Big pharma without trimming the fat
One of the largest holdings in the $37.9m (£29.8m) Antipodes Global fund, which contains 75 stocks – is a large-cap pharma name which isn’t dependent on popular weight-loss drugs.
Alison Savas, investment director at Antipodes Partners, has high conviction in Sanofi, a leading immunology healthcare firm headquartered in France.
“Its strengths lie in that it does not face any patent risk this decade, it has a much lower exposure to US drug pricing risk than peers, a deep pipeline, a dominant vaccines business and a leading consumer healthcare business that it’s in the process of monetising,” Savas told Portfolio Adviser.
It hasn’t all been smooth-sailing for the multinational company, however; Sanofi’s share price fell by more than 20% last year after it pledged to increase its research and development (R&D) investing by 10% to €7.7bn (£6.4bn) annually during 2024 and ’25.
Savas said prioritising pipeline development over short-term earnings growth “spooked the market”, although her team used this as an opportunity to increase the fund’s exposure.
“Central to Sanofi’s investment thesis is a pharma portfolio that isn’t facing patent cliffs. It has an emerging powerhouse on its hands with Dupixent, used to treat allergic diseases such as dermatitis and asthma, currently generating around €13bn in annual revenue and outperforming market expectations,” she explained.
“Despite its size, Dupixent can see low double-digit growth per annum into the next decade due to greater penetration of existing indications, younger age groups, new geographies and a recent approval to treat chronic obstructive pulmonary disease or COPD (chronic bronchitis) – a large additional patient population.
“This is not properly reflected in analyst forecasts,” Savas said.
What is even more appealing, according to the investment director, is that the company isn’t solely dependent on the success of Dupixent. It also holds business of so-called “orphan drugs”, used to treat rare diseases, which are typically high-cost but high-profit.
“Combined with exciting new launches, these account for an extra €7bn in revenue, growing at a high single-digit pace.
“On top of this Sanofi has a full pipeline focused around its key areas of strength. Any positive readouts in 2025 will increase the market’s confidence in the pipeline and vindicate the decision to pivot strategy. A solid balance sheet also leaves room for acquisitions to further bolster its pipeline.”
Elsewhere, Savas said Sanofi’s €7.5bn vaccines business is growing faster than market expectations.
“Vaccines are a sticky, long-duration business with high barriers to entry due to stringent approval requirements and scale manufacturing. Sanofi is one of three scale providers of the flu vaccine, with polio and meningitis vaccines also in its stable.
“Particularly promising is the new RSV vaccine, which targets a virus that can cause severe respiratory infections, particularly in children. Expanded production capacity positions Sanofi to meet rising demand, adding another growth driver.”
Finally, she referred to Opella – Sanofi’s consumer health business – which recently attracted a €16bn private equity deal, with Sanofi retaining a 48% stake. The division predominantly offers household-name, over-the-counter treatments and supplements.
“Once finalised, the transaction could unlock capital for share buybacks or strategic investments – moves likely to be rewarded by the market,” Savas said.
“At 12x earnings, with earnings forecast to grow around 10% per annum, there’s a lot to like about Sanofi. While the share price has regained almost all it lost on last year’s R&D announcement, there are multiple catalysts coming over the next 12 to 24 months that can drive the shares higher.”
Handbags and gladrags
Luxury goods companies such as L’Oréal in cosmetics and LVMH in fashion have proven resilient despite a global deceleration in consumer spending globally, according to Ben Peters, fund manager of the Evenlode Global Income fund.
But while revenue for the likes of these names has continued to rise, growth has still slowed on a relative basis, which the manager said has led markets to mark down the share prices of some firms “quite significantly”.
“We have responded by growing these positions over time. We have increased L’Oréal from 2.7% of the portfolio at the start of the year to 3.8%, and LVMH from 2.8% to 3.3%,” he explained. “As their stock prices are down by 20% and 13%, respectively, in sterling terms over the year so far, valuations look good in an absolute and a relative sense.”
Peters said famous fashion houses stand the test of time and avoid the cyclicality of lower-budget brands.
Because luxury brands are perceived to be higher quality, more durable and therefore more valuable than their non-luxury counterparts, the manager believes they offer “resilience in the event of an economic downturn”.
“We have held LVMH for some time, and Richemont has also recently been under our microscope although has not yet made it into our investable universe,” he said.
“Both companies are ‘houses of brands’, in other words a collection of well-diversified luxury businesses serving multiple end markets. For example, half of LVMH’s income derives from fashion and leather, with the other half coming from perfumes, watches and alcoholic beverages, among others.”
In contrast, Richemont focuses predominantly on luxury jewellery and watches, with Cartier one of its leading brands, although it also has a smaller segment offering luxury clothing and apparel.
“Richemont operates somewhere between LVMH and Hermès in terms of the tier of luxury goods it sells,” Peters explained. “Its jewellery brands and watch portfolio is undoubtedly in the very top tier of luxury goods, by both price and reputation. Its soft luxury brands, on the other hand, may not be quite as high tier when compared with their rivals in the space, and they are getting out of the online market business by selling Yoox Net-a-Porter (YNAP), an acquisition that never really got going.
“Additionally, the jewellery segment of luxury remains quite fragmented, providing opportunities for further consolidation where, YNAP aside, they have historically proven to be shrewd operators in M&A.”
Despite short-term headwinds, the manager is positive on the prospects for the luxury segment.
“On balance it seems unlikely that high-net-worth and aspirational wealthy consumers will eschew handbags and gladrags any time soon. Exactly where around the world the growth is driven from may change though, making a multinational approach appealing.
“While consumer spending could remain soft in the short term, the valuations at which some luxury companies are trading relative to history offsets these challenges.”
Learning curve
Education has long been preached as an investment in the next generation by parents and teachers alike, and for Steven Tredget, partner at Oakley Capital, it’s a valuable part of the portfolio.
“Education is a subscription,” said Tredget. “It’s one of the last things you will change, if you can avoid changing.”
From an investment perspective, this means a steady stream of income that is able to withstand economic wobbles. Tredget saw the opportunity to combine the longstanding success of education with technology, by investing in the mainly online university IU Group.
The German private university was founded in 2000 and targets a different group of students than a traditional university. “The average age of an IU group student is 27, and 70% of them do not come from a family background of higher education,” he said. “They’re in work or have families, and so they are looking to study on terms that suit them. These are highly modular degrees, so you can create one to suit you. Often people choose professional-type bachelors based on the fact they’re already working and want something quite specific.”
The university is now the largest and fastest-growing in Germany, with more than 140,000 students enrolled. Tredget believes some of this success is due to the business model, which is not focused on research or attracting international students, but on offering a service to its consumer.
“This is like any customer service. It’s asking what customers value and focusing on that output. What they typically value is the outcomes of degrees,” Tredget said.
“The average salary increases by 20%, and now their degree time is shortening as well.”
Recently, this has been aided by the launch of an AI teaching assistant, called Cynthia, which has cut the time it takes to complete a degree by almost a quarter.
“Students will ask 10 times more questions of Cynthia than they would a physical professor, because she’s always available. Second, they’re not embarrassed to ask the stupid questions, and so Cynthia learns much more about the student,” Tredget said.
Oakley first invested in IU Group in 2018, when the university was operating at a much smaller scale. When the investment came to fruition, it was too large for Oakley to remain the sole control investor. Oakley now has the holding in a continuation vehicle alongside a group of other investors.
It’s a story that’s not uncommon for Oakley, which invests primarily in companies that are not yet large enough to be considered by large-scale private equity firms. Tredget said the firm often works with companies that are diving into the world of private equity for the first time, with some deals taking years to build trust with the owners.
“It’s too much hassle for the larger firms to come down that far,” Tredget said. “We don’t tend to find much competition. Three quarters of our deals are outside the auction process, so they’re a bilateral conversation between us and the founder.”
This article first appeared in the December issue of Portfolio Adviser magazine