As in the case of other major pharmaceutical companies, Sanofi (SNY) faces increasing competition from 'generics' (copycats of the company's blockbuster products after expiry of patent protection). Merck (MRK) and Pfizer (PFE) are two of Sanofi's rivals which also face major headwinds due to the loss of patent protection on their major revenue-earning drugs.
Impact of Generic Competition and Sanofi's strategy
Sanofi's anti-clotting drug, Plavix, the second-largest selling drug in the world, lost patent exclusivity in the U.S. in May 2012.
A valuable slide in its third quarter 2012 earnings presentation explicitly broke out the y-on-y revenue performance showing the impact of generic competition, and its nullification by new growth products, and (partly) by forex variation:
Revenue Q3 2011: $11.2 billion
Generics impact: -$573.6 million
Others (including terminations such as Copaxone/Dermik): -$243.2 million
Growth products: $466 million
FX impact: $718 million
Revenue Q3 2012: $11.57 billion
The company has moved pro-actively to protect revenues by expanding into growth areas such as diabetes, animal health, consumer healthcare, vaccines, and through its $20 billion acquisition of Genzyme. The company set out to maintain or surpass revenue at 2011 level, at constant exchange rates, despite patent losses; this it has managed to do through the first three quarters of 2012.
However, as per the company's CFO, Singulair, a very high margin product, is being replaced by a basket of new growth products that deliver somewhat lower margins. This shift in mix could pressure margins during 2013. Major developments in pipeline are Suvorexant (insomnia), Odanacatib (osteoporosis), resubmission for Sugammadex (neuro-muscular block), vintafolide (tumors/cancer, to be filed in the EU), Tredaptive (anti-cholesterol) and V503 (HPV vaccine).
How rivals addressed the patent cliff
Third-quarter pharmaceutical sales at rival Merck declined 5 percent to $9.9 billion, including a 5 percent negative impact due to foreign exchange. Merck felt the impact of patent expiry in August 2012 of its anti-asthmatic drug Singulair. Compared to Q3 2011, revenue of Singulair fell 55%. It loses patent exclusivity in Europe in February 2013. Revenue for anti-hypertension drugs Cozaar and Hyzaar fell 27%. These drugs went off-patent in 2010. Merck countered these major losses with revenue gains from Januvia (diabetes, +15%), Gardasil (HPV vaccine, +31%), Janumet (diabetes, +16%) and Isentress (HIV, +16%). The company was also able to grow its business in emerging markets, which now constitute 20% of pharmaceutical sales. Growth in China was 19%. In 2009, Merck acquired Schering-Plough Corporation, a company with a good product pipeline and relatively insulated from patent cliff in the short term.
Rival Pfizer expects 2012 to be the year when the negative impact of loss of patent protection reaches a peak - it apprehends losses of revenue on this count to total about $8 billion. During the third quarter 2012, the company's profit fell 14% primarily due to lower sales of its blockbuster cholesterol drug Lipitor after loss of exclusivity. Overall revenues were down 16%, of which 12% was due to an operational decline, and 4% account adverse foreign exchange impact. US quarterly revenue plunged 18%, and "this decrease was primarily the result of loss of exclusivity of Lipitor on November 30, 2011," says the company's management.
Pfizer's strategy to counter the patent cliff' has focused on asset disposals, share buybacks, emphasis on emerging markets, aggressive discipline on costs and growth of its new product pipeline.
Third Quarter Results (YOY) (Reported basis) compared and Valuations
Sanofi: Net income -7.4%; Overall sales +3.3% [P/E=15.08 based on 2-11-12 price, Dividend yield 3.92%]
Merck: Net income +2%; Overall sales -4% [P/E=21 as on 2-11-12, dividend yield 3.66%]
Pfizer: Net income -14%; Overall sales -16% [P/E=18.32 as on 2-11-12, dividend yield 3.58%]
It appears that Sanofi has weathered the storm better than its rivals by protecting revenue at some cost of profitability. Its P/E ratio is also the lowest among the three.
Sanofi is seen to be more successful and focused in its efforts to bridge the patent cliff. With a lower P/E and higher dividend yield, and the possibility of institutions boosting their holdings, it should be considered for investment. Though, on the price front, Sanofi has underperformed relative to Pfizer and Merck; this may change in the not-too-distant future.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.