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From the Survey: Sanofi
Sanofi (SNY), formerly Sanofi-Aventis, is the fifth largest pharmaceutical company in the world and the third-biggest in Europe. Like several of its peers, the company is facing the end of patent protection on several major products. When a drug goes off patent, generic versions of the product enter the market, and the effect on the sales of the branded product can be devastating: sales of one of Sanofi’s drugs that lost patent protection in the last year have plunged about 90%.
About 85% of Sanofi’s sales derive from pharmaceuticals and consumer health products; 8% from vaccines; and 7% from animal health. Principal therapeutic areas include diabetes, oncology, thrombosis, and cardiovascular. Leading products include Lantus, the top-selling human insulin analog; cancer drugs Taxotere, Eloxatin, and Jevtana; thrombosis drugs Plavix and Lovenox; atrial fibrillation drug Multaq; and hypertension drug Approvel. With the purchase of Genzyme in April 2011, Sanofi acquired a portfolio of rare disease drugs, including Cerezyme, for Gaucher’s disease, and Fabryzyme, for Fabry’s disease. Vaccines constitute about 40% of revenues, with strong positions in pediatric combination and polio, meningitis, and adult booster and travel vaccines. Sanofi’s animal health business is the third-largest in the world and is divided about equally between pet and production animal products. Sanofi does business in over 100 countries and has about 115,000 employees.
Some figures outline Sanofi’s patent cliff. Sales of 10 key drugs now subject to generic competition in at least one major market, including Lovenox, Plavix, Taxotere, and Eloxatin, fell from about $10 billion in 2010, or 28% of total revenues, to around $7 billion in 2010, or 18% of the total. In the first quarter of 2011, these products had around $1.3 billion in sales, down over 50% from the prior-year period. While these products will lose all patent protection by late 2012, sales will probably not totally evaporate. Lovenox is difficult to produce, so it may retain a significant market share. Too, Sanofi has already introduced its own generic version of Allegra as an over-the-counter drug in the U.S., and it may produce generic versions of other drugs. But the impact on earnings has been and will be substantial, given the roughly 80% gross margin that branded, patent-protected drugs enjoy. In the first quarter of 2011, Sanofi’s consolidated gross margin declined 2.5 percentage points, to 74.9%, and operating profits were down 10%, year to year.
To combat the generic threat, Sanofi is broadening its product line and expanding geographically. The company highlights seven potential growth areas: diabetes, human vaccines, new products, consumer healthcare (over-the-counter products), emerging markets, animal health, and rare diseases. Sales of the first six grew to 59% of total revenues in the first quarter of 2011, from 46% in the prior-year period, and the purchase of Genzyme will add about $3 billion to 2011 revenues. The acquisition of Chattem in 2010 more than doubled Sanofi’s consumer health sales, while the purchases of Zentiva and Medley in 2009 boosted the company’s presence in eastern Europe and Brazil, respectively, and brought portfolios of generic products. Although the acquisition of Genzyme added around $16 billion of debt to the balance sheet, the company’s debt-to-capital is now around 25%, leaving borrowing power for further acquisitions, which we expect will happen.
Beside acquisitions, new drug launches ought to help. The pipeline includes over 20 compounds in Phase III trials, several of which will probably be approved and launched in the next 18 months. Along with its portfolio of rare disease drugs, Genzyme also brought Sanofi its multiple sclerosis drug Lemtrada, currently in Phase III tests and very likely to be approved next year. Genzyme and Sanofi had very different hopes for Lemtrada, and that was a stumbling block in Sanofi’s attempt to buy Genzyme. But the product ought to contribute to the bottom line by 2013.
Sanofi is about half way through the period when loss of patent protection will noticeably affect the bottom line, and its newer products and geographical expansion ought to more than replace earnings lost to generics by 2013. The dividend yield is a generous 4.4%, before French withholding tax, about average for the Big Pharma sector, and we think it will rise with earnings. Moreover, the Genzyme acquisition produced an instrument by which investors can take a position in that company’s results: contingent value rights (CVRs). These securities will earn up to $14 per CVR, to be paid if and when production targets for Cerezyme and Fabryzyme are met or registration and sales targets for Lemtrada are achieved. They currently trade for about $2.45 per CVR, suggesting that investors believe that the company will deliver at least some of the goods.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.