NEW YORK ( TheStreet) -- Investors in the healthcare industry should know very well by now that Big Pharma companies like Pfizer ( PFE) and Merck ( MRK) are only as strong as their product pipelines. With blockbuster drugs constantly threatened by cheaper generics due to expiring patents, today's drug kingpin can quickly become tomorrow's has-been.
Shares of Sanofi (SNY) have been up this year by as much as 22% despite a rash of negative news. Investors are apparently assuming that the company's management would put the chronic pipeline worries to rest.
Last week, following management's update on experimental drug Lyxumia (used to treat type-2 diabetes), this optimism now seems justified. In a phase-3 study that took roughly 24 weeks, Lyxumia was proven very effective in battling high blood-sugar levels. But the most important aspect of the study, and perhaps a key differentiating factor, was that the drug could be taken either before breakfast or as the main meal of the day.
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This affords patients with high glucose levels the flexibility and convenience needed to administer the drug. Management has been hard at work, overcoming some tough challenges. Sanofi deserves credit for this development.
That said, while it does seem as if management has moved the company one step closer towards shoring up the company's drugs portfolio, I wouldn't get carried away just yet. The pipeline update was encouraging, yes. But Lyxumia had already been approved for treatment in several European countries like Germany, Spain and the United Kingdom. And revenue hasn't been all that impressive.
Plus, while some investors may have some hope that an approval by U.S. Food and Drug Administration might bolster revenue, Sanofi withdrew its application back in September. Not to mention, management said that it does not plan to resubmit for approval until 2015, following the results for cardiovascular drug Elixa, which is now in clinical trial.
So although the news for Lyxumia is certainly positive, I can't help feeling unimpressed. Despite the strong exposure Lyxumia already had in Europe and markets, it has only had modest effects on the company's growth. Plus, even if we were to just look at it from the standpoint of Sanofi's strength in diabetes, I still don't believe the company is as diversified as it needs to be.
I'm not suggesting that management hasn't adequately positioned the company for long-term success. I do question, though, how long the Street will continue to tolerate declining revenue. Along those same lines, Sanofi's valuation is far from appealing in light of the company's operational growth struggles.