With an opening price of around $6 above its 52-week low French pharmaceutical company Sanofi (SNY) has seen better days. However, with experts giving the company a target price of over $40, Sanofi should still be considered a buy. The company's long-term viability is tied to its recent mergers and market activities - the success of which will determine whether Sanofi heads toward that target price or slides down from its current price of around $36.
'Aventis Pharma S.A. v. Hospira, Inc' and Other Legal Potholes
Sanofi's downturn in the market is largely due to the ruling against it in its patent-infringement claim against Roche Holding AG and Biogen Idec (BIIB) for the cancer drugs Rituxan and Avastin, as well as its lost suit against Hospira (HSP) and Apotex over the cancer drug Taxotere. Recently, the United States Court of Appeals for the Federal Court Circuit upheld a lower court's decision to vacate the patents on Taxotere, which generated 922 million euro in sales last year for Sanofi. The Federal Circuit felt that the lower court's judge was correct to state that the patents were based on earlier research, which was withheld from the U.S. Patent and Trademark Office.
On March 22, the same high court upheld another lower court's ruling that Roche and Biogen did not infringe Sanofi's patients for the drugs Rituxan and Avastin. Sanofi sued Roche Holding's Genentech and Biogen in 2008 after Genentech cancelled a 1991 licensing agreement. Sanofi claimed that Sanofi-owned inventions were used to enhance the expression of a gene that makes production of the drugs more efficient. The Federal Circuit ruled that Genentech and Biogen did not use Sanofi's methodology, despite Sanofi's adamant objection.
Both Rituxan and Avastin are huge money makers for their respective companies. As Roche is the largest seller of cancer drugs, the loss of the Taxotere patents and the failure to curb Rituxan and Avastin will dramatically cut into Sanofi-Aventis' bottom line this year, as seen in its target price.
Disappointing Clinical Results
Last December, Regeneron Pharmaceuticals (REGN) reported that Sanofi has voluntarily withdrawn its application for marketing approval of Zaltrap for the treatment of metastatic colorectal cancer. A new application was submitted to the FDA in early 2012, and on April 5th, the FDA granted a priority review. Implementation of this drug would give Sanofi a strong product, and could provide the sales Sanofi needs to grow again.
Zaltrap is also being investigated for prostate cancer. The Phase III VENICE trial did not meet the pre-specified criterion of improvement in overall survival, Sanofi said.
More promisingly, Regeneron and Sanofi have announced that the injectable drug code-named REGN727/SAR236553 has reduced "bad" cholesterol-low-density lipoproteins-levels from 40%-72% in trials among patients resistant to traditional drugs. This development, also, provides good news for the company and the outlook of its stock price.
Recently, Sanofi announced that it would acquire Woburn, Massachusetts-based Pluromed. Pluromed has developed LeGoo, a polymer technology known as a Rapid Transition Polymer (RTP), which allows for the injection of medical plugs for the temporary occlusion of blood vessels. According to the acquisition's press release, "In a prospective, randomized study, LeGoo has been shown to provide better operating conditions than conventional occlusion techniques, by limiting blood flow into a surgical field without causing damage to the vessels. The study also showed a reduction in the time required to perform an anastomosis for beating heart surgery when using LeGoo."
Last year, Sanofi acquired 100% of Genzyme, a pharmaceutical company based in Boston that focused on lysosomal storage disorders (LSDs), multiple sclerosis, and rare genetic diseases. The company has performed well for Sanofi, a trend the company hopes will continue.
On April 2, Merial, the animal health division of Sanofi, announced it would acquire Newport Laboratories, based in Worthington, Minnesota. Newport Laboratories is a leader in autogenous vaccines for pork and beef markets. This acquisition, too, gives Sanofi an opportunity to bring in revenue from outside the pharmaceutical industry.
Sanofi's chief executive stated that the company aims to receive 40% of its overall sales from emerging markets in five years. In accordance with this plan, Sanofi has signed an agreement with India's Hetero Drugs to make affordable anti-HIV drugs in South Africa. "The agreement with Hetero will allow Sanofi to produce (anti-retrovirals, or ARVs) locally and contribute to the government's objective to secure 80% locally supplied ARVs," said Viehbacher. Sanofi upgraded its Pretoria factory to meet the demands of this agreement. South Africa has 5.6 million HIV-infected citizens, making the country one of the highest HIV concentrations in the world.
With the legal pitfalls that have beset the company and a diminished market cap, Sanofi's mergers may be too much, too soon. In addition, Sanofi's planned gains in the emerging markets may not be aggressive enough to offset market loss in Europe and the United States. The best hope for Sanofi is its current slate of treatments in testing - if Sanofi can get these drugs to market quickly enough to curb generic competition, Sanofi has a real shot at cornering these market segments.
As such, I would put Sanofi as Overweight or a Hold right now. Sanofi will make gains, but this will not be enough to match the 52-week high that the company lost in light of the Federal Court's decisions. It is a wait-and-see situation. The worst may be over for Sanofi, but the future - at least in the short term - does not hold the promise of the market gain as happened immediately after the Genzyme merger.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.