Generics Hit Sanofi Revenues

Includes: SNY
by: Zacks Investment Research

Sanofi-Aventis (NYSE:SNY) reported fourth quarter earnings of 96 cents per American Depository Share (ADS), a penny above the Zacks Consensus Estimate but below the year-ago earnings of $1.04. Full year earnings came in at $4.69 per ADS, in line with the Zacks Consensus Estimate and 1.7% above the year-ago earnings.

Fourth quarter net sales declined 5.9%, with performance being impacted by the genericization of several products, especially Lovenox in the U.S., U.S. healthcare reform and EU pricing austerity. Full year sales declined 0.8%. During 2010, sales worth more than €2 billion were impacted by generic competition. Meanwhile, EU austerity measures and U.S. healthcare reform impacted 2010 sales by €450 million.

The Quarter in Detail

Pharmaceutical segment sales declined 2.7%, mainly due to the entry of generic Lovenox and Ambien CR in the U.S., the impact of U.S. healthcare reform and EU austerity measures, and generic competition for Plavix and Taxotere in Europe.

The diabetes franchise (up 8.8%) continued performing well, with growth being driven by Lantus (up 8.8%), and Apidra (up 24.3%). Eloxatin sales increased 101.5% during the quarter reflecting a partial recovery of sales in the U.S.

Meanwhile, Plavix continued to face generic erosion in the U.S. and in some parts of Europe. While Plavix revenues declined 45.1% in Europe due to increased generic competition, the product continued to grow at a decent rate in the U.S. (up 8.9%) and at a robust rate in both Japan (up 30.1%) and China (up 34.2%). Plavix is expected to lose U.S. exclusivity on May 17, 2012. Sanofi has a co-promotion agreement with Bristol-Myers Squibb (NYSE:BMY) for Plavix.

As expected, Lovenox sales (down 26.9%) continued to decline during the fourth quarter due to the entry of generic competition in the U.S. Sales in the U.S. plunged 51.7%. Taxotere lost market exclusivity in Nov 2010 and recorded a 20.1% decline in fourth quarter sales. Sanofi expects Taxotere sales to be about €500 million in 2011, down significantly from €2.1 billion reported in 2010.

The consumer health care business recorded a year-over-year growth of 32.6% in the fourth quarter. Following the acquisition of Chattem, Sanofi is now the fifth largest consumer healthcare player in the world on the basis of product revenues.

This acquisition should help Sanofi establish a strong presence in the U.S. consumer health care market. March 2011 should see the launch of Allegra OTC, which received U.S. Food and Drug Administration (FDA) approval recently.

Sanofi’s generics business recorded strong growth (18%) during the quarter. Meanwhile, Sanofi’s Human Vaccines business grew 12.6%.

Both research and development (R&D) and Selling and general expenses declined during the quarter mainly due to cost saving efforts.

Sanofi has been working on generating cost savings through its Transformation program, which generated cost savings of €1.3 billion in 2010. Sanofi expects to achieve cost savings of €2 billion by 2011, a couple of years ahead of expectations.

The company said that it is reallocating resources towards growth platforms and expects to report Phase III results on five candidates (lixisenatide, teriflunomide, aflibercept, ombrabulin, and semuloparin) in 2011. The company’s pipeline consists of 55 projects in different stages of clinical development, including 13 candidates that are in Phase III development/under regulatory review.

We expect Sanofi to continue its efforts for containing operating costs in order to grow earnings in the face of weakening sales of some of its biggest products. We also expect the company to pursue growing revenue through additional partnering deals and acquisitions. The company signed 37 deals in 2010 and is likely to pursue similar deals in future.

Earnings to Decline in 2011

For 2011, Sanofi expects earnings to decline 5-10% given the absence of A/H1N1 vaccine sales and the impact of generic competition. The Zacks Consensus Estimate for 2011 currently stands at $4.52, representing a year-over-year decline of 3.6%.

The guidance does not include the impact of a potential acquisition of Genzyme Corp. (GENZ) or the return of generic versions of Eloxatin. Sanofi expects Eloxatin sales of about €300 million in 2011.

Genzyme Talks Progressing

Sanofi reported that acquisition talks with Genzyme are progressing; Sanofi has signed a confidentiality agreement and is currently conducting due diligence.

Chances are that the companies could use a contingent value right (CVR) for alemtuzumab as part of a potential deal. A CVR allows shareholders of the acquired company to receive additional benefits on the occurrence of a specified event.

We expect investor focus to remain on the potential acquisition of Genzyme. With this acquisition, Sanofi is looking to create a new source of growth. Sanofi has a high exposure to generic risk on many of its leading franchises, and the acquisition of Genzyme would boost Sanofi’s revenues as well as its pipeline.