Monday, February 2, 2015

Bought 50 SNY at $46.69/Added to the ETF ADRU at $22.54

Stable Vix Pattern (Bullish):
Links to SeekingAlpha Instablog, Articles and Comments:

South Gent's Instablog | Seeking Alpha

South Gent's Articles | Seeking Alpha

South Gent's Comments | Seeking Alpha


Recent Developments: 

The official manufacturing PMI for China fell into contraction territory with a January reading of 49.8. That was the first dip below 50 since September 2012.

The official services PMI for China was reported at 53.7 down from December's 54.1  The importance of services has been growing in China's economy and accounting for approximately 48.2% of China's economy last year.

The ECB's loan officer survey for the 4th quarter showed a healthy demand for loans in the Euro areas (see page ECB Bank Lending Survey 2014 4th Quarter)

The ISM manufacturing PMI slid to 53.5 in January from 55.1 in December. There does appear to be a slowdown starting late last year.

During economic expansions, the manufacturing PMI will bob up and down, usually between 50 to 55 after the initial burst coming out of a recession.  ISM Manufacturing-St. Louis Fed

In the initial stages of a recovery from a recession, the manufacturing PMI will be a leading indicator of a recovery. An investor will see a surge in the new order component as I pointed out in several posts during the 2009 spring.

Fast Recovery of New Orders Before Recession Ended

The manufacturing PMI will burst from a very low reading, possibly in the 30s to the high 50s and then settle back in that 50 to 55 range with occasional bursts to over 55 or even temporary downdrafts below 50.  


1. Bought 50 SNY at $46.69 (see Disclaimer):

This purchase qualifies under my Dividend Growth Strategy, but not my Large Cap Valuation Strategy due to the currently elevated P/E.

Item # 6 Common Stock Dividend Growth vs. Long Term Investment Grade Bonds (3/22/2010 Post)
Item # 3 Large Cap Valuation Strategy (5/29/2010 Post); 
Snapshot of Trade: 

Add caption
I bought the ADR traded in the U.S. and priced in USDs. The ADR closed at $46.6 on 1/27/15.

1 ADR=.5 ordinary shares  Sanofi shares 

The ordinary shares are traded in Paris: SAN.PA

To arrive at a price for the ADR, the current ordinary share price needs to be converted into USDs and dividend by two. 

Company Description: Sanofi ADS (SNY) is a large pharmaceutical company based in France. The company focuses on diabetes, vaccines, oncology, rare diseases, multiple sclerosis, consumer and animal health care.

Sanofi Website
Bloomberg Page for € Shares (dividend yield=3.41%; five year dividend growth of 4.94% as of 1/30/15 closing price)

Key Developments Page at Reuters

SNY SEC Filings

Several of the current products were developed at Genzyme that Sanofi acquired in 2011:

About Genzyme and Development Pipeline

Sanofi has a number of diabetes products, with the biggest seller being Lantus, which generated sales of about $7.78B  in 2013. Unfortunately, U.S. patent protection expires this month and the EU patent expires shortly thereafter in May.

A generic version may not launch until the summer of 2016 due to a lawsuit filed by Sanofi against Eli Lilly that had developed a "biosimilar" drug.

Sanofi claims to have a new diabetes drug, Toujeo (U300), that works better than Lantus. Phase 3 Results.pdfReuters

The FDA accepted SNY's filing for review back in July 2014, but no decision has been reached yet by that agency. SNY believes that it will receive marketing approval in the first half. It would be a huge setback for the FDA to reject the application.

Another potential blockbuster drug waiting for the FDA's approval is Praluent with estimated 2020 sales of over $2B.

Regeneron and Sanofi announced late last month that the FDA had accepted the Praluent license application for priority review.

The recently FDA approved products for multiple sclerosis (Lemtrada and Aubagio), have the potential to reach blockbuster status according to some analysts.  Genzyme’s Lemtrada Approved by the FDAPress Announcements- FDA approves new multiple sclerosis treatment Aubagio

Consumer healthcare products were acquired when Sanofi bought Chattem in 2010. Those products include Gold Bond (skin lotions and powder), IcyHot, Selsun Blue (shampoo), Unisom (sleep aid), Kaopectate, Cortizone, Nasacort allergy products, and ACT mouthwash. Chattem Of those products, I use only the ACT mouthwash, which is just what my dentist recommended to me.

Chattem in turn had acquired many of those brands as cast-offs by the likes of JNJ and Abbott. The products acquired from JNJ were in turn acquired by JNJ from Pfizer.

In 2013, Sanofi's Chattem acquired the Rolaids brand from JNJ.

When Sanofi's Allegra product went off patent, Chattem launched that former allergy prescription medicine for over-the-counter sales. Like a lot of drugs sold by major pharmaceutical companies, Allegra (fexofenadine) was not developed by Sanofi, but by a company formerly known as Sepracor (now part of a Japanese drug company). Sepracor sold the development rights to another company who was then acquired by SNY. 

I view the foregoing product histories to be important since it gives me a feel on whether the drug company is developing product in-house or is paying up for product through expensive acquisitions. I have noted in the past that the current valuation of Pfizer is less than the amount paid by that company for acquisitions starting with Warner Lambert in 2000 ($112B cost) that brought Lipitor to Pfizer. Two subsequent large acquisitions were Pharmacia (2003-$60B) and Wyeth (2009-$68B): Item # 3 Bought 100 PFE at $28.7 (8/14/13 Post)Pfizer: Wyeth acquisition as more proof of Pfizer's failures (1/25/09 Post) Excluding the costs of a panoply of other deals, including King Pharmaceuticals, Innopharma, Coley Pharmaceuticals, and Vicuron Pharmaceuticals, the cost of those three acquisitions totaled about $240B vs. the 1/30/15 market cap of $197B.

Many investors were unhappy after SNY fired its chief executive Chris Viehbacher. That last link is to an article published in Fortune that explains in detail why that executive had to be fired, and it had nothing to do with his success at turning SNY around, or the warning about diabetes sales in the U.S. Another financial journalist viewed the firing as a huge mistake

Prior Trades: I have two minor prior trades that were apparently flips. I have no current memory of why I sold. I probably was just harvesting a trading profit on a small position. That seems to be confirmed in my discussion of the second small buy in 2010: "I sold those shares on a pop after the payment of the dividend." Bought 50 SNY at $34.21 

I did realize a small profit after harvesting a dividend payment. 
2009 SNY 50 Shares +$83.46 

I held the shares long enough to receive the annual dividend ($71.95): 

2009 SNY Dividend Payment $71.95

Total Return: $155.41 (11.72% annualized-holding period 3 months)

I would have been better off just keeping the shares rather than attempting what appears to be a dividend harvesting trading strategy.

SNY shares have not kept pace with the total returns of SPY since I first bought shares on 4/1/2009. SNY's total annual return from 4/1/2009 through 1/31/15 was 14.07% compared to 18.96% for SPY.

DRIP Returns Calculator-Dividend Channel

If I ended that calculation on 9/22/14, shortly before the decline in SNY shares after the company fired its CEO and cautioned about slowing growth in its diabetes division, the total annual return would improve to 19.71% compared to SPY's 20.16%.

Dividend History: I could only find information going back to 2004. Dividends are paid semi-annually in Euros. The ordinary share rate has been increased every year since 2004, going from €1.2 to €2.8 in 2013. The 2014 dividend has not yet been set but will go ex dividend in the spring.

To arrive at the dividend rate payable to the ADR share owner, the preceding Euro rates would need to be dividend by two and then I would have to have the conversion rates from Euros to USDs for each payment. I do not have that data.

With the plunge in the Euros, the next dividend payment will buy fewer USDs than the rate prevailing last year.

Assuming for purposes of illustration only a €2.8 conversion on 1/30/14 and on 1/30/15. The per share ADR payment would be $1.587 in 2015 and $1.9122 last year, or a 17% dividend cut due to the Euros recent devaluation with the dividend remaining constant at €2.8 divided by two for the ADR.

The flip side is that the shares are worth less in USDs; and the buyer now could receive a dividend increase with the Euro gaining in value after the purchase, with the amount of the increase dependent on the exchange rate at the time of conversion.

Assuming a 1/30/15 exchange rate and a €1.4 dividend payment (=$1.587 per share), the yield would be about 3.36% at a total cost of $46.69 per SNY ADR share.

However, if I assumed the same dividend at the 1/30/14 exchange rate, the yield then becomes about 4.1%.

EUR/USD Interactive Chart 

Whatever the dividend yield turns out to be in 2015, one things is for certain. It will be higher than the .95% yield on the German 30 year treasury bond as of last Friday. German Government Bonds- Bloomberg

Foreign Dividend Tax Withholding: The Deloitte International site notes that France has a 15% withholding tax. That is the amount withheld in the past when I owned the security in a Fidelity and Vanguard accounts. Both of those brokers made mass "relief at source" filings with France's tax authorities that reduced the tax from 30% to 15%. TD Ameritrade and Schwab did not perform that ministerial task and a 30% tax was levied by France on the dividend payment. I have not held a French dividend paying company in those later two brokerage since 2012, and I consequently do not know whether their unwillingness to perform that service persists to the current time. 

This link to a Depository Trust Company notice, regarding the Sanofi 2014 dividend, explains the procedure for securing "relief at source" that lowers the withholding from 30% to 15%. That link may not work after a period of time, but can be found with a google search  There is a fee of $.005 per ADR associated with that filing which Fidelity will subtract from the dividend payment. For 50 shares, the fee will be $.25.  

Chart: The one year chart, comparing the prices of the ADR and the ordinary shares priced in Euros, highlights the currency risk. 

Initially during this one year period, SNY was outperforming the ordinary shares due to the Euro gaining slightly in value against the USD. That abruptly changed in late August when the Euro started to lose considerable value against the USD. 

The end result after the one year period was that the ADR had declined in value by 5.75% and the ordinary shares had risen by 12.64%. That 18.39% differential is attributable to the decline in the Euros value that flows through into the USD priced ADRs.   

Last Earnings Report: For the 2014 third quarter, Sanofi reported that net income increased 9.4% to €1.935B (constant currencies).

Non-GAAP E.P.S. was reported  €1.47 per share, up from €1.36 in the 2013 third quarter.

Sanofi calls its non-GAAP numbers "Business Income". That number would exclude, for example, the after tax impact of amortization of intangible assets, impairment of intangible assets, and restructuring costs (see page 17 of the earnings release) Including those items, E.P.S. was at €.92 and €2.32 for the first nine months. (page 20)

The most important item in the earnings report was the CEO's comment at page 1 that SNY has "recently seen a more challenging U.S. diabetes price environment which will impact our sales throughout 2015". That warning was probably the cause of SNY's price decline from $52.42 (10/27/14) to $48.07 on the next day. The shares fell again after the CEO was fired.

Sanofi provided in this report a breakdown of revenues by product category and geographic region. Rather than summarizing those details, I took snapshots of the relevant data that provides a clearer picture than a long discourse in words. I will just include the major product categories, and the diabetes snapshot highlights the importance of Lantus to the company.

Diabetes Sales: 

Diabetes Revenues
Genzyme Product Sales: 

Generics and Vaccine Sales:

Other "Innovative" Products:

Emerging market sales are growing at a rapid clip.

Sales by Region: 

Rationale:  Due to  the innovation originating from Genzyme, along with SNY's collaborations with another innovative company Regeneron Pharmaceuticals (REGN), SNY looks to me to be well positioned with its pipeline product over the next several years, assuming no major hiccups in approvals.

The decline in the Euro has made the ADR cheaper to a new buyer now. The value of the Euro is near a ten year low.

While it is impossible to know now how much downside risk remains in the currency conversion, I suspect that there will come a time within the next two to five year when the Euro will return to 1.4 from its current perch around 1.13.

In other words, a lot of the currency risk associated with owning the USD priced ADR has already been removed by the approximate 20% devaluation that had already occurred when I bought the shares. (USD/EUR: 1.393 on 5/6/14 and 1.1248 on 1/27/15, or 19.25%) That 19.25 currency loss in the USD priced shares has at least been avoided by buying on 1/27/15 rather than on 5/6/14.

There is some dividend support as noted above.

The pipeline is probably the best or close to it for a major pharmaceutical company. (Morningstar 2014 Big Pharma Pipeline Rankings) The pipeline potential is a major reason for selecting a pharmaceutical stock. 

Risks: The currency risk is always omnipresent whenever a U.S. investor buys a foreign security. The impact on SNY's price, shown in the chart above, highlights the significance of currency exchange on share price.

While I do not see any near term problems involving FDA approval of key pipeline drugs, the FDA has been known to do the unexpected and delay approval or worst decline approval. If that happens to a major new drug, the negative impact on the share price will be both severe and fast. I would also note that I have no medical training and have not reviewed the literature relating to the trials.

It remains to be seen whether Lantus and the new pipeline diabetes drugs will allow SNY to continue its dominance in their field.

Future Buys: When I buy 50 shares, I am contemplating the possibility of averaging down with another 50 shares. I will not average up with this stock and will consider averaging down only after the FDA gives a green light to SNY's next generation diabetes drug.

2. Added to the ETF ADRU at $22.54 (see disclaimer):

Snapshot of Trade:

2015 Added 30 ADRU at $22.54

Snapshot of Most Recent Purchases: I have not sold any shares and have been reinvesting the dividend. I have not bought any shares in the open market since 2009. I bought 40 shares in August 2009 at $20.01 and 30 shares at $15.12 in April 2009:

Security Description: The BLDRS Europe 100 ADS Index Fund Fund  (ADRU) is an ETF that currently owns 80 European ADRs. It is not a popular fund, as shown by its current low market cap of $21M+.  When I initially purchased some shares, I simply viewed it as an alternative to buying European ADRs.

Top Ten Holdings as of 1/31/15: The fund has been hurt recently by its exposure to the large cap European energy companies BP, Royal Dutch and Total. Hopefully, most of the downside is already in those share prices.

The exposure to RDS is actually higher. The 3.62% weighting shown in the snapshot is for RDS/A. The fund also owns RDS/B with a 2.35% weighting. Unilever would be in the top ten by combining the 2.24% UN and 1.59% UL weightings.

The fund has also lost ground recently due to the decline in the Euro and British Pound against the USD. Those declines flow through into the pricing of the ADRs. Again, hopefully, most of the currency risk has already occurred when I added this small 30 share lot.

The European financial weighted was 21.62% as of 1/31/15 and those stocks have been a drag for some time. Hopefully, the worm will turn for them. The second largest financial weighting is in SAN which took a tumble recently after slashing its dividend.

Needless to say, I am not taking much of a risk with a 30 share add to a turnaround in any of the problems impacting the performance of the stocks owned by this ETF.

The sponsor's website has a description of the risks: ADRU-Product Detail A more detailed description of the risks can be found starting at page 2 of the Prospectus.

The prospectus contains one of the better fund descriptions of currency risks:

The sponsor states that the 12 month yield was 5.61% as of 1/31/15. Dividend support is one reason for adding shares at this time.

The net expense ratio after a fund waiver is currently .3%. Before the waiver, the expense ratio is .58%.


Anyone buying European stocks is making a contrarian play. There is certainly no solace to be found when focusing on the present. But, it is all about the future now. The past is already baked into the poor performance of this ETF.

For the most part, my position in this ETF has been out of sight, out of mind for about six years now. 

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