Sanofi-Aventis’ (SNY) third quarter 2011 business earnings of $1.27 per American Depository Share (ADS) were above the Zacks Consensus Estimate of $1.21. While earnings fell 5.3% from the year-ago period on a reported basis, earnings rose 1.6% at constant exchange rates (CER).
Third quarter net sales increased 5% on a reported basis (up 10.1% at CER). Although the Genzyme acquisition boosted sales by €768 million, generic competition wiped off sales by €471 million.
Pharmaceutical segment sales increased 10.0% to €6.9 billion mainly due to the positive impact of the Genzyme acquisition partially offset by generic competition, US healthcare reform and austerity measures in the EU. The diabetes franchise (up 12.4% to €1.2 billion) continued performing well with growth being driven by Lantus (up 14.6% to €968 million), and Apidra (up 22.2% to €53 million).
While Plavix revenues declined 21.0% in Europe due to increased generic competition, the product continued to grow at a decent rate in the US (up 9.0%) and at a robust rate in both Japan (up 20.1%) and China (up 28.5%). Plavix is expected to lose US exclusivity on May 17, 2012. Sanofi has a co-promotion agreement with Bristol-Myers Squibb (BMY) for Plavix. Anti-clotting drug Lovenox, insomnia and sleep disorder drug Ambien CR and cancer drug Taxotere performed disappointingly due to generic competition in the US. In the third quarter 2011, Eloxatin recorded net sales of €310 million, up 179.2% year over year, showing a recovery in US sales. Eloxatin has patent exclusivity in the US through August 9, 2012.
Cerezyme sales increased to €141 million, up only 7.0%. Limited product supply continued to impact performance – the company expects the supply situation to improve February 2012 onwards. Myozyme/Lumizyme sales increased 27.2% to €101 million, driven by continued growth worldwide. Fabrazyme sales were €32 million, up 24.9%, boosted by better product supply. We expect Fabrazyme will expand further in the first quarter of 2012 when the company starts providing the products made in the new manufacturing unit in Framingham. These products became a part of Sanofi’s portfolio post the Genzyme acquisition.
The consumer health care business recorded year-over-year growth of 20.3% to €665 million in the third quarter supported by the BMP Sunstone acquisition and Allegra OTC. Allegra OTC, which was launched during the first quarter of 2011, delivered sales of €43 million in the US in the third quarter of 2011.
Sanofi’s generics business recorded strong growth (9.2% to €410 million) during the reported quarter with the US and emerging markets driving growth. Meanwhile, Sanofi’s Human Vaccines business grew by 16.7% to €1,343 million (including A/H1N1 sales), primarily driven by US seasonal influenza vaccines sales (up 42.6% to €602 million).
Pipeline Update
During the third quarter of 2011, the company filed for EU and US approval of Visamerin/Mulsevo (semuloparin – prevention of venous thromboembolism events in cancer patients initiating a chemotherapy regimen), US approval of Aubagio (teriflunomide – relapsing multiple sclerosis), and Zaltrap (aflibercept – second line metastatic colorectal cancer). The company also filled for EU approval of Lyxumia (lixisenatide – type II diabetes) and Kynamro (mipomersen – homozygous familial hypercholesterolemia – hoFH and severe heterozygous familial hypercholesterolemia – heFH).
Outlook
Sanofi remains on track to deliver cost savings of €2 billion by the end of 2011 and expects to deliver another €2 billion cost savings in the 2011 to 2015 time-period. Sanofi continues to expect 2011 business EPS to be 2% to 5% lower on a year-over-year basis at CER, including Genzyme operations. Prior to purchasing Genzyme, Sanofi had projected a 5%-10 % drop in 2011 business EPS.
Our Recommendation
We currently have a Neutral recommendation on Sanofi. The stock carries a Zacks #5 Rank (Strong Sell rating) in the short run. We expect 2012 earnings to be hit by the loss of US exclusivity on Plavix and Avapro. While new product launches should make significant revenue contributions in the early part of the decade, we expect Sanofi to continue to contain 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 look to grow revenue through additional partnering deals and acquisitions. The Genzyme acquisition should not only bring in additional revenues, it will also strengthen Sanofi’s pipeline.
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