development race in a class of drugs known as anti-TL1A antibodies.
The timing of the potential consumer listing, which Sanofi said would be in the fourth quarter of 2024 or later, would be set to maximize shareholder value.
The company would not be drawn on further details of the planned listing and declined to comment on whether it might sell the business.
The focus of higher spending on clinical drug trials would be on immunology and inflammation, Sanofi said, as it seeks to follow up on the success of its major growth driver, eczema and asthma drug Dupixent, jointly developed with Regeneron (REGN.O).
The development push covers vaccines and drug candidates against multiple sclerosis as well as inflammatory skin and lung diseases.
For 2023, the Paris-based drugmaker still expects adjusted earnings per share to grow by a "mid-single-digit" percentage rate, excluding the effect of currency swings.
Sanofi said it is targeting cost savings of up to 2 billion euros ($2.11 billion) from 2024 until 2025-end, of which most will be reallocated to fund innovation.
The company reported a 10.4% decline in its third-quarter business operating income, or adjusted earnings before interest and tax, of 4.03 billion euros, slightly below the average analysts' estimate.