Sanofi-Aventis SA 20-F 2006
Documents found in this filing:
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
For the fiscal year ended December 31, 2005
Date of event requiring this shell company report . . . . . . . . . . . . . . . . . . . .
For the transition period from to
Commission File Number: 001-31368
(Exact name of registrant as specified in its charter)
(Translation of registrants name into English)
(Jurisdiction of incorporation or organization)
174, avenue de France, 75013 Paris, France
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act:
American Depositary Shares, each representing one quarter of a Participating Share Series A, par value 70.89 per share (removed from listing and registration on the New York Stock Exchange effective July 31, 1995).
The number of outstanding shares of each of the issuers classes of capital or
common stock as of December 31, 2005 was:
ordinary shares: 1,401,306,569
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405
of the Securities Act.
YES x NO ¨.
If this report is an annual or transition report, indicate by check mark if the registrant is not
required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
YES ¨ NO x.
Note Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark which financial statement item the registrant has elected to follow.
Item 17 ¨ Item 18 x
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES ¨ NO x.
PRESENTATION OF FINANCIAL AND OTHER INFORMATION
The consolidated financial statements contained in this annual report on Form 20-F have been prepared in accordance with International Financial Reporting Standards (IFRS) adopted by the European Union as of December 31, 2005 and with IFRS issued by the International Accounting Standards Board (IASB) as of the same date. IFRS differ in certain significant respects from U.S. generally accepted accounting principles (U.S. GAAP). For a description of the principal differences between IFRS and U.S. GAAP, as they relate to us and to our consolidated subsidiaries, and for a reconciliation of our shareholders equity and net income to U.S. GAAP, see Note G to our consolidated financial statements included at Item 18, of this annual report.
Our results of operations and financial condition as of and for the year ended December 31, 2004 and have been significantly affected by our August 2004 acquisition of Aventis and certain subsequent transactions (including the merger of Aventis with and into our Company in December 2004). The results of operations of Aventis for the period between August 20, 2004 and December 31, 2004 have been included in our consolidated income statement and cash flow statement. This resulted in a significant increase in revenues and significant changes in other financial statement items in 2004 compared to 2003. The assets and liabilities of Aventis are also included in our consolidated balance sheet at December 31, 2004. See Item 5. Operating and Financial Review and Prospects.
We have prepared unaudited pro forma income statements for 2004 that present our results of operations as if the acquisition had taken place on January 1, 2004, described under Item 5. Operating and Financial Review and Prospects. Because of the significance of the Aventis acquisition, we present certain 2004 financial information in this annual report, such as sales of particular pharmaceutical products, as a percentage of our unaudited pro forma sales, rather than as a percentage of our consolidated sales.
Unless the context requires otherwise, the terms sanofi-aventis, the Company, the Group, we, our or us refer to sanofi-aventis and our consolidated subsidiaries. References to Aventis refer to Aventis and its consolidated subsidiaries for periods prior to August 20, 2004.
All references herein to United States or U.S. are to the United States of America, references to dollars or $ are to the currency of the United States, references to France are to the Republic of France, and references to euro and are to the currency of the European Union member states (including France) participating in the European Monetary Union.
Brand names appearing in this annual report are trademarks of sanofi-aventis and/or its affiliates, with the exception of:
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This annual report contains forward-looking statements. We may also make written or oral forward-looking statements in our periodic reports to the Securities and Exchange Commission on Form 6-K, in our annual report to shareholders, in our proxy statements, in our offering circulars and prospectuses, in press releases and other written materials and in oral statements made by our officers, directors or employees to third parties. Examples of such forward-looking statements include:
Words such as believe, anticipate, plan, expect, intend, target, estimate, project, predict, forecast, guideline, should and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.
Forward-looking statements involve inherent risks and uncertainties. We caution you that a number of important factors could cause actual results to differ materially from those contained in any forward-looking statements. Such factors, some of which are discussed under Risk Factors below, include but are not limited to:
We caution you that the foregoing list of factors is not exclusive and that other risks and uncertainties may cause actual results to differ materially from those in forward-looking statements.
Forward-looking statements speak only as of the date they are made. Other than required by law, we do not undertake any obligation to update them in light of new information or future developments.
Item 3. Key Information
SUMMARY SELECTED FINANCIAL DATA
The tables below set forth selected consolidated financial data for sanofi-aventis. These financial data are derived from the sanofi-aventis consolidated financial statements. Sanofi-aventis financial statements for the years ended December 31, 2005 and 2004 are included in Item 18 of this annual report.
The consolidated financial statements of sanofi-aventis for the year ended December 31, 2005 have been prepared in compliance with IFRS adopted by the European Union as of December 31, 2005 and with the IFRS issued by the International Accounting Standards Board (IASB) as of the same date. The term IFRS refers collectively to International Accounting Standards (IAS), International Financial Reporting Standards (IFRS), Standing Interpretations Committee (SIC) interpretations and International Financial Reporting Interpretations Committee (IFRIC) issued by the IASB. The opening balance sheet as of the transition date (January 1, 2004) and the comparative financial statements for the year ended December 31, 2004 have been prepared in accordance with the same principles.
Sanofi-aventis reports its financial results in euro and in conformity with IFRS, with a reconciliation to U.S. GAAP. Sanofi-aventis also publishes condensed U.S. GAAP information. A description of the principal differences between IFRS and U.S. GAAP as they relate to the sanofi-aventis consolidated financial statements are set forth in Note G to the sanofi-aventis audited consolidated financial statements included in this annual report.
SELECTED CONDENSED FINANCIAL INFORMATION
Certain data as of and for the year ended December 31, 2004 have been reclassified to conform to the presentation adopted under IFRS with respect to joint ventures that are no longer accounted for under the proportionate consolidation method.
EXCHANGE RATE INFORMATION
The following table sets forth, for the periods and dates indicated, certain information concerning the exchange rates for the euro from 2001 through March 28, 2006 expressed in U.S. dollar per euro. The information concerning the U.S. dollar exchange rate is based on the noon buying rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York
(the Noon Buying Rate). We provide the exchange rates below solely for your convenience. We do not
represent that euros were, could have been, or could be, converted into U.S. dollars at these rates or at any other rate. For information regarding the effect of currency fluctuations on our results of operations, see Item 5. Operating and Financial Review and Prospects.
Selected Exchange Rate Information
On March 28, 2006 the Noon Buying Rate was $1.2078 per euro.
D. Risk Factors
Important factors that could cause actual financial or operating results to differ materially from expectations are disclosed in this annual report, including without limitation the following risk factors and the factors described under Cautionary Statement Regarding Forward-Looking Statements. In addition to the risks listed below, we may be subject to other material risks that are not currently known to us or that we deem immaterial at this time.
Risks Relating to Our Company
The integration of the new Groups activities presents significant challenges that may result in the combined business not operating as effectively as expected or in the failure to achieve some or all of the anticipated benefits of the business combination.
The benefits and synergies expected to result from the combination of sanofi-aventis and Aventis will depend in part on whether the operations of Aventis can be integrated in a timely and efficient manner with those of sanofi-aventis. Sanofi-aventis faces significant challenges in consolidating sanofi-aventis functions with those of Aventis, and integrating the organizations, procedures and operations of the two businesses. The integration of the two businesses is complex and time-consuming, and management must dedicate substantial time and resources to it. These efforts could divert managements focus and resources from other strategic opportunities and from day-to-day operational matters during the integration process. Failure to integrate successfully the
operations of sanofi-aventis and Aventis could result in delay or the failure to achieve some or all of the anticipated benefits from the business combination, including synergies and other operating efficiencies, and could have an adverse effect on our business, operating results, financial condition or prospects.
We incurred substantial debt in connection with the acquisition of Aventis, which limits our business flexibility and requires us to devote cash resources to debt service payments.
In connection with our acquisition of Aventis, our consolidated debt increased substantially, because we incurred new debt to finance the cash portion of the acquisition consideration, and because our consolidated debt includes the debt incurred by Aventis prior to the acquisition. As of December 31, 2005, our net consolidated debt (financial debt less cash and cash equivalents and short term investments) was 9.9 billion, compared to a positive consolidated net cash position of 2.4 billion as of December 31, 2003, prior to the acquisition of Aventis. We make significant debt service payments to our lenders and our current debt level could restrict our ability to engage in additional transactions or incur additional indebtedness. For more information on our debt, please see Item 5. Operating and Financial Review and Prospectus Liquidity and Capital Resources in this annual report.
We depend on the United States market for a significant part of our current and future operating results. A failure to continue our strategy of profitable operations in that market could adversely affect our business, results of operations, financial condition or prospects.
We may not achieve our growth strategy if we do not maintain and continue to expand profitably our presence in the United States, the worlds largest pharmaceuticals market. We have identified the United States, which accounted for approximately 35% of our net sales in 2005, as a potential major source of continued future growth and plan to capitalize on our direct presence in the United States in the coming years to build our leadership in this market. We face a number of challenges in maintaining profitable growth in the United States, including:
We depend on third parties for the marketing of some of our products. These third parties may act in ways that could harm our business.
We commercialize some of our products in collaboration with other pharmaceutical companies. For example, we currently have a major collaborative arrangement with Bristol-Myers Squibb for the marketing of Plavix® and Aprovel® in the United States and several other countries, and co-marketing agreements with Procter & Gamble Pharmaceuticals for the osteoporosis treatment Actonel® and Teva for Copaxone®, as well as an agreement with Merck & Co., Inc. for the distribution of vaccines in Europe. We also have alliances with several Japanese companies for the marketing of our products in Japan. See Item 4. Information on the Company Business Overview Markets Marketing and Distribution. When we commercialize our products through collaboration arrangements, we are subject to the risk that certain decisions, such as the establishment of budgets and promotion strategies, are subject to the control of our collaboration partners, and that deadlocks may adversely affect the activities conducted through the collaboration arrangements. For
example, our alliances with Bristol-Myers Squibb (BMS) are subject to the operational management of BMS in some countries, including the United States. We cannot be certain that our partners will perform their obligations as expected. Further, our partners might pursue their own existing or alternative technologies or product candidates in preference to those being developed or marketed in collaboration with us.
The manufacture of our products is technically complex, and supply interruptions, product recalls or inventory losses caused by unforeseen events may reduce sales, delay the launch of new products and adversely affect our operating results and financial condition.
Many of our products are manufactured using technically complex processes requiring specialized facilities, highly specific raw materials and other production constraints. Our vaccine products in particular are subject to the risk of manufacturing stoppages or the risk of loss of inventory because of the difficulties inherent to the sterile processing of biological materials and the potential for the unavailability of adequate amounts of raw materials meeting our standards. The complexity of these processes as well as strict company and government standards for the manufacture of our products subject us to production risks. The occurrence or suspected occurrence of out-of-specification production can lead to lost inventories, and in some cases product recalls, with consequential reputational damage and the risk of product liability (See Product liability claims could adversely affect our business, results of operations and financial condition, below). The investigation and remediation of any identified problems can cause production delays, substantial expense, lost sales and the delay of new product launches.
We depend on third parties for the manufacture and supply of a substantial portion of our raw materials, specialized components, active ingredients and medical devices.
Availability of Raw Materials and Specialized Components. Third parties supply us with a substantial portion of our raw materials and specialized components. Some raw materials and specialized components essential to the manufacture of our products are not widely available from sources we consider reliable for example, there is a limited number of approved suppliers of heparins, which are used in the manufacture of Lovenox®. See Item 4. Information on the Company Business Overview Production and Raw Materials for a description of these outsourcing arrangements.
Third-Party Manufacturing of Active Ingredients. Although our general policy is to manufacture the active ingredients for our products ourselves, we subcontract the manufacture of some of our active ingredients to third parties, which exposes us to the risk of a supply interruption in the event that our suppliers experience financial difficulties or are unable to manufacture a sufficient supply of our products. The manufacture of the active ingredients for Eloxatine® and Xatral® and part of the manufacture of the active ingredient for Stilnox® is currently carried out by third parties, as are some of the manufacturing steps in the production of Lovenox®. Additionally, under our collaborative arrangement with BMS, pharmaceutical production of Plavix® and Aprovel® is conducted partly in sanofi-aventis plants and partly in BMS plants.
Third-Party Supply of Medical Devices. Medical devices related to some of our products, such as certain pens used to dispense insulin, are manufactured by third parties. Reliance on third parties exposes us to the risk of supply interruptions, including as a result of third-party manufacturing problems, as well as the risk of product liability for materials not produced by the Group. See Product liability claims could adversely affect our business, results of operations and financial condition, below.
If disruptions or quality concerns were to arise in the third-party supply of raw materials, specialized components, active ingredients or devices, this would affect our ability to sell our products in the quantities demanded by the market and could damage our reputation and relationships with our customers. See also The manufacture of our products is technically complex, and supply interruptions, product recalls or inventory losses caused by unforeseen events may reduce sales, delay the launch of new products and adversely affect our operating results and financial condition, above. Even though we aim to have backup sources of supply whenever possible, including by manufacturing backup supplies of our principal active ingredients at a second or third facility when practicable, we cannot be certain they will be sufficient if our principal sources become unavailable. Any of these factors could adversely affect our business, operating results or financial condition.
Our collaborations with third parties expose us to risks that they will assert intellectual property rights on our inventions or fail to keep our unpatented technology confidential.
We occasionally provide information and materials to research collaborators in academic institutions or other public or private entities, or request them to conduct tests to investigate certain materials. In all cases we enter into appropriate confidentiality and intellectual property rights agreements with such entities. However, those entities might assert intellectual property rights with respect to the results of the tests conducted by their collaborators, and might not grant licenses to us regarding their intellectual property rights on acceptable terms.
We also rely upon unpatented proprietary technology, processes, know-how and data that we regard as trade secrets and protect them in part by entering into confidentiality agreements with our employees, consultants and certain contractors. We cannot be sure that these agreements or other trade secret protections will provide meaningful protection, or, if they are breached, that we will have adequate remedies. You should read Item 4. Information on the Company Business Overview Patents, Intellectual Property and Other Rights for more information about our patents and licenses.
Claims relating to marketing practices could adversely affect our business, results of operations and financial condition.
The marketing of our products is heavily regulated, and failure to comply fully with applicable regulations could result in civil or criminal actions against us, and in some circumstances potential disqualification from participation in government health programs. Sanofi-aventis and certain of its subsidiaries are under investigation by various federal government entities in the United States, and are defendants in a number of lawsuits, relating to antitrust and/or pricing and marketing practices, including an investigation of suspected misrepresentations in product price data provided to U.S. federal health programs allegedly leading to inflated government reimbursements. See Note D.22(c) to our consolidated financial statements included at Item 18 of this annual report.
In addition, following judgments holding the U.S. patents covering DDAVP® tablets and Lovenox® to be unenforceable, a number of civil antitrust and fair trade claims have been filed against sanofi-aventis as putative class actions alleging that the Group has prevented competition and generated excess profits.
Because many of these cases allege substantial unquantified damages, including treble damages, and seek significant punitive damages and penalties, it is possible that any final determination of liability could have a material adverse effect on our business, results of operations or financial condition.
Fluctuations in currency exchange rates could adversely affect our results of operations and financial condition.
Because we sell our products in numerous countries, our results of operations and financial condition could be adversely affected by fluctuations in currency exchange rates. We are particularly sensitive to movements in exchange rates between the euro and the U.S. dollar, the British pound, the Japanese yen, and to a lesser extent to currencies in emerging countries. In 2005, approximately 35% of our net sales were realized in the United States. While we incur expenses in those currencies, the impact of currency exchange rates on these expenses does not fully offset the impact of currency exchange rates on our revenues. As a result, currency exchange rate movements can have a considerable impact on our earnings. When deemed appropriate, we enter into transactions to hedge our exposure to foreign exchange risks. These efforts, when undertaken, may fail to offset the effect of adverse currency exchange rate fluctuations on our results of operations or financial condition. For more information concerning our exchange rate exposure, see Item 11. Quantitative and Qualitative Disclosures About Market Risk.
Risks Relating to Our Industry
We must invest substantial sums in research and development in order to remain competitive, and we may not fully recover these investments if our products are unsuccessful in clinical trials or fail to receive regulatory approval.
To be successful in the highly competitive pharmaceutical industry, we must commit substantial resources each year to research and development in order to develop new products. In 2005, we spent 4,044 million on
research and development, amounting to approximately 14.8% of our net sales. Our ongoing investments in new product launches and research and development for future products could result in higher costs without a proportionate increase in revenues.
The research and development process is lengthy and carries a substantial risk of product failure. If our research and development does not yield sufficient new products that achieve commercial success, our future operating results may be adversely affected.
The research and development process typically takes from 10 to 15 years from discovery to commercial product launch. This process is conducted in various stages, and during each stage there is a substantial risk that we will not achieve our goals and will have to abandon a product in which we have invested substantial amounts.
For example, in order to develop a commercially viable product, we must demonstrate, through extensive pre-clinical and human clinical trials, that the pharmacological compounds are safe and effective for use in humans. There is also no assurance that favorable results obtained in pre-clinical trials will be confirmed by later clinical trials, or that the clinical trials will establish safety and efficacy data sufficient for regulatory approval. In the first quarter of 2006, we had 127 compounds in pre-clinical and clinical development in our targeted therapeutic areas, of which 55 were in phase II or phase III clinical trials. For additional information regarding clinical trials and the definition of the phases of clinical trials, see Item 4. Information on the Company Business Overview Research and Development. There can be no assurance that any of these compounds will be proven safe or effective, or that they will produce commercially successful products.
After completing the research and development process, we must invest substantial additional resources with a view to obtaining government approval in multiple jurisdictions, with no assurance that approval will be obtained. We must obtain and maintain regulatory approval for our pharmaceutical products from the European Union, the United States and other regulatory authorities before a given product may be sold in these markets. The submission of an application to a regulatory authority provides no assurance that the regulatory authority will grant a license to market the product. Each authority may impose its own requirements, including requiring local clinical studies, and may delay or refuse to grant approval, even though a product has already been approved in another country.
In our principal markets, the approval process for one or more indications of a new product is complex and lengthy, and typically takes from six months to two years from the date of application depending on the country. Moreover, if regulatory approval of a product is granted, the approval may place limitations on the indicated uses for which it may be marketed. A marketed product is also subject to continual review even after regulatory approval. Later discovery of previously unknown problems may result in marketing restrictions or withdrawal of the product, as well as an increased risk of litigation. See also Product liability claims could adversely affect our business, results of operations and financial condition, below. In addition, we are subject to strict government controls on the manufacture, labeling, distribution and marketing of our products. Each of these factors may increase our costs of developing new products and the risk that we may not succeed in selling them successfully.
Obtaining regulatory marketing approval is not a guarantee that the product will achieve commercial success. Commercial success is dependent on a number of factors beyond our control, notably the level of reimbursement which is accorded to the product by public health entities and third-party payers, the acceptance of the product by the medical establishment and patients, and the existence and price of competing products and alternative therapies.
If we are unable to protect our proprietary rights, we may fail to compete effectively or operate profitably.
It is important for our success that we be able to effectively obtain and enforce our patents and other proprietary rights. We currently have over 50,000 patents, patent licenses and patent applications worldwide. To the extent effective patent protection of our products is not maintained, these products will become exposed to competition from generic products. The entry of a generic product into the market typically is followed by a substantial decline in the brand-name products sales volume and revenues.
Obtaining Patent Rights. Patent law relating to the scope of claims in the pharmaceutical field in which we operate is continually evolving and can be the subject of some uncertainty. Accordingly, we cannot be sure that:
Patent protection once obtained is limited in time (typically 20 years), after which competitors may use the covered technology without obtaining a license from us. Because of the time required to obtain regulatory marketing approval, the period of effective patent protection for a marketed product is frequently substantially shorter.
Enforcing Patent Rights. Our competitors may infringe our patents or successfully avoid them through design innovation. To prevent infringement, we may file infringement claims, which are expensive and time consuming and which may result in decisions unfavorable to us. Policing unauthorized use of our intellectual property is difficult, and we may not be able to prevent misappropriation of our proprietary rights. We may also be accused of infringing the rights of others who then seek substantial damages from us. This risk is increased by the growth in the number of patent applications filed and patents granted in the pharmaceutical industry.
Even prior to the scheduled expiration of a patent, third parties may challenge the validity of the patents issued or licensed to us, which may result in the invalidation of these rights and the loss of sales derived from the related products. Such challenges have become increasingly common in recent years. Typical assertions in suits challenging a patent are that (i) the competing product does not fall within the scope of the patent, (ii) that the patent claims matters that are not in fact patentable, for example because they are not a true innovation; or (iii) that there were procedural flaws that invalidate the patent offices decision to issue the patent. Patent litigation is subject to substantial uncertainty, and we cannot be sure how much protection, if any, will be provided by our patents if we attempt to enforce them and they are challenged in court or in other proceedings.
Additionally, if a competitor chooses to take the risk of launching an infringing product prior to a courts determination that our patent rights are valid, enforceable and infringed, there can be no assurance (i) that we will be successful in obtaining a preliminary injunction to remove the infringing product from the market prior to obtaining a final injunction at trial, and (ii) that we will be able effectively to both obtain and collect sufficient damages from the competitor to repair all harm caused to us.
Significant challenges to our proprietary rights include:
Plavix®: In the first half of 2002, two pharmaceutical companies, Apotex and Dr. Reddys Laboratories, each filed an Abbreviated New Drug Application (ANDA) with the U.S. Food and Drug Administration (FDA), seeking to market a purportedly generic form of Plavix® in the United States and challenging certain U.S. patents relating to Plavix®. Subsequently, in August 2004, Teva filed an ANDA challenging one of the U.S. patents relating to Plavix®. On January 24, 2006, we learned that the FDA had approved Apotexs ANDA. For additional information regarding ANDAs, see Item 4. Information on the Company Business Overview Regulation. We have filed suit against Apotex, Dr. Reddys Laboratories and Teva for infringement of our patent rights. See Item 8. Financial Information Consolidated Financial Statements and Other Financial Information Information on Legal and Arbitration Proceedings and Note D.22(b) to our consolidated financial statements included in this annual report at Item 18. The Plavix® patent rights are material to our business, and if we were unsuccessful in asserting them or they were deemed invalid, any resulting introduction of a generic version of Plavix® in the United States would reduce the price that we receive for this product and the volume of the product that we would be able to sell, and could materially adversely affect our business, results of operations and financial condition.
As a reference, the developed sales of Plavix® in 2005 in the United States amounted to 2,585 million out of total worldwide developed sales of sanofi-aventis for all products of 30,778 million. Developed sales is a non-GAAP financial measure we use to demonstrate the overall trends for our products in the market, and which consists of sales of our products, excluding sales to our alliance partners, and of sales that are made through our alliances but which are not included in our consolidated sales. In 2005, sanofi-aventis share of the profits of the
Plavix® and Aprovel® alliance entities managed by BMS in North America amounted to 404 million after taxes. See Item 5. Operating and Financial Review and Prospects Results of Operations Year Ended December 31, 2005 Compared with Year Ended December 31, 2004 herein for additional information as well as a derivation of developed sales.
Allegra®: We have been notified that seven generic pharmaceutical companies are seeking FDA approval to market generic versions of Allegra® products in the United States. We have filed patent infringement lawsuits against all of these companies. Two of these companies, Barr and Teva, announced in September 2005, that they were launching their generic version of Allegra® immediately without first waiting for the judgment in the pending patent litigation. Although we continue to assert our patent rights against these companies, this generic launch has already resulted in a substantial decline in the Groups sales of Allegra®, which dropped to 160 million in the last quarter of 2005 compared to 373 million in the last quarter of the preceding year.
Lovenox®: In June 2003, we were notified that both Amphastar Pharmaceuticals and Teva Pharmaceuticals were seeking approval from the FDA for purportedly generic versions of Lovenox® and are challenging the patent protection of this product. In June 2005, the U.S. District Court for the Central District of California granted Amphastars request for a summary judgment ruling our patent unenforceable on the grounds of inequitable conduct. Although we are appealing this decision, if we do not succeed in having the lower court decision overturned, we will no longer be able to assert our patent rights in the United States against purportedly generic versions of enoxaparin, the active ingredient of Lovenox®.
We are also involved in litigation challenging the validity or enforceability of patents related to a number of other products in the United States and the European Union, and challenges to other products may be expected in the future. We can give no assurance that as a result of these challenges we will not face generic competition for additional group products. See Item 8. Financial Information Consolidated Financial Statements and Other Financial Information Information on Legal or Arbitration Proceedings and Note D.22(b) to our consolidated financial statements included in this annual report at Item 18 for additional information.
Product liability claims could adversely affect our business, results of operations and financial condition.
Product liability is a significant commercial risk for us, and may become a more significant risk as we expand in the United States (where product liability claims can be particularly costly). Substantial damage awards have been made in certain jurisdictions against pharmaceutical companies based upon claims for injuries allegedly caused by the use of their products. Several pharmaceutical companies have recently recalled or withdrawn products from the market based on actual or suspected product risks, and currently face significant product liability claims. We are currently defending a number of product liability claims (see Note D.22 to the consolidated financial statements included at Item 18 of this annual report and Item 8. Financial Information Information on Legal or Arbitration Proceedings.), and there can be no assurance that the Group will not face additional claims in the future. Although we maintain insurance to cover the risk of product liability, we cannot be certain that our insurance will be sufficient to cover all potential liabilities. Further, we face a general trend in the insurance industry to exclude certain products from coverage and to reduce insured limits for liabilities, causing companies to rely increasingly on self-insurance. Substantial product liability claims, if successful, could adversely affect our business, results of operations and financial condition.
Use of biologically derived ingredients may face consumer resistance, which could adversely affect sales and cause us to incur substantial costs.
In line with industry practice, we manufacture our vaccines and many of our prescription pharmaceutical products with ingredients derived from animal or plant tissue. Most of these products cannot be made economically, if at all, with synthetic ingredients. We subject our products incorporating these ingredients to extensive tests and believe them to be safe. There have been instances in the past where the use of biologically derived ingredients by sanofi-aventis or its competitors has been alleged to be an actual or theoretical source of harm, including infection or allergic reaction, or instances where production facilities have been subject to prolonged periods of closure because of possible contamination. Such allegations have on occasion led to damage claims and increased consumer resistance to such ingredients. A substantial claim of harm caused by a product incorporating biologically derived ingredients or a contamination event could lead us to incur potentially substantial costs as a result of, among other things, litigation of claims, product recalls, adoption of additional
safety measures, manufacturing delays, investment in consumer education, and development of synthetic substitutes for ingredients of biological origin. Such claims could also generate consumer resistance, with a corresponding adverse effect on sales and results of operations.
We face uncertainties over the pricing of pharmaceutical products.
The commercial success of our products depends in part on the conditions under which our products are reimbursed. Price pressure is strong due to:
Price pressure is considerable in our two largest markets, Europe and the United States, which represented approximately 44% and 35%, respectively, of our net sales in 2005. Changes in the pricing environments in the United States or Europe (on an individual country basis) could have a significant impact on our sales and results of operations. See Item 4. Information on the Company Business Overview Pricing for a description of certain regulatory pricing systems that affect our Group.
Our results may also be adversely affected by parallel imports, a practice by which traders exploit price differentials among markets by purchasing in lower-priced markets for resale in higher-priced markets.
Changes in the marketing status or competitive environment of our major products could adversely affect our results of operations.
In some cases, pharmaceutical products face the risk of being switched from prescription drug status to over-the-counter (OTC) drug status by national regulatory authorities. OTC drugs may not benefit from the same reimbursement schemes and are generally priced significantly lower than brand-name prescription drugs. The competitive environment for our products could also be adversely affected if generic or OTC versions of competitors products were to become available.
Risks from the handling of hazardous materials could adversely affect our results of operations.
Pharmaceutical manufacturing activities, such as the chemical manufacturing of the active ingredients in our products and the related storage and transportation of raw materials, products and wastes expose us to various risks, including:
These operating risks can cause personal injury, property damage and environmental contamination, and may result in:
The occurrence of any of these events may significantly reduce the productivity and profitability of a particular manufacturing facility and adversely affect our operating results.
Although we maintain property, business interruption and casualty insurance that we believe is in accordance with customary industry practices, we cannot assure you that this insurance will be adequate to cover fully all potential hazards incidental to our business. For more detailed information on environmental issues, see Item 4. Information on the Company Business Overview Health, Safety and Environment.
Environmental liabilities and compliance costs may have a significant adverse effect on our results of operations.
The environmental laws of various jurisdictions impose actual and potential obligations on our Group to remediate contaminated sites. These obligations may relate to sites:
These environmental remediation obligations could significantly reduce our operating results. In particular, our accruals for these obligations may be insufficient if the assumptions underlying these accruals prove incorrect or if we are held responsible for additional, currently undiscovered contamination. Sanofi-aventis accrues reserves for remediation when our management believes the need is probable and that it is reasonably possible to estimate the cost. These judgments and estimates may later prove inaccurate, and any shortfalls could have a material adverse effect on our results of operations. See Item 4. Information on the Company Business Overview Health, Safety and Environment for additional information regarding our environmental policies.
Furthermore, we are or may become involved in claims, lawsuits and administrative proceedings relating to environmental matters. Some current and former sanofi-aventis subsidiaries have been named as potentially responsible parties or the equivalent under the U.S. Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (also known as Superfund), and similar statutes in the United States, France, Germany, Brazil and elsewhere. As a matter of statutory or contractual obligation, we and/or our subsidiaries may retain responsibility for environmental liabilities at some of the sites our predecessor companies, or our subsidiaries that we demerged, divested or may divest. We are currently involved, for example, in litigation with Albemarle and Rhodia over environmental remediation at several sites no longer owned by the Group. An adverse outcome in any of these might have a significant adverse effect on our operating results. See Note D.22(e) to the consolidated financial statements included at Item 18 of this annual report.
Finally, stricter environmental, safety and health laws and enforcement policies could result in substantial costs and liabilities to our Group and could subject our handling, manufacture, use, reuse or disposal of substances or pollutants to more rigorous scrutiny than is currently the case. Consequently, compliance with these laws could result in significant capital expenditures as well as other costs and liabilities, thereby adversely affecting our business, results of operations or financial condition.
Risks Relating to an Investment in our Shares or ADSs
Foreign exchange fluctuations may adversely affect the U.S. dollar value of our ADSs and dividends (if any).
As a holder of ADSs, you may face exchange rate risk. Our ADSs trade in U.S. dollars and our shares trade in euro. The value of the ADSs and our shares could fluctuate as the exchange rates between these currencies fluctuate. If and when we do pay dividends, they would be denominated in euro. Fluctuations in the exchange rate between the euro and the U.S. dollar will affect the U.S. dollar amounts received by owners of ADSs upon conversion by the depositary of cash dividends, if any. Moreover, these fluctuations may affect the U.S. dollar price of the ADSs on the New York Stock Exchange (NYSE), whether or not we pay dividends in addition to the amounts, if any, that you would receive upon our liquidation or upon the sale of assets, merger, tender offer or similar transactions denominated in euro or any foreign currency other than U.S. dollars.
If you hold ADSs rather than shares it may be difficult for you to exercise some of your rights as a shareholder.
As a holder of ADSs, it may be more difficult for you to exercise your rights as a shareholder than it would be if you directly held shares. For example, if we offer new shares and you have the right to subscribe for a portion of
them, the depositary is allowed, at its own discretion, to sell for your benefit that right to subscribe for new shares instead of making it available to you. Also, to exercise your voting rights, as a holder of ADSs, you must instruct the depositary how to vote your shares. Because of this extra procedural step involving the depositary, the process for exercising voting rights will take longer for you, as a holder of ADSs, than for holders of shares. ADSs for which the depositary does not receive timely voting instructions will not be voted at any meeting.
Our two largest shareholders own a significant percentage of the share capital and voting rights of sanofi-aventis.
At December 31, 2005, Total and LOréal, our two largest shareholders, held approximately 12.7% and 10.2% of our issued share capital, respectively, accounting for approximately 19.5% and approximately 17.4%, respectively, of the voting rights of sanofi-aventis. See Item 7. Major Shareholders and Related Party Transactions Major Shareholders Shareholders Agreement.
To the extent these shareholders continue to hold a large percentage of our share capital and voting rights, Total and LOréal will remain in a position to exert heightened influence in the election of the directors and officers of sanofi-aventis and in other corporate actions that require shareholders approval. Continued ownership of a large percentage of the share capital and voting rights of sanofi-aventis by these two principal shareholders, affiliates of whom may also continue to be members of the sanofi-aventis board of directors, may have the effect of delaying, deferring or preventing a future change in the control of sanofi-aventis and may discourage future bids for sanofi-aventis other than with the support of these shareholders.
Sales of our shares may cause the market price of our shares or ADSs to decline.
Neither Total nor LOréal are, to our knowledge, subject to any contractual restrictions on the sale of the shares each holds in our Company. Sales of a substantial number of our shares, or a perception that such sales may occur, could adversely affect the market price for our shares and ADSs.
Item 4. Information on the Company
We are a global pharmaceutical group engaged in the research, development, manufacture and marketing of healthcare products. In 2005, our net sales amounted to 27,311 million. On the basis of 2005 net sales, we are the third largest pharmaceutical group in the world and the largest pharmaceutical group in Europe (IMS/GERS year end 2005; all available channels). Sanofi-aventis is the parent of a consolidated group of companies. A list of the principal subsidiaries included in this consolidation is shown at Note E to the consolidated financial statements included under Item 18 of this annual report.
Our business includes two main activities: pharmaceuticals (principally prescription drugs) and human vaccines.
In our pharmaceuticals activity, which generated net sales of 25,249 million in 2005, we specialize in six therapeutic areas:
Our top fifteen products are Lovenox®, Plavix®, Taxotere®, Eloxatine®, Stilnox®, Allegra®, Lantus®, Tritace®, Copaxone®, Aprovel®, Amaryl®, Actonel®, Depakine®, Xatral® and Nasacort®, which together accounted for 64.1% of our net sales for the pharmaceutical activity, or 16,188 million, in 2005.
In the human vaccines activity, we are a major player with leading vaccines in five areas:
In 2005, the human vaccines business recorded net sales of 2,062 million, significantly boosted by three successful launches in the United States (Decavac® in January, Menactra® in March and Adacel® in July) and a highly successful influenza vaccination season.
We have a strong commitment to research and development. We have 28 research centers and over 17,600 employees (including Vaccines, Industrial Development and Medical/Regulatory staff in subsidiaries) devoted to research and development.
A. History and Development of the Company
Sanofi-aventis was incorporated under the laws of France in 1994 as a société anonyme, a form of limited liability company, for a term of 99 years. We operate under the commercial name sanofi-aventis. Our registered office is located at 174, avenue de France, 75013 Paris, France, and our main telephone number is +33 1 53 77 40 00. Our principal U.S. subsidiarys office is located at 300 Somerset Corporate Boulevard, Bridgewater, NJ 08807-2854.
Following the acquisition of Aventis in August 2004, sanofi-aventis is present in more than 100 countries on five continents and employed over 97,100 people worldwide at year end 2005. The main purpose of the merger of Sanofi-Synthélabo and Aventis was to create a platform for strong, sustainable and profitable growth. Our legacy companies bring to the Group more than a century of experience in the pharmaceutical industry. Sanofi-Synthélabo itself was the result of the 1999 merger of Sanofi and Synthélabo, two major French pharmaceutical companies.
Sanofi was founded in 1973 by Elf Aquitaine, a French oil company, when it took control of the Labaz group (a pharmaceutical company) for diversification purposes. Sanofi launched its first major product on the market, Ticlid®, in 1978. Sanofi made a significant venture into the United States market in 1994, when it acquired the prescription pharmaceuticals business of Sterling Winthrop, an affiliate of Eastman Kodak. Sanofi launched its first major product on the U.S. market, Aprovel®, in 1997, followed by Plavix® in 1998.
Synthélabo was founded in 1970 through the merger of two French pharmaceutical laboratories, Laboratoires Dausse (founded in 1834) and Laboratoires Robert & Carrière (founded in 1899). In 1973, the French cosmetics group LOréal acquired the majority of its share capital, and in 1988 Synthélabo launched two major products on the French market: Stilnox® and Xatral®. By 1994, Stilnox® had become the leading insomnia prescription medication worldwide (IMS Health).
The formation of Aventis on December 15, 1999 was the result of the combination of Rhône-Poulenc and Hoechst bringing together a broad portfolio of activities including prescription drugs and vaccines, which became the core business of Aventis.
Hoechst traces its origins to the second half of the 19th century, with the German industrial revolution and the emergence of the chemical industry. Traditionally active in pharmaceuticals (notably penicillin), Hoechst strengthened its position in that industry by taking a controlling interest in Roussel-Uclaf in 1974 and the U.S. pharmaceutical company Marion Merrell in 1995. Hoechst was especially strong in metabolic disorders with Amaryl® and several insulin products, and cardiovascular diseases with Tritace®.
Rhône-Poulenc was formed in 1928 from the merger of two French companies, a chemical company created by the Poulenc brothers and Société Chimique des Usines du Rhône, which was founded in 1895. The companys activities in the first half of the 20th century focused on producing chemicals, textiles and pharmaceuticals (acetylsalicylic acid and penicillin). Rhône-Poulenc began to focus its activities on life sciences in the 1990s, which led to the successive purchases of Rorer, a U.S. pharmaceutical company acquired in two stages in 1990 and 1997, Institut Mérieux in the area of vaccines in 1994 and the U.K. pharmaceuticals company Fisons in 1995. Rhône-Poulencs main therapeutic fields were thrombosis with Lovenox®, oncology with Taxotere® and Campto® (divested in 2004), respiratory diseases with Nasacort®, and vaccines.
On January 26, 2004, Sanofi-Synthélabo announced a bid to acquire all of the shares of Aventis through mixed exchange/cash tender offers on substantially identical terms in France, Germany and the United States. On April 26, 2004, the managements of Sanofi-Synthélabo and Aventis announced that the Supervisory Board of Aventis had voted to recommend an improved offer to Aventis shareholders. On August 20, 2004 Sanofi-Synthélabo acquired control of Aventis upon the settlement of these offers. At that time, Sanofi-Synthélabo changed its registered name to sanofi-aventis. A subsequent offering period followed. As a result of these offers, sanofi-aventis acquired an aggregate of 791,317,811 Aventis ordinary shares, which represented slightly over 98% of the share capital and 98% of the voting rights of Aventis on an undiluted basis (or over 92.44% of the share capital and the voting rights on a fully diluted basis). In December 2004, the respective extraordinary shareholder meetings of Aventis and sanofi-aventis adopted an agreement and plan of merger, and on December 31, 2004, Aventis merged with and into sanofi-aventis, with sanofi-aventis as the surviving company.
We divested certain assets in connection with the acquisition, including two products, Fraxiparine® and Arixtra®, that we sold in order to respond to potential demands from competition authorities in relation to the acquisition. Aventis also divested certain assets, including its product Campto®.
Mandatory Offers Subsequent to the Acquisition
From October 1 to December 10, 2004, pursuant to the German securities laws, sanofi-aventis conducted a mandatory offer for the outstanding shares of Hoechst AG not already indirectly acquired through the acquisition of Aventis, which held approximately 98.1% of Hoechst AGs share capital. 583,515 Hoechst shares, representing approximately 0.1% of the share capital and voting rights of Hoechst AG, were tendered into the mandatory offer.
Following the mandatory offer, Aventis proposed a squeeze-out resolution to the remaining minority shareholders of Hoechst according to which the shares of the remaining minority shareholders would be transferred to Aventis (now sanofi-aventis) for cash compensation of 56.50 per share. On December 20 and 21, 2004 at an Extraordinary Shareholders Meeting, the shareholders of Hoechst AG approved this squeeze-out resolution. The price initially set out in the resolution was raised to 63.80 per share in settlement of shareholder suits contesting the validity of the squeeze-out, and the squeeze-out of the minority shareholders took legal effect on July 12, 2005. At the same time, Hoechst became a wholly owned subsidiary of the sanofi-aventis Group. Those minority shareholders who waived their right to any future price increase resulting from litigation received an additional 1.20 per share. Following the squeeze-out, a number of former minority shareholders have commenced litigation contesting the adequacy of the price paid by sanofi-aventis. These suits, which do not contest sanofi-aventis ownership of the shares acquired through the squeeze-out, are ongoing. See Note D.2. to the consolidated financial statements included under Item 18 of this annual report.
Aventis Pharma Limited India
In accordance with the Securities and Exchange Board of India takeover regulations, on August 11, 2004, sanofi-aventis announced that it intended to acquire up to 4,606,125 fully paid up equity shares of Aventis Pharma Limited India (a company that is 50.1% owned by Hoechst through its wholly owned subsidiary, Aventis Pharma Holding GmbH), for a cash offer price of Rupee 792.20 (13.96) per fully paid up equity share and aggregate consideration of Rupee 3,648 million (64.27 million).
The shares of Aventis Pharma Limited India are listed on the Stock Exchange, Mumbai and the National Stock Exchange of India Limited. The offer to the shareholders of Aventis Pharma Limited India is being made as a result of the offers pursuant to which sanofi-aventis acquired indirect control of Aventis Pharma Limited India. As of the date of this annual report, the offer documentation for the proposed acquisition is still under review by the competent Indian authorities.
Our mission at sanofi-aventis, as the third largest pharmaceutical group in the world and first in Europe, is to do more, perform better and move faster in the field of health.
This means that we are committed to finding new compounds that bring hope and are essential to medical progress. We are equally committed to providing millions of patients with new, innovative and effective drugs to combat disease, to participating actively to make medicines accessible to the greatest number of people possible, and to seek to ensure the development of our Group through a strategy of strong, sustainable and profitable growth.
In 2005, we achieved a successful integration and exceeded objectives with:
The key elements of our strategy for the coming years are to:
Sanofi-aventis is organized around two main business activities: our pharmaceuticals business and our human vaccines business, the latter which is conducted through our wholly owned subsidiary sanofi pasteur.
In the description below, the following should be kept in mind:
Within our pharmaceuticals business, we focus on six main therapeutic areas: cardiovascular, thrombosis, metabolic disorders, oncology, central nervous system and internal medicine.
Top 15 products
The following table sets forth the net sales and developed sales, where applicable, of our top 15 products for the year ended December 31, 2005.
Top 15 Products
*Developed sales is a non-GAAP financial measure, refer to Item 5.
Within the cardiovascular market, hypertension remains the most prevalent disease. Hypertension is defined as blood pressure above the normal level and is one of the main causes of severe kidney, heart, brain, vessel and eye complications. Our principal products for the treatment of cardiovascular diseases are:
Aprovel® (irbesartan) belongs to the fastest growing class of anti-hypertensives, angiotensin II receptor antagonists, and is indicated as a first-line treatment for hypertension. Angiotensin II receptor antagonists, which are highly effective, act by blocking the effect of angiotensin, the hormone responsible for blood vessel contraction, thereby enabling blood pressure to return to normal. In addition to Aprovel®/Avapro®/Karvea®, we market CoAprovel®/Avalide®/Karvezide®, a fixed dose combination of irbesartan and hydrochlorothiazide (HCTZ), a diuretic that increases the excretion of water by the kidneys and provides an additive blood pressure lowering effect. These products achieve control of blood pressure in over 80% of patients with a very good safety profile.
Aprovel® was launched in 1997 and is now marketed in more than 80 countries, including the United States (under the brand name Avapro®), through an alliance with Bristol-Myers Squibb, (BMS). In Japan, where the product is licensed to BMS and Shionogi, an application for marketing authorization for the treatment of hypertension was submitted in October 2002, and the review is still ongoing.
Aprovel® is also approved for the treatment of nephropathy in hypertensive patients with type 2 diabetes, in both Europe and the United States. These approvals were based on the results of the PRIME program, a clinical program that demonstrated that irbesartan protects type-2 diabetic hypertensive patients from the progression of renal impairment, at both early and more advanced stages of the disease. Following the announcement of the PRIME results in 2002, the American Diabetes Association (ADA) recommended the use of angiotensin receptor antagonists, such as Aprovel®, as a first-line treatment for renal disease in hypertensive patients with type-2 diabetes.
In June 2005, results of the INCLUSIVE trial, an important efficacy clinical trial for CoAprovel® in uncontrolled hypertensive patients on monotherapy, were released and published at the European Society of Hypertension meeting. The trial demonstrated that CoAprovel® can result in the achievement of blood pressure goals in eight out of 10 patients from diverse patient populations. As less than a third of the treated hypertensive patients are currently treated to the blood pressure goal recommended by international guidelines, these results could move hypertension management towards a new standard.
Two further efficacy trials were completed in 2005 to evaluate Aprovel® and CoAprovel® in patients with severe and moderate hypertension. Results are due to be announced in 2006.
To continue to demonstrate the protective effects of Aprovel® beyond the blood pressure lowering efficacy, several clinical trials were initiated or completed in 2005:
We are currently conducting two large-scale clinical programs as part of our life cycle management program for Aprovel® that will enroll a total of 14,100 patients and that we expect to complete in 2006/2007:
A new dosage formulation and its pharmaceutical form, CoAprovel® 300 mg irbesartan / 25 mg HCTZ, was approved by the FDA and launched in the United States in June 2005. The same formulation has been submitted for marketing authorization in Europe in 2006.
At the end of 2005, based on the total sales of Aprovel® and CoAprovel®, we rank third in the top five European markets (all channels except Italy & Spain retail only) and third in the United States among the angiotensin II receptor antagonists in the hypertension market. (IMS sales December 2005, GERS for France, parallel trade sales re-allocated in Germany)
Tritace® (ramipril) is an angiotensin converting enzyme (ACE) inhibitor for the treatment of hypertension, congestive heart failure after myocardial infarction and nephropathy. Its use has widely increased since the initial publication of the Heart Outcomes Prevention Evaluation (HOPE) study in 2000 showing it to be effective in reducing the incidence of stroke, heart attacks and cardiovascular death in high-risk patients. Tritace® is the only ACE inhibitor approved for the prevention of stroke, heart attack and death in people at high risk for cardiovascular events.
The long-term follow up study of the HOPE trial, HOPE TOO, was published in Circulation in September 2005. The results of HOPE TOO confirm that sustained vascular and metabolic benefits attained with Tritace® 10 mg on top of standard therapy are maintained in the long term. This indicated that the reduction in cardiovascular outcomes demonstrated at the end of the HOPE study were most likely an underestimate of the full effects of long-term Tritace® therapy. Subgroup analysis demonstrated that the benefits observed with Tritace® 10 mg are additive to those of other life-saving therapies and extended to all patients with vascular disease, independent of their baseline risk.
As of December 31, 2005, Tritace® was the market leader in Canada, France, Spain and Italy. Tritace® continues to be the market leader in Germany, with demand volumes increasing, despite the end of market exclusivity in Germany in January 2004. (IMS sales December 2005 GERS for France, ACE inhibitors)
The U.S. rights to Tritace® were sold to King Pharmaceuticals in 1998.
Thrombosis occurs when a thrombus, or blood clot, forms inside a blood vessel. Left unchecked, a thrombus can eventually grow large enough to block the blood vessel, preventing blood and oxygen from reaching the organ being supplied. Our principal products for the treatment of thrombosis are:
Lovenox® (enoxaparin sodium) is the most widely studied and used low molecular weight heparin (LMWH) in the world. It has been used to treat an estimated 170 million patients in 96 countries since it was first introduced in 1987 and is approved for more clinical indications than any other LMWH. Numerous clinical studies have demonstrated the products benefits as an effective way to reduce significantly the incidence of deep vein thrombosis in a wide range of patient populations with a good safety profile, and also as an effective prophylaxis of ischemic complications of unstable angina and non-Q-wave myocardial infarction when administered concomitantly with acetylsalicylic acid (ASA, the active ingredient in Aspirin®).
The results of STEEPLE (Safety and Efficacy of Enoxaparin in Percutaneous Coronary Intervention (PCI) patients), an international, prospective, randomized, open-label, parallel group trial were presented at the European Society of Cardiology meeting in Stockholm in September 2005. STEEPLE showed that a
single intravenous bolus of enoxaparin is associated with significantly less major bleeding, more predictable anticoagulation levels and similar efficacy compared with the current standard, unfractionated heparin (UFH), in patients undergoing elective PCI or coronary angioplasty. PCI is increasingly used in the treatment of obstructive coronary lesions. More than 1 million PCI procedures are now performed worldwide each year.
ExTRACT is a Phase III study comparing Lovenox® to Unfractioned Heparin (UFH) as an adjunctive therapy in 20,500 patients with myocardial infarction receiving thrombolytic therapy, the most common treatment for this acute coronary syndrome. The study was presented at the American College of Cardiologys Annual Scientific Session in March 2006. It has demonstrated a significant 17% reduction of death and myocardial reinfarction compared to UFH with the lower rate of bleeding not previously observed with Lovenox® in the previous trials performed in this indication. This resulted in 28 patients saved with four non-fatal haemorrhages for each 1,000 patients treated by Lovenox® instead of UFH. These results should lead to a new indication in the coming months. More than 1 million people suffer from an ST elevation myocardial infarction each year.
In the Medical Prophylaxis market, Lovenox® continues to gain patient share from UFH, in the United States (Source: Solucient). Two major trials evaluating Lovenox® for the prevention of thromboembolic events in the setting of medically ill patients are expected to complete enrolment by the second quarter of 2006. Further, the EXCLAIM trial is currently examining the benefits of an extended Lovenox® prophylaxis regimen of 28 days versus the currently approved regimen of six to 10 days. The PREVAIL trial will assess the efficacy of Lovenox® given once daily versus UFH given twice daily in the prevention of thromboembolic events in post-ischemic stroke patients.
Lovenox® is the leader in antithrombotics, in the United States, Germany, France, Italy, Spain and the United Kingdom. (IMS sales December 2005 GERS for France).
Plavix® / Iscover®
Plavix® (clopidogrel), a platelet adenosine diphosphate (ADP) receptor antagonist with a rapid onset of action that selectively inhibits platelet aggregation induced by ADP, is indicated for long-term prevention of atherothrombotic events in patients with a history of recent myocardial infarction, recent ischemic stroke or established peripheral arterial disease. Plavix® is currently the only drug indicated for the secondary prevention of atherothrombosis regardless of the location of the arteries initially affected (heart, brain, lower limbs). This indication is supported by the results of the landmark CAPRIE trial, including almost 20,000 patients. CAPRIE demonstrated the superior efficacy of Plavix® over acetylsalicylic acid (ASA, the active ingredient in Aspirin®), with a comparable safety profile.
Plavix® was launched in 1998, and is now marketed in over 80 countries, including the United States, through our alliance with Bristol Myers Squibb (BMS). In Japan a New Drug Application (NDA), was submitted for marketing authorization in February 2004 and approval was granted in January 2006, with launch expected later this year. Sales of Plavix® in Japan are outside the scope of our alliance with BMS.
Since 2002, Plavix® has also been indicated for the treatment of Acute Coronary Syndrom (ACS; non-Q-wave myocardial infarction and unstable angina) in combination with ASA following the impressive results of the CURE trial. This indication was rapidly incorporated into the guidelines of the American Heart Association, the American College of Cardiology and the European Society of Cardiology. The CURE trial demonstrated that Plavix® provided significant early- and long-term benefits in patients with ACS. Plavix® reduced the relative risk of atherothrombotic events (myocardial infarction, stroke and death from a cardiovascular cause) by 20% when added to standard therapy including ASA, with a 1% increase in the rate of major bleeding. With more than 12,000 patients enrolled, CURE is the largest clinical trial ever conducted in patients presenting unstable angina or non-Q-wave myocardial infarction. Based on its broad clinical evidence base in this population, Plavix® has gained the highest grade of recommendation in recent Guidelines issued by medical societies for the management of ACS and Percutaneous Coronary Intervention (PCI).
Since 2003, following an FDA written request for pediatric data, development of a pediatric indication for Plavix® in the United States in the form of the PICOLO study has been ongoing. Phase II studies have been completed, and the finalization of Phase III design is currently underway.
The benefits of Plavix® are supported by an extensive program of clinical studies:
Other major planned or ongoing clinical trials that are designed to support the long-term value of Plavix® by providing complementary clinical data include:
In 2003, one of the largest disease registries was initiated to evaluate patients at risk of atherothrombosis. This registry, called REACH (Reduction of Atherothrombosis for Continued Health) includes 63,000 patients in more than 43 countries. Preliminary data from this registry indicate that although
there are substantial differences in the incidence of risk factors, a consistent pattern of underachievement of therapeutic goals is nonetheless evident across patient types and geographic regions. Further analysis of this population will be presented in the first half of 2006.
The extensive clinical program for Plavix®, including all completed, ongoing and planned studies, is one of the largest of its kind and will enroll more than 100,000 patients overall. In addition, over 41 million patients worldwide are estimated to have been treated with Plavix® since its launch, providing significant safety and efficacy experience with this product.
With Plavix® sanofi-aventis is the leader in the European and the U.S. markets for anti-platelet agents. (IMS sales, December 2005)
Lantus® (insulin glargine) is a long-acting analog insulin, indicated for once-daily subcutaneous administration in the treatment of adult patients with type 2 diabetes mellitus who require basal insulin for the control of hyperglycemia, and for adult and pediatric patients of six years and above with type 1 diabetes mellitus.
Lantus® is the first and only basal insulin with a 24-hour peak-less duration of action, allowing a once-daily regimen that can be taken at any time but at the same time every day, titration under safer conditions, and with less hypoglycemia than with Neutral Protamine Hagedorn (NPH).
This product allows more effective treatment than products with different action mechanisms, with the result that patients are able to reach their HbA1c target with an improved quality of life.
The simplicity of the once-daily insulin injection regimen can facilitate a more timely and effective insulin use in routine medical practice, improving the achievement of recommended standards of diabetes care.
Since the launch, two studies in particular, Treat-to-Target and LANMET, have been key to demonstrating Lantus® as the basis for a simple, standardized way to initiate basal insulin in routine type 2 diabetic patients and have confirmed the effectiveness of two different titration algorithms to achieve target HbA1c for a majority of patients.
In 2005, three major studies were published:
In 2005, two major studies were presented and/or published at the American Diabetes Association (ADA) 65th Annual Scientific Sessions and at the 41st Annual Meeting of the European Association for the Study of Diabetes (EASD):
Following the approval of OptiClik® for use with Lantus® by the relevant authorities, this medical device was launched in the United States and Japan in 2005. OptiClik® is a reusable pen which provides people with diabetes with a new and easy-to-use delivery option. Further launches are planned throughout 2006.
Lantus® has outperformed insulin market growth since it was first launched in Germany in 2000, followed by the United States in 2001, then the United Kingdom in 2002, and France in 2003. Overall, Lantus® has been launched in over 70 countries worldwide.
The largest insulin market after the United States is Germany followed by Japan. Since December 2003, Lantus® has been the leading insulin brand worldwide with sales exceeding 1 billion in 2005. The top three markets for Lantus® are the United States, Germany and the United Kingdom. (IMS sales Full Year 2005, retail only except for U.S. retail and hospital, All insulin).
Amaryl® (glimepiride) is a once-daily sulfonylurea for the oral treatment of type 2 diabetes, as an adjunct to diet and exercise. Sulfonylureas are part of the guidelines for the first step of treatment for type 2 diabetes patients. Studies also prove the effective combination of Amaryl® with Lantus®, if oral treatment alone does not provide tight diabetes control. Amaryl® reduces the bodys blood sugar level in two ways: by helping the body to produce more insulin both at mealtime and between meals and by decreasing insulin resistance. Studies demonstrate that a patient can achieve a very good level of control with a low risk of hypoglycemia.
Amaryl® was first launched in 1995 and has been approved in about 100 countries worldwide. The key markets for Amaryl® are Japan (rank: #3), Germany (rank: #1) and Poland (rank: #2) (IMS sales December 2005, parallel trade sales re-allocated in Germany, oral antidiabetes market).
In the European countries, the Amaryl® active ingredient patent expired in December 2005. In the United States, where the equivalent patent also expired in 2005, sanofi-aventis has entered into a partnership with Prasco to offer a generic at the end of this products U.S. patent protection. In December 2005, our generic achieved total prescriptions (TRx) monthly market share of 29.6% of the glimepiride molecule (IMS NPA).
Sanofi-aventis is a leading group in the oncology field, primarily in chemotherapy, with two major agents: Taxotere® and Eloxatine®.
Taxotere® (docetaxel), a drug in the taxoid class of chemotherapeutic agents, inhibits cancer cell division by essentially freezing the cells internal skeleton, which is comprised of microtubules. Microtubules assemble and disassemble during a cell cycle. Taxotere® promotes their assembly and blocks their disassembly, thereby preventing many cancer cells from dividing and resulting in death in some cancer cells. Taxotere® was launched in 1995 and is currently marketed in over 100 countries.
Taxotere® is indicated for early stage and metastatic breast cancer, non-small cell lung cancer (NSCLC), and androgen-independent (hormone-refractory) metastatic prostate cancer.
Taxotere® is being studied extensively in clinical trials for safety and efficacy in head and neck and gastric cancers. On March 23, 2006, following a priority review, the FDA approved Taxotere® in combination with cisplatin and 5-fluorouracil for the treatment of patients with advanced stomach (gastric) cancer, including cancer of the gastro esophageal (GE) junction, who have not received prior chemotherapy for advanced disease.
This additional indication is also currently under review by the European Agency for the Evaluation of Medicinal Products (EMEA). The Agencys Committee for Medicinal Products for Human Use (CHMP) issued a positive opinion, announced March 24, 2006, recommending approval in Europe of Taxotere® (docetaxel) Injection Concentrate in combination with cisplatin and 5-fluorouracil for the treatment of patients with metastatic stomach cancer, including the cancer of the gastro esophageal (GE) junction, who have not received prior chemotherapy for their metastatic disease.
In 2005, we continued our efforts to improve awareness of the effectiveness of Taxotere® in cancer patients. At the American Society of Clinical Oncology (ASCO) congress of 2005, based on the SWOG 9504 trial, Taxotere® demonstrated an impressive 29% five-year survival rate, as consolidation chemotherapy in stage IIIb advanced NSCLC patients, which is a unique position for Taxotere® in this setting.
At the San Antonio Breast Cancer Symposium, in December 2005, the Breast Cancer International Research Group (BCIRG) and sanofi-aventis announced the results from the first interim efficacy and updated safety analyses from the BCIRG 006 phase III breast cancer study, which demonstrated that Herceptin® (trastuzumab) combined with Taxotere®-based regimens significantly improves disease free survival for women with early HER2-positive breast cancer. Results from the BCIRG 006 study also demonstrated that a novel non-anthracycline-based regimen TCH with Taxotere®, platinum salt and Herceptin® (trastuzumab) reduces the risk of recurrence without increasing cardiotoxicity in patients with early stage HER2-positive breast cancer.
At the same meeting, Taxotere® also demonstrated for the first time, in a direct head-to-head study vs. a standard anthracycline-based regimen AC (doxorubicin / cyclophosphamide) in 1,016 women with early stage breast cancer, that by replacing the doxorubicin with Taxotere®, Taxotere® significantly improved five-year Disease Free Survival compared to AC regimen.
The ARD6562 phase II study of Taxotere® in the treatment of hormone refractory prostate cancer is ongoing in Japan. Results are expected in 2007.
The top four countries contributing to the sales of Taxotere® in 2005 were the United States, France, Germany and Japan in that order (based on net sales).
Eloxatine® (oxaliplatin) is an innovative platinum agent, and is currently the only agent indicated both for the treatment of metastatic colorectal cancer and for adjuvant treatment of stage III colon cancer.
In the United States, France, Germany, Italy, Spain, the United Kingdom and Japan more than 500,000 people are diagnosed every year with colorectal cancer for the first time. Colorectal cancer is the second cause of death from cancer in the United States. Colorectal cancer with distant metastases (referred to as stage IV)
makes up around 30% of all new colorectal cancer diagnoses per year. When diagnosed at an early stage, chances of cure with surgery increase dramatically. Chemotherapy is used as an adjuvant therapy to surgery in order to prevent recurrences.
The development of Eloxatine® has led to major progress in the treatment of metastatic colorectal cancer. First, median survival has been prolonged to 20 months when Eloxatine® is used as a first-line treatment in combination with 5-fluorouracil (or 5-FU) and leucovorin (LV) (the FOLFOX regimen). Second, thanks to its demonstrated ability to reduce the size and number of liver metastases, Eloxatine® has allowed the complete surgical removal of hepatic metastases and has given the hope of a potential cure in a significant proportion of patients with initially unresectable liver metastases. Due to its consistently high and sustained efficacy in treating metastatic colorectal cancer, the FOLFOX regimen is a mainstay treatment of metastatic colorectal cancer in the United States, Europe and certain countries in the Asia-Pacific region.
Eloxatine® is now recognized as a cornerstone chemotherapy to which new targeted therapies (e.g., monoclonal antibodies or small molecules) can be combined, with the hope of further increasing survival rate. Results from a cooperative group study (ECOG 3200) were presented at ASCO 2005 in the United States, showing that patients receiving bevacizumab in addition to FOLFOX4 had a 33% improvement in overall survival, compared to patients receiving FOLFOX4 alone.
Eloxatine® has also been developed for adjuvant treatment of colon cancer. Eloxatine® was the first anticancer agent to result in a significant improvement of the adjuvant treatment of colon cancer in a decade. Based on the results of the MOSAIC clinical trial presented for the first time at ASCO 2003, which studied the efficacy of Eloxatine® as an adjuvant treatment in over 2,200 patients, approval for adjuvant treatment was respectively granted by the European agency and the FDA on September 12, 2004 and on November 4, 2004. MOSAIC showed that the addition of Eloxatine® to the previous post-surgery reference chemotherapy of 5-FU/LV for colon cancer reduces the risk of recurrence by 23% when compared to the reference treatment alone. In 2005, results from a second large multicentric clinical trial conducted by the U.S. cooperative group NSABP were presented at ASCO. These studies showed a 21% reduction in risk of relapses, confirming the efficacy of Eloxatine® in the adjuvant setting. FOLFOX is now the standard treatment for stage III colon cancer patients who have undergone complete resection of the primary tumor.
Eloxatine® is being investigated in pancreatic cancer. Efficacy results of a large Phase III study (E 6201) led by the U.S. cooperative group study ECOG are expected in 2006.
A new liquid formulation (Eloxatine® Injection) was approved on January 31, 2005 by the FDA. This new formulation offers additional safety benefits and convenience to nurses since it involves fewer steps in the reconstitution of Eloxatine®. Sanofi-aventis plans to roll-out this formulation in a number of European countries in 2006.
Eloxatine® is in-licensed from Debiopharm and is marketed in nearly 70 countries worldwide. The top three countries contributing to our sales of Eloxatine® are, respectively, the United States, France and Germany (based on net sales).
Central Nervous System
We have long-standing expertise in the Central Nervous System therapeutic area. Our principal products in this area are:
Stilnox® (zolpidem) is the worldwide hypnotic leader and is indicated in the short-term treatment of insomnia. Stilnox® is both chemically and pharmacologically distinct from benzodiazepines, and is distinguished by its selective binding to receptors that are presumed to mediate hypnotic activity. Due to this characteristic, Stilnox® rapidly induces sleep that is qualitatively close to natural sleep and devoid of certain side effects that are characteristic of the benzodiazepine class as a whole. Its action lasts for a minimum of six hours, and it is generally well tolerated, allowing the patient to awake with a reduced risk of impaired attention, decreased alertness or memory lapses throughout the day. The risk of dependence is minimal when Stilnox® is used at the
recommended dosage and duration of use. Stilnox® is currently the only hypnotic demonstrated to be suitable for as needed use based on an extensive program of eight clinical trials, which together enrolled over 6,000 patients. This mode of administration avoids the systematic intake of a hypnotic by patients who suffer only occasionally from insomnia.
We believe that Stilnox® is also one of the most studied hypnotics in the world to date, as data on its efficacy and safety have been generated from 160 clinical trials involving 80,000 patients worldwide.
To improve further the efficacy of Stilnox® in sleep maintenance without inducing next-day residual effects, we have developed a controlled release formulation of zolpidem. Two three-week placebo-controlled studies conducted in sleep laboratories, ZOLADULT and ZOLELDERLY, assessed the efficacy and safety of the controlled release formulation of zolpidem in the treatment of patients experiencing insomnia. The studies showed that the controlled release formulation of zolpidem improved sleep maintenance, sleep duration and the ability to fall asleep compared to a placebo. Based on these results, we obtained FDA market authorization in the United States and launched the product in September 2005 under the brand name Ambien CR. Ambien CR is indicated for the treatment of insomnia with sleep induction and/or sleep maintenance disorders. A clinical development program has also been initiated in Japan, with results expected in 2008.
In January 2006, the FDA issued a written request for pediatric studies for Ambien®, and we are currently exploring the potential for a pediatric indication in the United States.
Stilnox® was first launched in 1988 in France and is marketed today in over 100 countries. In Japan, although launched only in December 2000, Stilnox® became the leading hypnotic on the market within three years of its launch. It is sold under the brand name Myslee® through our joint venture with Astellas.
Stilnox® is the leading hypnotic brand in its three largest markets: the United States, Japan and France. Generics have been available in France since January 2004. (IMS sales December 2005 retail + hospital, GERS for France - N5B1 (non barbiturate plain) + Trazodone (United States only))
Copaxone® (glatiramer acetate) is an immunomodulating agent indicated for reducing the frequency of relapses in patients with relapsing-remitting multiple sclerosis (MS). This disease-modifying drug is characterized by an original and specific mode of action on MS. Clinical studies have shown that Copaxone® is more effective than placebo at two years, but also that it has a clinical efficacy over ten years both in reducing relapses and progression of disability. A significant effect on lesions has also been confirmed by nuclear magnetic resonance imaging (MRI).
Copaxone® was first launched in 1997 in the United States and between 2000 and 2002 in Europe. It is in-licensed from Teva and marketed via our alliance with Teva. Additional details on this alliance can be found in Alliances below.
In Europe in 2004, in cooperation with our alliance partner Teva, we launched a new formulation of the product a pre-filled syringe in order to improve product delivery and patient comfort.
More than 90,000 patients worldwide are treated with Copaxone®. The three leading countries for its use are the United States (rank: #2), Canada (rank: #2) and Germany (rank: #4) (IMS sales, December 2005)
Depakine® (sodium valproate) is a broad-spectrum anti-epileptic that has been prescribed for over 38 years. Numerous clinical trials, as well as long years of experience have shown that it is effective for all types of epileptic seizures and epileptic syndromes, and is generally well tolerated. Consequently, Depakine® remains a reference treatment for epilepsy worldwide.
We produce a wide range of formulations of Depakine® (syrup, oral solution, injection, entero-coated tablets and Chrono, a sustained release formulation in tablets) permitting its adaptation to most types of patients. Depakine ChronosphereTM, a new innovative, tasteless, sustained release formulation of Depakine® packaged in
stick packs, facilitating its use by children (the first Depakine® sustained release form for children), the elderly and adults with difficulties swallowing, has been approved in several European countries. It was commercialized for the first time in Austria in October 2004 and then in France and Germany in 2005. We plan to commercialize this new formulation gradually over the next few years as we register the product in additional countries.
Depakine® is marketed in over 100 countries, including the United States, where it is licensed to Abbott. In 2005, we received marketing approval in several European countries for Depakine Chrono and Chronosphere for use in the treatment of bipolar disorder.
Our main products in the internal medicine therapeutic area are in the fields of respiratory/allergy, urology and osteoporosis.
Allegra® (fexofenadine HCl) is an effective, powerful, long-lasting (12- and 24-hour) non-sedating prescription antihistamine for the treatment of seasonal allergic rhinitis (hay fever) and the skin condition chronic idiopathic urticaria (hives). It offers patients significant relief from allergy symptoms without causing drowsiness. Our top three markets for Allegra® in 2005 are the United States (rank: #1), Japan (rank: #1), and Australia (rank: #1). (IMS sales all channels December 2005).
We also market Allegra-D® 12 Hour, an antihistamine/decongestant combination product with an extended-release decongestant for effective non-drowsy relief of seasonal allergy symptoms, including nasal congestion. In July 2005, we introduced Allegra-D® 24 Hour, a once-daily formulation of the antihistamine/decongestant combination.
In September 2005, the FDA approved the U.S. New Drug Application (NDA) for a 180 mg once-daily dose for adult chronic idiopathic urticaria. An NDA for a pediatric indication was submitted in Japan in February 2004 and we are developing two new pediatric formulations: 30 mg orally disintegrating tablets and a 6 mg/ml oral suspension. The U.S. NDA for the pediatric suspension was filed in December 2005.
The top three markets for Allegra-D® 12 Hour and 24 Hour are the United States, Brazil, and Mexico. (IMS sales all channels December 2005)
In September 2005, Barr and Teva jointly launched a generic version of fexofenadine HCL 180mg, 60 mg and 30 mg to compete with Allegra®. Sanofi-aventis responded by entering into an agreement with Prasco Pharmaceuticals to launch an authorized generic of fexofenadine. In December 2005, the authorized generic product, marketed by Prasco, accounted for over 30% of fexofenadine prescriptions for the month. (IMS NPA)
Nasacort® (triamcinolone acetonide) AQ Spray is an unscented, water-based metered-dose pump spray formulation unit containing a microcrystalline suspension of triamcinolone acetonide in an aqueous medium. It is indicated for the treatment of the nasal symptoms of seasonal and perennial allergic rhinitis in adults and children six years of age and older.
In April 2004, we received approval from the FDA for Nasacort® HFA Nasal Aerosol, the first intranasal corticosteroid dry-aerosol formulation approved in the United States that contains hydrofluoroalkane (HFA) rather than chlorofluorocarbons (CFCs).
Nasacort® HFA Nasal Aerosol will provide physicians and patients with a new option for those seeking a dry-aerosol formulation for the management of nasal allergy symptoms. It replaces Nasacort® Nasal Inhaler, which was taken off the market in July 2003 to comply with Environmental Protection Agency (EPA) and FDA requirements intended to protect the ozone layer, which required the removal of nasal inhalers containing CFCs from the U.S. market.
Our leading markets for Nasacort® AQ Spray are the United States (rank: #3), France (rank: #2) and Turkey (rank: #2). (IMS sales December 2005 all channels GERS for France)
Xatral® (alfuzosin) belongs to the alpha1-blocker class of medications, and was the first product of the class to be indicated uniquely and specifically for the treatment of the symptoms of benign prostatic hyperplasia (BPH), as well as the first marketed product capable of acting selectively on the urinary system. Xatral® (extended release formulation) does not require dose titration, and shows good tolerability, particularly cardiovascular tolerability. Active from the first dose, it provides rapid and lasting symptom relief; improving patient quality of life. Xatral® has demonstrated a good safety profile, with very marginal blood pressure changes even in elderly or hypertensive patients. Cardiovascular safety results from the combination of Xatral® with a PDE5 inhibitor were released in 2005 and will be published in Urology in 2006, further demonstrating Xatral®s good cardiovascular safety profile.
Besides this symptomatic action, a large clinical program has been launched to document the use of Xatral® for the management and prevention of the most severe complication of BPH: acute urinary retention (AUR).
We also completed Phase IIb in 2005 and will begin Phase III clinical trials of the once-daily formulation of Xatral® in 2006 for the treatment of BPH in Japan.
Since Xatral® was launched in 1988 in France, we have constantly worked on optimizing its formulation. The new once-daily formulation of Xatral® (branded Uroxatral® in the United States) has now been registered in over 90 countries and is marketed worldwide except in Australia and Japan. Our leading markets for Xatral® are France (rank: #1), the United States (rank: #4) and Italy (rank: #3). (IMS sales December 2005 GERS for France, all channels except for Italy retail).
Actonel® (risedronate sodium) is a bisphosphonate that helps prevent bone loss by inhibiting bone resorption. Actonel® 5 mg daily is indicated for the prevention of postmenopausal osteoporosis (PMO) in Europe and for the treatment of PMO in Europe and the United States. Actonel® 35mg once-a-week is indicated for the prevention and treatment of this disease in both Europe and the United States. Actonel 5mg daily is indicated for the treatment glucocorticoid-induced osteoporosis in Europe and the United States. In the United States, it is indicated for patients either initiating or continuing systemic glucocorticoid treatment (daily dosage of 7.5 mg or more of prednisone or equivalent) for chronic diseases. Actonel® 30 mg is approved for the treatment of Pagets disease, a rare bone disorder.
Actonel® is the only osteoporosis treatment that reduces the risk of vertebral fracture in just six months (Roux et al.). Data shows that Actonel® is effective in preventing bone loss and preserving trabecular architecture within one year of treatment, an effect that may contribute to the early reduction in risk of vertebral fracture observed with Actonel®. Actonel® also stands out in that it provides proven fracture protection at vertebral and non-vertebral sites (non-vertebral fracture reduction based on a composite endpoint of the following sites: hip, wrist, humerus, clavicle, leg and pelvis).
Actonel® is in-licensed from Procter & Gamble Pharmaceuticals (P&G) and is co-marketed by sanofi-aventis and P&G through the Alliance for Better Bone Health. In Japan, Actonel® was marketed by sanofi-aventis under a license from Ajinomoto. As of October 2005, with the agreement of Ajinomoto, distribution of Actonel® in Japan was transferred to Eisai.
The top four markets for Actonel® are the United States, Canada, France and Germany.
Other Pharmaceutical Products
In addition to the top 15 pharmaceutical products of sanofi-aventis global portfolio, a wide range of products exists, which includes prescription drugs, products sold over the counter (OTC) and generic drugs. They represent a significant part of our pharmaceutical activity (36% of 2005 worldwide net sales). Depending on the affiliates, these products can be strategic products for local markets. Where they have important growth potential they generally receive targeted promotional investments. On the other hand, if the products potential is more limited, the approach will be to capitalize on current prescriptions. Due to their presence on the market for several years, these products have strong brand recognition and are known by healthcare professionals and patients as much for their effectiveness as for their safety.
Human Vaccines Activity
Our subsidiary sanofi pasteur is a fully integrated vaccine business offering the broadest range of vaccines in the industry. In 2005 sanofi pasteur immunized over 500 million people against 20 serious diseases and generated net sales of 2,062 million.
Based on our estimates, sanofi pasteur is a world leader in the vaccine industry and holds a leading position in most countries. In the United States and Canada, which account for approximately 50% of the worldwide vaccines market, sanofi pasteur is the market leader with a 28% market share.
In 2005, North America accounted for 54% of sanofi pasteurs global sales activity (global sales activity is defined as the sum of consolidated net sales plus 100% of Sanofi Pasteur MSD sales, but excluding what sanofi pasteur sells to Sanofi Pasteur MSD).
In Europe, our vaccines business are marketed by Sanofi Pasteur MSD, a 50-50 joint venture between sanofi pasteur and Merck & Co, which provides vaccines to 19 countries. With a 36% market share in 2005, Sanofi Pasteur MSD was the market leader in Europe overall, and in particular in France and the United Kingdom. In 2005, sales of Sanofi Pasteur MSD, which are accounted for using the equity method, were 688 million.
Sanofi pasteur has established a leading position in Latin America, has been expanding its presence in Asia, particularly in China and Japan, and is very active in international publicly funded markets such as UNICEF; it also has a significant activity in other developed, middle income and emerging markets throughout the world.
Pediatric Combination and Polio Vaccines
The components of these vaccines vary due to diverse immunization schedules throughout the world. Protecting against up to five diseases in a single immunization, this group of products is anchored by acellular pertussis components in general and by the trivalent vaccine Daptacel® in particular. Daptacel® protects against pertussis, diphtheria and tetanus. It was launched in the United States in 2002 and has become a strong sales contributor due to its synergy with immunization schedules. Act-HIB® for the prevention of Haemophilus influenzae type b, is also an important growth driver within the pediatric product line. Pentacel® is a vaccine against five diseases (pertussis, diphtheria, tetanus, polio and Haemophilus influenzae type b) that is approved in nine countries and has been a standard of preventive care in Canada since its launch in 1997. Pediacel®, another acellular pertussis-based pentavalent vaccine, was launched in the United Kingdom in 2004 and several other EU countries in 2005.
Sanofi pasteur is one of the worlds leading developers and manufacturers of polio vaccines, both oral (OPV) and inactivated (IPV). We expect the use of inactivated polio vaccines (IPV) to increase as the goal of global polio eradication is nearly reached with only four countries in the world remaining polio-endemic. As a result, sanofi pasteur is expanding its production capacity to meet this growing demand. The worldwide polio eradication initiative of the World Health Organization (WHO) and UNICEF has positioned sanofi pasteur as a
global preferred partner with both oral polio and IPV vaccines. In March 2005, sanofi pasteur developed the first new polio vaccine in nearly 30 years for use in eradication. The companys Monolavent Oral Polio Vaccine - 1 was subsequently licensed by the French regulatory authorities (AFSSAPS). This new vaccine has first been used in Egypt in 2005 as part of a new WHO strategy to end polio transmission. Egypt is no longer a polio endemic country.
With more than a 45% share of the 1.3 billion influenza vaccine market in 2004, sanofi pasteur is the world leader in the production and marketing of influenza vaccines. Since 1995, sales of the influenza vaccines Fluzone® and Vaxigrip®/Mutagrip® have more than tripled and annual production capacity has been increased to 165 million doses to better meet demand. We expect global demand for influenza vaccines to grow strongly within the next decade, due to increasingly broad government immunization recommendations. Health authorities, medical professionals and the public are paying more attention to the potential threat of an avian influenza pandemic, which is also expected to contribute to an increase in demand for influenza vaccines in general. In 2005, we initiated a $160 million investment in the United States for a brand new influenza vaccine manufacturing facility, which will double our production capacity there. This will help meet additional influenza vaccine demand from both inside and outside the United States. In April 2005, sanofi pasteur and the U.S. Health and Human Services Department (HHS) entered into a five-year agreement to speed the development of a production process for new cell culture influenza vaccines in the United States and to design a U.S.-based cell-culture vaccine manufacturing facility. A 160 million investment has also been approved for a formulation and filling facility in Val de Reuil, France, to boost filling capabilities, mainly for influenza vaccines. In recent years, influenza vaccine demand has experienced strong growth in many other countries, including China, Korea and Mexico, and this trend is expected to continue over the next several years.
Adult and Adolescent Boosters
The incidence of pertussis (whooping cough) is on the rise globally, affecting both children and adults. Its resurgence, combined with an increased awareness of the dangers of vaccine-preventable diseases in general, has led to higher sales of this product group in recent years. Adacel®, which is the first trivalent adolescent and adult booster against diphtheria, tetanus and pertussis, was licensed by the FDA in June 2005 and launched in the United States in July 2005 (see Vaccines Research and Development below). Adacel® became the standard of care in Canada in 2004 where the majority of provinces provide routine adolescent immunization. This product will play an important role in efforts to better control pertussis by not only preventing the disease in adolescents and adults, but also by breaking the cycle of transmission in infants too young to be immunized or only partially vaccinated. Additionally, the Tetanus-diphtheria booster, Decavac®, has been a strong growth driver in this category in the United States.
Sanofi pasteur is at the forefront of developing vaccines to prevent meningitis and introduced the first conjugate quadrivalent vaccine against meningococcal meningitis, arguably the deadliest form of meningitis, in the United States. In January 2005, Menactra®, a conjugate vaccine that is expected to offer a longer-lasting immune response and a boostable memory response, was approved by the FDA for use in adolescents and adults aged 11-55 years. One month later, the U.S. Advisory Committee on Immunization Practices (ACIP) recommended immunization with the Menactra® vaccine for young adolescents at the pre-adolescent visit (11-12 years old), adolescents at high-school entry (15 years old) and college freshmen living in dormitories. To protect younger segment of the population, sanofi pasteur filed a supplemental application with the FDA in March 2005 to amend the vaccines license to include children aged two through 10 years. Sanofi pasteur also submitted for licensing of the vaccine in Canada in 2005 and additional submissions are expected during the coming years in various parts of the world. Meningococcal meningitis vaccines are expected to contribute significantly to growth due to their anticipated future use in multiple segments of the population.
Sanofi pasteurs Travel/Endemic vaccines provide the widest range of traveler vaccines in the industry, and include hepatitis A, typhoid, rabies, yellow fever, Japanese encephalitis, cholera, ETEC, and anti-venoms. These
vaccines are used in endemic settings to protect large populations in the developing world against severe infectious diseases, and are the basis for important partnerships with governments and organizations such as UNICEF. These vaccines are also used by militaries and travelers to endemic areas. As the global market leader in most of these vaccines, sanofi pasteurs Travel/Endemic franchise has provided stable, profitable growth. Additionally, sanofi pasteur has several lifecycle and new vaccine projects in development, including vaccines for Dengue Fever and Malaria, which are major burdens of disease-endemic areas in Asia, South America and Africa, and the leading causes of fever amongst travelers.
Research and Development
We have two Research and Development (R&D) organizations: one for our pharmaceutical activity (Scientific and Medical Affairs) and the other dedicated to our human vaccines activity, sanofi pasteur.
The objective of sanofi-aventis R&D organizations is to discover, develop, register and launch highly innovative compounds answering major unmet medical needs worldwide. They include a global force made up of over 17,600 people working in 28 research and development centers on three continents.
Pharmaceutical Research and Development
In 2005, the first full calendar year for sanofi-aventis, our large R&D organization was integrated and, on top of smooth progress for the projects in our portfolio, achieved significant goals with two major submissions in the United States and Europe (rimonabant and dronedarone), an important approval in the United States (zolpidem CR®), and approvals of several new indications for already-marketed products (e.g. Allegra®, Taxotere®, Eloxatine®, Ketek® and Lantus®). Furthermore, Plavix® was approved for marketing in Japan on January 23, 2006.
Global and Focused Organizations: Discovery and Development
In 2005, Discovery Research continued its efforts to provide Development with a pipeline of high quality, innovative drugs that fulfill unmet medical needs or provide improved treatments for patients.
We benefit from the excellence of our scientists in six major therapeutic areas (Cardiovascular Diseases, Thrombosis & Angiogenesis, Metabolic Diseases, Central Nervous System Diseases, Oncology and Internal Medicine), with our activities currently targeting 12 out of the 16 diseases / conditions identified as demonstrating pharmaceutical gaps according to the World Health Organization.
In 2005, Discovery Research enriched the Development pipeline by entering 11 new molecules into Development:
Furthermore, two new molecules entered development in early 2006:
Among the 11 compounds that entered development in 2005, we consider that five products are first-in-class (see Portfolio): AVE8680A, SAR7226, SAR97276, SAR3419A, and SAR502250.
Sanofi-aventis Discovery Research now combines the skills of around 3,000 people in a coherent global organization in which each scientist contributes positively his/her multidisciplinary and cultural approach to our drug discovery effort. Our aim is to continue to synergistically capitalize upon the unique skill-sets of our scientists so as to maintain the necessary high-quality research that will fulfill the expectations of our top management, shareholders and, above all, patients who are in need of new drugs.
Sanofi-aventis development structure relies on a strong matrix organization that leads and coordinates the efforts and expertise of representatives from all functions, and at all stages of development, from the preclinical stage to marketing. The members of the Development team work together to register and deliver innovative new medicines to patients worldwide, while meeting critical strategic, technical and time-to-market requirements, in accordance with our high standards of quality and ethics.
One major principle of our matrix organization is the continuity of development from the very beginning of a molecules development (when it enters Development from Discovery) to the end of development (until the project is terminated or until the last potential approval is obtained). A project is defined by one molecule, even if multiple indications are possible. When a molecule enters development, a project team is formed with representatives from all relevant functions (including pharmacologists, clinicians, chemists, toxicologists, regulatory affairs specialists, marketing specialists and many others) who work together throughout the life of the molecule in development. Development ends when the last potential indication has been approved by Regulatory Authorities. Throughout development, our global organization aims at strategic and operational excellence, two key success factors.
In 2005, several hundred clinical trials were up and running in more than 60 countries for our projects under clinical development (including life cycle management projects), thanks to the consolidation and growth of our International Clinical Development organization. Most studies were managed through the in-house Clinical Research Units (CRU) network that consists of 26 units (covering, with their satellites about 40 countries), involving three of them created in 2005: Korea, China and Turkey. Korea was set up in January 2005 and particularly involved in thrombosis, cardiology, oncology and metabolism trials. The Turkish CRU was created early 2005 and is involved in three international clinical trials (ExTRACT, Origin and a study on Actonel®) including more than 900 patients in 32 centers. The Chinese CRU was created on June 1, 2005. Further to the mega-trial CCS2/COMMIT with Plavix® in acute myocardial infarction, Chinese clinical centers have been involved in two large international clinical trials: Extract (with Lovenox® in acute coronary syndromes) and Origin (with Lantus® in diabetes). The involvement of China will be considered for other studies in 2006, mainly in cardiology, diabetes, metabolic disorders, oncology and neurology.
As regards disclosure of clinical trial information, the research-based pharmaceutical industry with the participation of sanofi-aventis, committed in January 2005 to increasing the transparency of sponsored clinical
trials. Practitioners, patients and the community will benefit from broader distribution of clinical results. In addition, sanofi-aventis, in compliance with this policy, has taken the initiative of posting all clinical trials it, sponsors, other than exploratory trials, in a free, publicly accessible clinical trial registry, within three weeks of the initiation of patient enrolment (unless there are alternative national requirements).
The research and development process historically takes from 10 to 15 years from discovery to initial product launch and is conducted in various stages. During the pre-clinical stage, research scientists perform pharmacology and toxicology studies on various animals. Before testing on humans, an application for the compound must be filed with and approved by the requisite regulatory authorities. Testing on humans is performed in different clinical phases to demonstrate the safety and efficacy of a new compound:
Together, phases IIb and III typically take from three to five years to complete. Thereafter, an application containing all data for the proposed drug is sent to regulatory authorities for approval, which may take an additional six months to two years or longer. There are two types of further clinical trials: one called phase IIIb, where new indications are sought; and one called phase IV trials, which are generally carried out after product launch to continue to monitor the efficacy and safety of a new drug.
A Rich, Innovative and Balanced R&D Portfolio
The table below shows the composition of our R&D portfolio at the end of 2005:
Sanofi-aventis Pharmaceutical Scientific and Medical Affairs are currently developing 106 compounds, in six therapeutic areas (these figures do not include the vaccines portfolio; for details of this portfolio, please refer to Vaccines Research and Development below). We believe this is one of the strongest and most promising R&D portfolios in the pharmaceutical industry, particularly strong in the CNS and oncology therapeutic areas, where the needs for better drugs to treat neurodegenerative diseases, dementia and psychosis are still considerable. The portfolio is well balanced throughout all our therapeutic areas. With 60 compounds in early development (preclinical and phase I), and 46 in late development (phase II and III), our pharmaceutical portfolio is also well balanced in terms of phase distribution, with a quite significant reservoir of compounds in the early phases.
The sanofi-aventis R&D portfolio is particularly innovative, as indicated by the number of first-in-class new molecular (or biological) entities in this portfolio. A molecule is considered as first-in-class if, at the time of its entry into development, to our knowledge, no other active substance with the same mode of action is under active preclinical or clinical development or already on the market. By the end of 2005, 42 products (small molecules) are first-in-class in our portfolio.
Sanofi-aventis Scientific and Medical Affairs Achievements in 2005
The strength of the sanofi-aventis portfolio is illustrated through the key achievements and project highlights of our R&D in 2005.
In 2005, 11 new compounds have entered preclinical development (see Discovery Research). Also, another compound re-entered the oncology development portfolio, alvocidib (HMR1275), a cyclin-dependent kinase inhibitor, for which phase III studies in chronic lymphocytic leukaemia will be initiated.
In 2005, 12 compounds entered phase I, while four phase II programs have started and nine phase III/IIIb programs have been initiated.
In terms of regulatory submissions, two major NDAs were submitted in April 2005 in the United States and Europe for rimonabant (obesity, metabolic disorders and smoking cessation), and in June 2005 for dronedarone (atrial fibrillation). Furthermore, the mutual recognition process for Zolpidem MR was initiated in Europe in 2005.
Several sNDAs were submitted in 2005 in the United States and in Europe for major products like Actonel®, Allegra®, Aprovel®, Taxotere® (gastric cancer, granted priority review in the United States), or Plavix® (acute myocardial infarction). In Japan, the amiodarone IV (Ancarone®) dossier was submitted, as well as a new formulation for Lantus®.
As far as regulatory approvals are concerned, Ambien CR was approved and launched in the United States in 2005. One marketing authorization was obtained in France for an orphan drug, Flisint® (fumagillin), a very potent treatment for a very rare disease (microsporidiosis in severely immuno-compromised patients).
Several sNDAs were granted in the United States, Europe or Japan to major products including Taxotere®, Eloxatine®, Allegra® or Lantus®: details are given below under Project Highlights.
Furthermore, in Japan, the approval of Plavix® was obtained on January 23, 2006.
Life cycle management development programs for our marketed products are described above under Major Products.
Certain of our principal compounds in the fields of cardiovascular medicine currently in phase IIIb, phase III or phase IIb clinical trials are described below.
There are four compounds that are currently in later-stage development in thrombosis:
Our main compounds currently in late-stage development for metabolic disorders are described below.
Rimonabant has completed a phase III program in obesity, cardiometabolic risk management and related disorders like type 2 diabetes and dyslipidemia (the RIO program: rimonabant in obesity) as well as a program in smoking cessation (STRATUS program). In 2005, registration dossiers were submitted in the United States and Europe. On February 17, 2006, an approvable letter for the
weight management indication and a non-approvable letter for the smoking cessation indication were received from the FDA. Sanofi-aventis continues to work closely with the FDA on this matter.
The sanofi-aventis oncology portfolio represents a broad spectrum of novel agents with a variety of mechanisms of action for treating cancer and/or cancer side-effects, including cytotoxic agents, anti-mitotic agents, bioreductive agents, receptor antagonists, anti-angiogenic agents, anti-vascular agents, monoclonal antibodies, and cancer vaccines, as well as supportive care therapies. Our principal compounds in the field of oncology currently in clinical trials are described below.
Central Nervous System
Certain of our principal compounds in the Central Nervous System field currently in phase II or III clinical trials are described below.
Negative results for Osanetant, which was in Phase IIb, led us to stop the development of this compound.
Certain of our principal compounds in the field of Internal Medicine currently in clinical trials are described below.
Targeted Partnerships to Support the Development of Innovative Products
Through partnerships and alliances established with biotechnology firms and other pharmaceutical groups, sanofi-aventis is able to access new technology and to extend or strengthen existing areas of research.
Two types of partnerships are employed to boost Discovery Research:
For other products developed under other research agreements with various pharmaceutical companies, such as Alvesco® (Altana AG) and Actonel® (P&G) see Project Highlights/Internal Medicine for Alvesco® and Pharmaceutical Activity /Internal Medicines for Actonel®.
Vaccines Research and Development
Our human vaccines R&D remains focused on the development of new preventive vaccines, one particular area of research covers novel therapeutic vaccines targeting diseases such as HIV and cancer.
Sanofi pasteur R&D Pipeline
The table below shows the composition of our Research and Development Portfolio.
We are developing a new formulation and applying new technologies including new delivery modes and new manufacturing processes with the aim to increase efficacy, acceptance or both. We are very active in pandemic preparedness.
A new delivery program based on the administration of Flu vaccine by Intra Dermal (ID) route using an innovative microinjection system is being developed in partnership with Becton Dickinson. Phase II studies were conducted in 2005 and Phase III clinical trials will be initiated in 2006.
A new formulation has been developed with the aim of improving vaccine effectiveness in the elderly population. This project is currently in Phase II.
New technology using a cell-based system, instead of the classic egg-based manufacturing process, has been developed under contract with the U.S. Government (under HHS supervision) and in partnership with Crucell. This program is aimed at both inter-pandemic and pandemic vaccines. A Phase I study will be initiated in 2006.
An extension of indication will be sought for the pediatric population in the United States. This project is currently in Phase II.
Pandemic PreparednessA very active program for pandemic preparedness has been launched in both Europe and the United States. In the United States, activities are conducted under U.S. Government contracts. These activities concern year-round egg supply, clinical batch formulation and stockpiling of H5N1 vaccine. In Europe, activities include clinical batch production, clinical studies and core dossier submission for registration with the EMEA. The first clinical studies using H5N1 vaccine were completed in 2005.
Pediatric & Adolescent/Adult Booster Combination Vaccines
A number of pediatric vaccines are in development. Tailored for specific markets, they are aimed at protecting against 5 or all 6 of the following diseases: diphtheria, tetanus, pertussis, poliomyelitis, Haemophilus influenzae type b and hepatitis B.
Pentacela pentavalent pediatric vaccine protecting against diphtheria, tetanus, pertussis, hepatitis B, poliomyelitis, and Haemophilus influenzae type b disease for the U.S. market was filed with the FDA in 2005.
Pediacel®another pentavalent pediatric vaccine protecting against diphtheria, tetanus, pertussis, hepatitis B, poliomyelitis and Haemophilus influenzae type b disease for the EU markets, was licensed in the Netherlands and Portugal in 2005 (after being licensed in the United Kingdom in 2002).
Two hexavalent pediatric vaccines protecting against diphtheria, tetanus, pertussis, hepatitis B, poliomyelitis and Haemophilus influenzae type b disease are in development. One has completed Phase II development stage and will enter the Phase III development stage in 2006.
Adacel®a trivalent vaccine protecting adolescents and adults against diphtheria, tetanus, and pertussis. Marketed in Canada and Germany. This product has been approved by the FDA and was launched in the United States in July 2005. In 2006, we will focus on efforts to extend its indications (primarily the pre-school booster indication) in countries where the product is already marketed, and to gain new licenses.
Neisseria meningitidis has been a leading cause of meningitis in the United States, Europe and elsewhere, striking the very young as well as adolescents. There are five serogroups that contribute to the vast majority of the incidences of the disease worldwide: A, C, W-135, Y and B. A polysaccharide vaccine comprised of serogroups A, C, W-135 and Y, Menomune®, has been a valuable product for many years. In 2005, a conjugate-based vaccine, Menactra®, was licensed in the United States for indications against invasive meningococcal diseases in patients aged 11-55 years. As a conjugate vaccine, Menactra® is expected to provide a longer immunity than the polysaccharide vaccine. Ongoing projects related to Menactra® have the primary focus of decreasing the age at which one can first receive this vaccine. In 2005, a supplement to the Menactra® license was submitted to the FDA to lower the indication to two years of age, effectively increasing the age range of 2-55 years. This
supplement is pending and expected to be approved in 2006. In parallel, activities are ongoing to license this vaccine worldwide. In 2005, an application was filed in Canada and approval is expected in 2006. Submission to the European Union is targeted for early 2007. Additional international filings will subsequently occur.
Streptococcus pneumoniae is the leading etiological agent of severe infections such as pneumonia, septicemia, meningitis and otitis media and causes over 3 million deaths per year worldwide, of which a million are children. The problem of antimicrobial resistance in Streptococcus pneumoniae has complicated the treatment of pneumococcal disease and further emphasized the need for vaccination to prevent large-scale morbidity and mortality. Sanofi pasteur has 2 projects in its pneumoccal program.
New vaccine targets
Dengue fever is growing in epidemiological importance, linked with global socio-climatologic changes, and is a major medical and economic burden in endemic areas in Asia, Latin America, the Pacific and Africa and one of the leading causes of fever among travelers. We are undertaking multiple approaches to develop a vaccine covering the four viral serotypes of Dengue fever in order to prevent this disease and its severe complications (hemorrhagic fever). The sanofi pasteur Dengue fever vaccine project has now entered Phase II following promising phase I results. Vaccination will target people living in affected areas as well as travelers to these regions.
The sanofi pasteur malaria vaccine project is in the pre-clinical stage and will benefit from the malaria partnership network and vaccine adjuvant technology developed in-house.
Chlamydia trachomatis is the most commonly reported sexually transmitted bacterial pathogen and produces serious morbidity and long-term sequels, especially in women. Chlamydia-host immunobiology is characterized by acute infection followed by immunity or by persistent infection that is associated with tissue damage and disease sequels. The Chlamydia trachomatis project goal is to develop a recombinant protein vaccine for prophylactic vaccination against the Chlamydia trachomatis sexually transmitted infection. The target population is pre-sexually active women, 11 to 14 years of age. At present the project is at the exploratory stage.
A development program is focusing on colorectal and melanoma cancers, seeking specifically to activate the immune system to destroy cancer cells. Phase I clinical studies using the proprietary ALVAC technology in patients with melanoma and colorectal cancer showed a favorable safety profile.
The incidence and mortality of cutaneous malignant melanoma have risen dramatically over the past several decades and combating melanoma remains an unmet medical need. There is evidence that suggests that manipulation of the immune response against melanoma may be therapeutic. During 2005, clinical and research grade new generation melanoma multiantigen vaccine candidates have been engineered and preclinical immunologic validation was initiated.
Colorectal cancer is the most common cancer of the gastrointestinal tract and the second leading cause of cancer-related morbidity and mortality, with approximately 300,000 new cases and 200,000 deaths in Europe and the United States each year. A multiantigen therapeutic vaccine is being developed, incorporating several tumor-associated antigens highly specific to colorectal cancer, as well as a co-stimulatory component to enhance immune activation. New antigens for the colorectal vaccine from recently established collaborations are currently being evaluated.
Both our cancer vaccine programs use the ALVAC technology: an avian pox virus is used as the vector tumor-associated antigens to deliver to the immune system and elicit a cell-mediated immune response aimed at controlling or destroying malignant cells.
Sanofi pasteur has been a pioneer in HIV vaccine research with a long-standing research program as well as partnerships with leading government agencies and pharmaceutical companies. Sanofi pasteur is exploring both prophylactic and therapeutic approaches to developing vaccines to combat HIV.
Vaccine-based HIV immunotherapy aims to present critical HIV antigens in a novel way, thus triggering an HIV-specific immune response capable of controlling viral replication. The goal of immunotherapy is to provide HIV patients with the option of interrupting antiviral therapy in order to maintain treatment options, relieve side effects and improve patient quality of life. Sanofi pasteurs approach is based on two candidates: recombinant Tat toxoid, and the recombinant canarypox vector expressing HIV genes. The goal is to elicit antibodies to block Tat secreted by HIV-infected cells since Tat is involved in the replication of the virus and in its immunosuppressive effects. The canarypox vector, ALVAC-HIV, is designed to elicit cell-mediated immune response that would kill HIV-infected cells. Pilot clinical studies have been conducted and support further development to determine the best treatment modality for this approach.
The development of an effective prophylactic vaccine for human immunodeficiency virus has been an elusive target since the discovery of the virus 20 years ago. However, until an efficacy trial is undertaken, the evaluation of candidate vaccines relies on anecdotal criteria derived from other clinical settings, such as the immunologic responses found in HIV-1 infected long-term non-progressors and in HIV-1 and non-human primate vaccine studies. A recombinant canarypox vaccine, ALVAC-HIV is currently in phase III in Thailand. The trial is a collaboration between the U.S. Army, the National Institute of Allergy and Infectious Diseases of the NIH, the Ministry of Public Health of Thailand, sanofi pasteur and Vaxgen. In 2005, the enrolment of more than 16,000 volunteers was completed. A 2.5 year follow-up is now underway. A similar approach using a recombinant virus to elicit HIV-specific CD8 response is being applied in Europe where a Phase I trial sponsored by the EuroVacc Foundation (EuroVacc 02) has been completed.
Sanofi pasteur has concluded important partnerships in 2005 with:
Production and Raw Materials
Our principal manufacturing processes consist of three stages: the manufacture of active ingredients, the incorporation of those ingredients into products designed for use by the consumer and packaging. At each of these three stages, we need to purchase a variety of raw materials. When possible, we have a policy of maintaining multiple sources of supply for these materials. In a few cases, some raw materials may be in short supply. Nonetheless, we have not experienced any material difficulty in obtaining a sufficient supply of raw materials in recent years and believe that we will be able to obtain supplies in sufficient quantities in the future. We do not believe the Group is exposed to any material risks related to the volatility of the prices of raw materials that we outsource.
We generally develop and manufacture the active ingredients that we use in our products. We have a general policy of producing the active ingredients for our principal products at our own plants rather than outsourcing production. Even though we must outsource certain production elements, we are committed to this general principle, which reduces our dependency on key suppliers.
The production of the active ingredients used in Stilnox®, Kerlone®, Xatral®, Solian® and Tildiem® is outsourced to Dynamit Nobel, a company to which we sold the related facilities in 2001. Under our current outsourcing agreement, we are required to purchase 50% of our manufacturing requirements of the ingredients for Stilnox®, Xatral® and Solian® and all of our manufacturing requirements of the ingredients for Kerlone® and Tildiem® from these facilities through December 31, 2007.
Among our other key products, we also depend on third parties in connection with the manufacture of Eloxatine®. Under the terms of our license agreement, we purchase the active ingredient from Debiopharm, and the production of the finished product is outsourced to two manufacturers. We have scheduled to transfer the manufacture of the liquid form of Eloxatine® to our facility in Dagenham (United Kingdom). Routine production will occur end of 2006.
In addition, we work with external manufacturers mainly for several small products. These subcontractors are required to follow our guidelines in terms of quality, logistics and other criteria. Our main subcontractors are Patheon, Famar, LCO, Haupt and Sofarimex.
Under our partnership with BMS, a multi-sourcing organization is in place for Plavix® and Aprovel®. For both products, pharmaceutical production is performed partly in sanofi-aventis plants and partly in BMS plants. For active ingredient production, a double-sourcing approach has been put in place for Aprovel® involving sanofi-aventis, BMS and sub-contractors plants.
In mid-2004, we sold the chemical manufacturing plant at Villeneuve-la-Garenne to PCAS. As a consequence we now outsource a part of the chemical activity linked with Lovenox® to PCAS (early stages of chemical synthesis), pursuant to a six-year outsourcing agreement.
In connection with the acquisition of Aventis, we divested our interests in Arixtra® and Fraxiparine®. Our facility at Notre-Dame de Bondeville, which produces those two products, was sold to GlaxoSmithKline on September 1, 2004. This plant also manufactures other products like Elitek®, Tranxene®, and Depakine® under a supply agreement until September 2009.
Each stage of the manufacturing process is carried out under carefully controlled conditions and is regulated by applicable legislation and regulatory authorities, including for facilities that produce products marketed in the United States. Wherever possible, we seek to have multiple plants approved for the production of key active ingredients and finished products.
Our main European production facilities are located in France, Germany, Italy, Spain, the United Kingdom and Hungary. In North America, we run two facilities in the United States (Kansas City and Saint Louis) and one in Canada (Laval). We have one plant in Japan (Kawagoe) and additional facilities located in many other countries around the world, including in Northern Africa, Eastern Europe, Asia and Latin America.
All of our facilities are Good Manufacturing Practices (GMP) compliant in accordance with international guidelines. Our main facilities are also FDA approved, including, our facilities in Ambarès, Tours, Le Trait, Maisons-Alfort and Compiègne in France, Dagenham and Holmes Chapel in the United Kingdom, Frankfurt in Germany, Saint Louis and Kansas City in the United States and Laval in Canada.
To carry out the production of human vaccines, sanofi pasteur has a large industrial operations network with sites located in North America and Europe as well as in emerging markets: China, Thailand and Argentina.
A more detailed list of our manufacturing sites is set forth below under Property, Plant and Equipment.
Marketing and Distribution
The combination of Sanofi-Synthélabo and Aventis into sanofi-aventis has reinforced our Groups international footprint and our marketing strength in a number of key markets.
We have a commercial presence in approximately 100 countries, and our products are available in more than 170. Our top five markets in terms of net sales are, respectively, the United States, France, Germany, Italy and Japan.
A breakdown of our sales by geographic market is presented in Item 5. Operating and Financial Review and Prospects Results of Operations Year Ended December 31, 2005 Compared with Year Ended December 31, 2004. Accounting for over 49% of global prescription drug sales, the United States is the worlds largest pharmaceutical market and our single largest national market. In 2005, we generated 35% of our net sales in the United States. In Europe, our leading markets are France, Germany, Italy, Spain and the United Kingdom. Japan, the worlds second-largest national pharmaceutical market, accounted for 3.8 % of our net sales in 2005.
Although specific distribution patterns vary by country, we sell prescription drugs primarily to wholesale drug distributors, independent and chain retail drug outlets, hospitals, clinics, managed care organizations and government institutions. These drugs are ordinarily dispensed to the patients by pharmacies upon presentation of a doctors prescription.
We have a global sales force of 35,000 representatives, including approximately 12,400 in Europe, 9,400 in the United States, 1,600 in Japan and 1,600 in China. The precise composition by therapeutic area fluctuates according to business needs and in line with each countrys key products. In our major markets, we deploy dedicated sales forces specialized in areas such as oncology, metabolism and cardiovascular diseases.
Our 35,000 medical sales representatives, who work closely with health care professionals, use their expertise to promote and provide information on our drugs. These representatives embody the Groups values on a day-to-day basis and are required to adhere to a code of ethics. This commitment extends to promoting and providing information not only on the latest therapeutic advances but also on all our traditional products, which provide the foundation for satisfying major therapeutic needs. The quality of our sales force teams is recognized by our customers, as highlighted in the United States by the results of the Health Strategies Fall 2005 SFE monitor survey. In this survey, sanofi-aventis enhanced its high ranking: both in its ability to access customers and inform them about its products, and in effectiveness of sales calls, in terms of delivering useful content to customers.
Beyond direct promotion by our sales forces, and as most pharmaceutical companies do, we also market and promote our products to physicians through a variety of advertising, public relations and promotional tools. We regularly advertise in medical journals and exhibit at major medical congresses. In some countries, some of our products are also marketed directly to consumers by way of television, radio, newspapers and magazines. Not all products are marketed through all media channels. National advertising campaigns are used to enhance
awareness of conditions such as deep vein thrombosis, osteoporosis, uncontrolled diabetes, influenza and peripheral arterial disease in markets such as Germany, France and the United States. Some major campaigns took place in 2005, such as a direct-to-consumer campaign in the United States on the importance of compliance with medical recommendations related to a drug treatment.
Although we market most of our products with our own sales forces, we have entered into and continue to form partnerships to co-promote/co-market certain products in specific geographic areas. Major arrangements currently include an agreement with BMS for the cardiovascular drugs Aprovel® and Plavix®, P&G for the osteoporosis drug Actonel® and Teva Pharmaceuticals for the multiple sclerosis drug Copaxone®. More details on these alliances are provided below under Alliances.
Our human vaccines are sold and distributed through multiple channels, including physicians, pharmacies and distributors in the private sector, and governmental entities and Non-Governmental Organizations (NGOs) in the public and international donor markets, respectively.
In 2005, we had three major alliances through which four of our top 15 products were marketed. The first, with Bristol-Myers Squibb, or BMS, governs the development and marketing of Plavix® and Aprovel®. The second, with Procter & Gamble Pharmaceuticals, or P&G, governs the development and commercialization of Actonel®. The third is a marketing agreement with Teva Pharmaceuticals regarding Copaxone®.
The financial impact of our principal alliances on our financial condition or results of operations is significant and is described in detail under Item 5. Operating and Financial Review and Prospects Overview Financial Presentation of Alliances.
We market Aprovel® and Plavix® through a series of alliances with BMS. The alliance agreements include marketing and financial arrangements that vary depending on the country in which the products are marketed.
There are three principal marketing arrangements that are used in the BMS alliance:
Under the alliance arrangements, there are two territories, one under our operational management and the other under the operational management of BMS. The territory under our operational management consists of Europe and most of Africa and Asia, while the territory under the operational management of BMS consists of the rest of the world excluding Japan. In Japan, Aprovel® is under development through agreements between BMS and the Japanese pharmaceutical company Shionogi Pharmaceuticals. The BMS alliance does not cover rights to Plavix® in Japan.
In the territory under our operational management, the marketing arrangements are as follows:
In the territory under BMS operational management, the marketing arrangements are as follows:
In countries where the products are marketed by BMS on a co-marketing basis, or through alliances under the operational management of BMS, we often sell the active ingredients for the products to BMS or such entities.
Procter & Gamble Pharmaceuticals
We in-license Actonel® from Procter & Gamble Pharmaceuticals. An alliance with P&G was concluded in April 1997 for the co-development and marketing of Actonel®. The 1997 agreements were amended in October 2004 following the acquisition of Aventis by sanofi-aventis.
The alliance agreement with P&G includes the development and marketing arrangements for Actonel® worldwide (except Japan). The ongoing R&D costs for the product are shared equally between the parties, while the marketing arrangements vary depending on the country in which the product is marketed.
Under the alliance arrangements with P&G, there are four principal territories with different marketing arrangements:
We in-license Copaxone® from Teva Pharmaceuticals (Teva) and market it through an alliance agreement with Teva, which was originally concluded in December 1995, and amended several times, most recently on December 22, 2005.
Under the alliance agreement with Teva, marketing and financial arrangements vary depending on the country in which the products are marketed.
Outside the United States and Canada, there are two principal marketing arrangements under the Teva alliance:
In the United States and Canada, Copaxone® is sold and distributed by sanofi-aventis but marketed by Teva. Following the expiration of an agreement in March 2008, Teva will assume the Copaxone® business, including sales of the product, in the United States and Canada.
The pharmaceutical industry in which we operate is highly competitive. Over the last few years, the pharmaceutical industry has experienced increased vertical and horizontal consolidation.
In addition to the consolidation, significant changes in marketing conditions are occurring in the European, U.S. and Japanese pharmaceutical markets, including decreased pricing flexibility, increased cost control measures, and the impact of managed care, especially with respect to product selections and pricing concessions. As a result of these factors, the breadth of products that we offer and our distribution capabilities have become increasingly important.
The pharmaceutical market is generally defined by three types of competition:
We compete with other pharmaceutical companies to develop new and innovative pharmaceutical products. We may develop new technologies and new patented products entirely internally, or we may enter into collaborative R&D arrangements in order to access additional new technologies. When we decide to have access to new technologies through outside R&D collaborative arrangements, we compete directly with large pharmaceutical companies.
Our prescription drugs compete in all our major markets primarily against other branded, patented drugs from large national and international pharmaceutical companies, e.g., Novartis in hypertension and oncology, Pfizer in antibiotics, oncology and allergy, AstraZeneca in cardiovascular and oncology, BMS in oncology, Boehringer-Ingelheim in atherothrombosis and benign prostatic hyperplasia, Eli Lilly in osteoporosis, diabetes, and oncology, GlaxoSmithKline in oncology, allergy and thrombosis, Merck & Co. in hypertension, osteoporosis and benign prostatic hyperplasia, Abbott in benign prostatic hyperplasia, Novo Nordisk in diabetes and Roche in oncology. In the human vaccines business, we compete primarily against GlaxoSmithKline, Merck & Co., Wyeth and Novartis through its subsidiary Chiron.
Note: The following market share and ranking information is based on sales data from IMS Health MIDAS and GERS (France), retail and hospital, for the full year 2005, in constant euro.
While we believe the IMS/GERS sales data we present below are generally useful comparative indicators for our industry, they may not precisely match the sales figures published by the companies that sell the products (including our company and other pharmaceutical companies). The rules used by IMS to attribute the sales of a product covered by an alliance or license agreement do not always exactly match the rules of the agreement.
In order to prepare a reconciliation of consolidated net sales data to developed sales as defined in Item 5 Operating and Financial Review and Prospects Presentation of Net Sales Developed Sales, IMS net sales have been adjusted as follows:
IMS consolidated net sales as presented:
The scope of IMS developed sales includes:
Products market shares are calculated based on referenced market definitions specified internally and on the basis of IMS consolidated sales unless specified otherwise.
Sanofi-aventis ranks eighth based on IMS-consolidated sales and fourth based on IMS-developed sales. Our market share in this market is 4.4% based on IMS-consolidated sales and 6.0% on IMS-developed sales.
In 2005, our top-selling products in the U.S. were Lovenox®, Plavix®, Stilnox® under the brand name Ambien® and Allegra®. These two last ones faced major events in September 2005 with the launch of the new controlled-release formulation of Ambien® (Ambien CR) and the market entry of generic versions of fexofenadine HCI.
Sanofi aventis is the leading pharmaceutical company in France with a market share of 16.4% based on IMS consolidated sales. Plavix®, Lovenox® and Taxotere® are leading brands in their market.
The Group has a market share of 6.7% in IMS consolidated sales and 7.6% in IMS developed sales. Our largest products are Plavix®, Lovenox® and Insuman®.
In Japan, sanofi-aventis has a market share of 1.7% based on IMS-consolidated sales and 1.9% on IMS-developed perimeter and ranks 17th in both perimeters. Our top-selling products were Allegra®, Amaryl® and zolpidem under the brand name Myslee®.
In July 2005, we announced an agreement with Daiichi under which sanofi-aventis Japan would recover all Japanese rights to Plavix®. Sanofi-aventis and Daiichi agreed to collaborate in the future in the areas of manufacturing and co-promotion to ensure the success of Plavix® in Japan, which we currently expect to launch in 2006.
We also face competition, which can be significant, from generic prescription products. Generic products typically enter the market as patent protection and regulatory exclusivity expire. More details on such challenges are provided under at Item 8. Financial Information Consolidated Financial Statements and Other Financial Information Information on Legal or Arbitration Proceedings and at Note D.22(b) to the consolidated financial statements included in Item 18 of this annual report. In addition, a competitor who has otherwise received all relevant regulatory approvals for its proposed generic product, may choose to launch its product before either the patent expiration date or the decision of a court in a legal challenge to the patent. Such launches are said to be at risk for the promoter of the generic product because of the risk it will be required to pay substantial damages to the owner of the original product. See Item 3. Risk Factors. If we are unable to protect our proprietary rights, we may fail to compete effectively or operate profitably. This was the case in September 2005 when Teva and Barr launched a generic of fexofenadin HCI before the expiration of the U.S. patents and while patent litigation against these companies remains pending.
Sanofi-aventis also faces competition from over-the-counter (OTC) products which pharmacies sell without a prescription, generally at a price lower than the price of drugs sold only with a doctors prescription.
Another competitive issue facing pharmaceutical manufacturers is the increasing incidence of parallel trade, also known as re-importation, which takes place when drugs sold abroad under the same trade name as in a domestic market are then imported into the domestic market by parallel traders, who may repackage and/or resize the original branded product or offer products for sale by alternative means, such as by mail or the internet. The rationale for parallel trade lies in economic advantages arising from different prices for the drugs due to different sales costs, market conditions (e.g., intermediate trading stages) and tax rates or because of national regulation of prices. There are indications that parallel trade is affecting markets in several regions, mostly in European countries.
The global pharmaceutical industry is highly regulated. National and supranational regulatory authorities administer numerous laws and regulations covering the testing, approval, labeling, manufacturing, importation, exportation, labeling and marketing as well as post-marketing commitments of drugs, and also review the quality, safety and efficacy of pharmaceutical products. Of particular importance is the requirement to obtain regulatory approval for a pharmaceutical product from a countrys national regulatory authority before such product may be marketed in that country and also to maintain the dossier thereafter. These regulatory requirements are a major factor in determining whether a substance can be developed into a marketable product and the amount of time and expense associated with such development.
The submission of an application to a regulatory authority does not guarantee that a license to market the product will be granted. Furthermore, each regulatory authority may impose its own requirements and may refuse to grant, or may require additional data before and also after granting, an approval, even though the relevant product has been approved in one or several other countries. Regulatory authorities also have administrative powers that determine product recalls, seizure of products and other sanctions.
Europe, the United States and Japan all have very high standards for technical appraisal. Approval takes usually one to two years but may vary by country, from six months to, in some cases, several years from the date of application, depending on the quality of data produced, the degree of control exercised by the regulatory authority, the review procedures, the nature of the product and the condition to be treated.
In recent years, intensive efforts have been made among the United States, the European Union and Japan to harmonize registration requirements. Many pharmaceutical companies are now able to prepare and submit a common technical document (CTD), that can be used in each jurisdiction for a particular product with only local or regional adaptation.
However, the requirement of many countries (including Japan and several Member-States of the European Union) to negotiate selling prices or reimbursement levels with government regulators can substantially extend the time to market after initial approval to market is granted. While marketing authorizations for new pharmaceutical products in the European Union have been substantially centralized with the European Agency for the Evaluation of Medicinal Products (EMEA), pricing and reimbursement remains a matter of national competence. See( Pricing), below.
In the European Union, there are three main procedures by which to apply for marketing authorization: the Centralized Procedure, the Mutual Recognition Procedure and the decentralized procedures.
The EMEA has introduced a series of initiatives aiming at improving the openness and the transparency of its activities, such as procedures dealing with the publication of the European Public Assessment report which will now be more detailed. New initiatives are proposed with regards to the publication of Questions and Answer documents and of Safety Bulletins for medicines for human use.
National authorizations are still possible but are only for products intended for commercialization in a single EU Member State, or for line extensions to existing national product licenses.
In the United States, applications for drug registration are submitted to and reviewed by the FDA. The FDA has broad regulatory powers over all pharmaceutical products that are intended to be, and which are, commercialized in the United States. To commercialize a product in the United States a New Drug Application is filed with the FDA with data that sufficiently demonstrate the drugs quality, safety and efficacy. Approval for a new indication of a previously registered drug requires the submission of a supplemental NDA (sNDA).
Pharmaceutical manufacturers have committed to publish protocols and results of clinical studies performed with their compounds in publicly accessible registries (Clinical Trials Registry and Clinical Trial Results Registry). See Research and Development Pharmaceutical Research and Development Global and Focused organizations : Discovery and Development Development above.
Generic drug manufacturers may file an Abbreviated NDA (ANDA). These applications are abbreviated because generic manufacturers, except for the quality part of the dossier, need only to demonstrate that their product is bioequivalent (i.e., that it performs in the same manner as the innovators product). Consequently, the length of time and cost required for development of such product is considerably less than for the innovators drug. See Patents, Intellectual Property and Other Rights, below, for additional information. The ANDA procedures in the United States can be used for pharmaceutical products classified as drugs, but are not currently available for other product categories including vaccines.
Once marketing authorization is granted, the new drug (or new indication) may be prescribed by physicians. Thereafter, the drug owner must submit periodic reports to regulatory authorities including any cases of adverse reactions. For some medications, regulatory authorities may require additional studies to evaluate long-term effects or to gather information on the use of the product under special conditions. In addition, manufacturing facilities must be approved by regulatory authorities, and are subject to periodic inspections. Non-U.S. manufacturing facilities that export products for sale in the United States must be approved by the FDA in addition to local regulatory approvals, and are also subject to periodic FDA inspections.
In Japan, the regulatory authorities can request bridging studies to verify that foreign clinical data are applicable to Japanese patients and also require data to determine the appropriateness of the dosages for Japanese patients. These additional procedures have in the past created differences of several years in the registration dates of some of our products in Japan compared to our other major countries.
In most markets in which we operate, governments exercise some degree of control over pharmaceutical prices. The nature of these controls and their effect on the pharmaceutical industry vary greatly from country to country. In recent years, national healthcare reimbursement policies have become more stringent in a number of
countries in which we do business as part of an overall effort to reduce the cost of healthcare. Different methods are applied to both the demand and supply side to control pharmaceutical costs, such as reference pricing, patient co-payment requirements, reimbursement limitations and volume containment measures, depending on the country.
We believe that the governments in many markets important to our business will continue to enact measures in the future aimed at reducing the cost of pharmaceutical products to the public. It cannot be predicted with certainty what future effects the various pharmaceutical price control efforts will have on our business. These efforts could have significant adverse consequences for the pharmaceutical industry as a whole and, consequently, also for sanofi-aventis. Increasing budgeting and price controls, the inclusion of patent protected drugs in national reference price systems and approved drug lists and other similar measures may continue to occur in the future.
In the United States, the initiation of the new Medicare Part D drug benefit program, combined with Medicaid, establishes the federal government as almost equal to the private health insurance sector in terms of total drug reimbursement. The Medicaid program requires that pharmaceutical manufacturers pay rebates to individual states on Medicaid reimbursed pharmaceutical products so that the Medicaid program receives the manufacturers best price or a minimum discount provided by law. Individual state governments are actively seeking ways to further reduce the cost of pharmaceutical products by exerting more formulary control of available products in the program through a discount bid process as well as the historical preference for generic product usage. However, the estimated total drug spend in Medicaid has been reduced by 50% due to the shift of the dual Medicare/Medicaid eligible patients to Part D. The new Part D program is implemented through third party market drug benefit providers utilizing formulary design and a discount bid process to attain access similar to the private sector. Benefit Managers, both in Part D as well as for the private sector plans, dynamically manage the formulary process and products in order to control overall cost trends. Further attempts to reform Medicaid and Medicare may occur, due to the U.S. government motivation to keep costs down via future pricing and reimbursement constraints. Private sector plans will continue to pressure prescription cost increases by greater generic utilization and cost shifting to the beneficiaries.
In France, the government regulates prices of new prescription and non-prescription drugs and price increases and decrease for existing drugs. A new reference pricing system was introduced in France in July 2003 under which the government reimburses some off-patent products only up to a certain level (generic price or the so-called reference price) with patients paying the remainder if the original brand does not cut its price to the level of the reference price. In addition, the French health ministry de-listed several products deemed to have insufficient medical benefit. In return, the government introduced the principle of a fast-track procedure to set prices and provide reimbursement for new innovative drugs. This measure could extend by many months the duration of commercialization for drugs under patent protection. In July 2004, the French Parliament passed a Health Insurance Bill (Projet de Loi Relatif à lAssurance Maladie) with the objective to reduce costs by around 10 billion per year and to raise additional revenues totaling 5 billion per year. A major impact on the pharmaceutical industry will be that, if health insurance spending on drugs increases by more than the governments target of 3% in 2004 and 1% per annum in subsequent years, the pharmaceutical industry will be required to pay rebates equivalent to up to 50% up to 1.5%, 60% up to 2% and 70% of the excess. Beginning January 1, 2005, a new organization, the High Authority for Health (Haute Autorité de la Santé), will evaluate medicines and other forms of treatment, offer recommendations on what the health insurance system should reimburse, and issue guidelines on good clinical practice. On 23 November 2005 the Parliament approved the Social Security Finance Act for 2006, which provides for some cost containment measures for medicines, inter alia:
The Ministry for Health, Labor and Welfare (MHLW) controls the pricing of pharmaceutical products in Japan. The MHLW determines the drug reimbursement price paid by the National Health Insurance (NHI) to medical institutions. The NHI drug reimbursement price is determined for each prescription drug by the MHLW. Since the price at which medical institutions purchase drugs can be set at a lower price than the reimbursement price through negotiation with wholesalers, a gap may exist between the selling price and the NHI drug price. Periodically (every two years in principle), the MHLW carries out a revision of drug reimbursement prices aimed at bringing NHI prices closer to the market prices. The latest pricing round in April 2004 averaged a decrease of 4.2%, which was the lowest in two decades. Having implemented wide-ranging reforms to its healthcare system over a three-year period, Japans new Pharmaceutical Affairs Law (PAL) was finally completed in April 2005. The government has since recognized the need for reforms to its pricing and reimbursement system in light of the countrys demographic problems. The reforms include raising co-payments from 20% to 30% for the elderly, and promoting generic substitution by changing a prescription. The April 2006 price cuts average of 6.7% which was caused by the increasing purchasing power.
Since the late 1980s, the German government has imposed a wide range of supply- and demand-side restrictions intended to curb the level of overall spending on pharmaceuticals. A reference pricing system that requires patients to pay the difference between the actual price of the prescribed drug and the reference price has been in existence since 1989. In practice, patients are generally not willing to pay the difference. As a result, pharmaceutical companies face the decision either to reduce prices to the reference price level or risk a substantial drop in prescriptions. In 1996, the German government suspended reference pricing for all patent-protected drugs approved in Germany after December 31, 1995. In 2004, reference pricing for patent-protected drugs was re-introduced by the new healthcare legislation. Patent-protected drugs without demonstrable therapeutic superiority according to the criteria of the Joint Federal Committee can be subject to reference pricing.
Further to reference pricing, individual prescription limits for physicians were introduced in 2001, which have to be negotiated annually between the Statutory Health Insurance (SHI) and the National Association of SHI-accredited Physicians. The legislation is also aimed at increasing the prescription of generic and imported drugs. In 2002, a sales quota for imported drugs came into force. Pharmacists were obliged to fulfill an import quota of 5.5% in 2002 and 7% in 2003, respectively. The new healthcare legislation reduced the import quota to 5% in 2004. In addition, pharmacies were obliged to dispense parallel imports only if the imported drug is 15% or 15 cheaper than the original drug. In 2003, a price freeze and a compulsory rebate of 6% for all prescription drugs not covered by reference pricing came into force. In 2004, this rebate was increased to 16%, limited until the end of 2004. The price freeze ended in December 2004 and the compulsory rebate was reduced to 6% in January 2005. Meanwhile, Germanys newly created Institute for Quality and Economic Efficiency (IQWiG)has began to conduct Health Technology Assessments (HTAs), similar to its British counterpart, NICE. IQWiG is an advisory body, but its recommendations have an impact on pricing and reimbursement decisions for innovative drugs.
A reference price reimbursement for off-patent products system has been in place in Italy since September 2001. The reference price is currently calculated as the price of the cheapest drug in the category at the regional level. Beginning January 2004, a new public body, the Italian medicines agency (AIFA), has taken over all the responsibilities covering medicine approval, pricing and reimbursement, as well as pharmaceutical expenditure in general. The AIFA has the authority to reassess the reimbursement list on an annual basis and decide which changes need to be implemented. In June 2004 the AIFA imposed a 6.8% price cut on the ex-factory price of all reimbursed medicines, equivalent to a 4.12% reduction of the reimbursed public price level. In line with its powers, the AIFA approved a restructuring of the reimbursement list (Prontuario) that involves price cuts for almost 300 high-selling presentations and an increase in the number of drugs for which patients do not have to pay. As a result, the number of fully reimbursed medicines, both patented and generic, increased. To help offset
the cost of this decision and to rein in the expected overshoot in pharmaceutical spending for 2004, as well as cap the growth for 2005, the AIFA approved the following measures:
(a) Reduction of the retail public price affecting 294 product presentations (a total of 56 active ingredients) implemented on January 1, 2005. These are active ingredients that in the first half of the year 2004 recorded a sales increase above the average of the whole market (8.6%). Prices can be reduced by a maximum of 10%.
(b) Extension of the current compulsory 6.8% reduction of the ex-factory price up until October 2005.
The two measures are cumulative, and consequently the 294 high selling presentations had been subject to both price cuts. Despite a decline in pharmaceutical spending following this price cut, the Italian Ministry of Health also imposed a price-freeze of Class C drugs (reimbursable, but at 0%)with only biannual price increases allowed, starting in January 2007. There has been a marked shift in the use of pharmaceuticals from the retail to the hospital sectoras Italian regions encourage hospitals to provide drugs for home use to patients upon discharge, thus utilizing the 50% lower price of hospital medicines.
The measures mentioned in (a) and (b), above, recovered the overspending of 2004. The estimated budget overrun for 2005 borne by drug companies is estimated to be about 0.8 billion. Two temporary measures were initiated on January 15, 2006 with the aim of recovering this overspend:
1. 4.4% Public Price Decrease for all reimbursed products (retail and hospital)
2. 1% rebate on wholesaler prices to be paid only by drug companies (limited to retail and non generic products)
The AIFA will check the results of these measures before the end of the second quarter of 2006 and depending on expenditure levels, could take other decisions.
The Department of Health has power, now contained in the Health Act 1999, to limit prices of pharmaceuticals and control the profits of pharmaceutical companies. Against this background, a voluntary agreement called the Pharmaceutical Price Regulation Scheme (PPRS) has been concluded between the industry association and the Department of Health.
Within a framework relating to profit, manufacturers are free to set initial prices but restricted in making subsequent price changes. The previous form of the PPRS was in place from 1999 to 2004. In November 2004 the Department of Health announced that it had re-negotiated the PPRS for the next five years for the period through 2010. This includes an overall 7% price cut, which the companies can achieve by modulating reductions on their products covered by PPRS. The National Institute for Health and Clinical Excellence (NICE) is empowered to issue guidelines in relation to therapeutic areas and guidance on the clinical effectiveness and cost effectiveness of particular treatments. Guidance by NICE influences the extent to which supply of the product is financed within the National Health Service. Under public and industry pressure, NICE adopted a fast-track appraisal system for life-saving drugs that could lead to faster adoption of innovative drugs by the National Health Service.
The Spanish health care system has traditionally offered its beneficiaries favorable reimbursement terms for prescription drugs. Nevertheless drugs prices are generally lower than in other major markets. Companies must negotiate the price of a reimbursable drug with the Central Government. In addition the recent decentralization of health care has a powerful influence on the evolution of the market, as regional governments have sought greater control over the pricing and reimbursement. The Spanish health ministry has announced a large number of measures (included in the Strategic Pharmacy Policy Plan) to reduce drug spending. The proposed 67 measures include a reduction in drug prices of 4.2% in 2005 and another 2% in 2006, a modification of the reference pricing system to boost the generic market and the rewarding of true innovation through the introduction of a pricing and reimbursement scale that will set the prices of new drugs according to their degree of therapeutic superiority over established treatments. On the other hand the government has decided not to renew the three-year old stability pact with the pharmaceutical industry and to introduce a sales tax.
Patents, Intellectual Property and Other Rights
We currently own over 50,000 patents, patent applications and patent licenses worldwide. These patents cover:
Patent protection for individual products typically extends for 20 years from the patent filing date in countries where we seek patent protection. A substantial part of the 20 year life span of a patent on a new chemical entity has generally passed before the related product obtains marketing approval, resulting in an effective period of patent protection which is significantly shorter for an approved products active ingredient. In some cases, this period of effective protection may be further extended, in particular in Europe, the United States and Japan, where procedures exist to compensate significant regulatory delay.
The product may benefit from the protection of other patents, including patents obtained after the products initial marketing approval. The protection a patent affords the related product depends upon the type of patent and its scope of coverage, and may also vary from country to country. In most industrial countries, patent protection exists for new active substances and formulations, as well as for new indications and production processes. We monitor our competitors and vigorously challenge patent and trademark infringements.
The expiration or loss of a product patent may result in significant competition from generic products against the covered product and, particularly in the United States, can result in a dramatic reduction in sales of the pioneering product. In some cases, it is possible to continue to obtain commercial benefits from product manufacturing trade secrets, patents on processes and intermediates for the economical manufacture of the active ingredients, and patents for special formulations of the product or for delivery mechanisms. Certain categories of products, such as traditional vaccines and insulins, have been historically relatively less reliant on patent protection and may in many cases have no patent coverage, although it is increasingly frequent for novel vaccines and insulins to be patent protected.
Data Exclusivity and Data Protection
In some countries, including Europe and the United States, many of our products may also benefit from a five-to-10-year data exclusivity period, during which a generic competitor may not rely upon our clinical trial and safety data in its drug application. For example, in the United States, a generic competitor may generally not file an ANDA until the expiration of the five-year market exclusivity period that applies to the original product following its initial market authorization. In some cases, it is possible to extend the U.S. data exclusivity for an additional period of six months. This exclusivity period operates independently of patent protection and may protect the product from generic competition even if the basic patent for the product has expired.
Plavix® benefits from three U.S. patents, one expiring in 2011 and two expiring in 2019, and national patents issued from two European patents, expiring in 2013 and 2019, respectively. Aprovel® is protected in the United States until 2011 and in Europe until 2012. Taxotere®s active ingredient is protected in the United States and Europe until 2010, and the product benefits from additional patent coverage ranging through 2015. Lantus®s patent protection runs to 2014 in Europe and the United States, and in the United States benefits from a
six-month pediatric extension through February 2015. For Lovenox® our principal U.S. patent expires in 2012, but in June 2005 was declared unenforceable in a U.S. District Court decision which we are in the process of appealing. Lovenox® continues to benefit from patent protection in a number of significant markets outside the United States under patents expiring in or about 2012, depending on the country. Ambien® began to lose its patent protection in many markets in 2002. Its main remaining patents (United States and Japan) will expire in 2006. However, U.S. patent protection covering the formulation of Ambien CR, which was launched in the United States in 2005, extends to 2019.
For several of our top fifteen products in terms of 2005 sales Allegra®, Amaryl®, Depakine®, Nasacort®, Tritace® and Xatral® our patent covering the active ingredient has expired in most or all of our major markets, but the products continue to benefit from patent protection on a particular formulation of the drug, on medical indications and/or on a manufacturing process in numerous countries.
Three of our top fifteen products, Eloxatine®, Copaxone® and Actonel®, are protected by patents owned by third-parties and marketed by us under licensing agreements. We do not own the Eloxatine® patents but license them from Debiopharm for marketing. The patent covering the active ingredient has expired, but other patents remain in force in our principal markets. Copaxone® is co-promoted by sanofi-aventis and Teva, and its basic patents expire in 2014. We co-market Actonel® with Procter & Gamble Pharmaceuticals, which holds the NDA for this product in the United States. The U.S. patent on the active ingredient expires in December 2013 and the U.S. formulation patents expire in 2018.
In the United States, the FDA has invited us by written request to provide additional pediatric data on several of our top fifteen products (Lovenox®, Eloxatine®, Plavix® and Ambien®). Under the Hatch-Waxmann Act, timely provision of data meeting the FDAs requirements may result in the FDA treating the product as if its data exclusivity and patent life had been extended 6 months, to the extent they have not already expired (so-called pediatric exclusivity). Japanese and European regulations do not currently offer the possibility of similar extensions in exchange for pediatric study results.
One of the main limitations on our operations in some countries outside the United States and Europe is the lack of effective intellectual property protection for our products. Under international agreements in recent years, global protection of intellectual property rights is improving. The TRIPS Agreement (Trade-Related Aspects of Intellectual Property Rights), which forms part of the General Agreement on Tariffs and Trade, has required developing countries to amend their intellectual property laws to provide patent protection for pharmaceutical products since January 1, 2005 although it provides a limited number of developing countries an extension to 2010. While the situation has gradually improved, the lack of protection for intellectual property rights poses difficulties in certain countries. Additionally, in recent years a number of countries faced with health crises have waived or threatened to waive intellectual property protection for specific products.
In the United States, companies have filed Abbreviated New Drug Applications, or ANDAs, challenging patents related to a number of our products. An ANDA is an application by a drug manufacturer to receive authority to market a generic version of another companys approved product, by demonstrating that purportedly generic version has the same properties as the original approved product. An ANDA relies on the safety and other technical data of the original approved product, and does not generally require the generic manufacturer to conduct clinical trials, presenting a significant benefit in terms of time and cost. As a result of data exclusivity, the ANDA may generally be filed only 5 years following FDA approval of the initial U.S. marketing authorization of the original product. This period is reduced to 4 years for products protected by a patent listed in the FDAs list of Approved Drug Products with Therapeutic Equivalence Evaluations, also known as the Orange Book, and owned by or licensed to the manufacturer of the original version. However, in such a case if the patent holder or licensee brings suit within the statutory window, then the FDA is barred from granting a final approval to an ANDA during the 30 months following the patent challenge (this bar being referred to in our industry as a 30 month stay), unless, before the end of the 30 months, a court decision or settlement has determined either that the ANDA does not infringe the listed patent or that the listed patent is invalid and/or unenforceable. FDA approval of an ANDA after this 30 month period does not resolve outstanding patent disputes, but it does remove the regulatory impediments to a product launch by a generic manufacturer willing to take the risk of later being ordered to pay damages to the patent holder. Procedures comparable to the ANDA exist in other major markets. In Canada, an Abbreviated New Drug Submission may be filed with respect to a
generic version of an existing drug only after data exclusivity has expired, and a stay on regulatory approval of a generic for up to 24 months may be obtained if a listed patent is asserted. In the European Union, a generic drug manufacturer may reference the data of the regulatory file for the original approved product after data exclusivity has expired. However, there is no patent listing system in Europe comparable to the Orange Book, which would allow the patent holder to bar the competent authorities from granting the marketing approval by bringing patent infringement litigation prior to approval. Nevertheless, in most of these jurisdictions once the product is launched and in some jurisdictions already before (once launch is imminent), the patentee can seek an injunction against this marketing if its patents are infringed. See Item 8. Financial Information Consolidated Statements and Other Information Information on Legal or Arbitral Proceedings and Note D.22(b) to the consolidated financial statements included at Item 18 of this annual report. The accelerated ANDA-type procedures are potentially applicable to most, but not all, of the products we manufacture. See Regulation above. We intend to defend our patent rights vigorously in these cases.
Our products are sold around the world under brand-name trademarks that we consider to be of material importance in the aggregate. It is our policy to register our trademarks worldwide, and to monitor the trademarks in our portfolio and defend them worldwide.
The degree of trademark protection varies country by country, as each state implements its own laws applicable to trademarks used in its territory. In most countries, trademark rights may only be obtained by registration. In some countries, trademark protection is primarily based on use. Registrations are generally granted for a fixed term (in most cases ten years) and are renewable indefinitely, but in some instances may be subject to the continued use of the trademark. When trademark protection is based on use, it covers the products and services for which the trademark is used. When trademark protection is based on registration, it covers only the products and services designated in the registration. Additionally, in certain cases, we may enter into a coexistence agreement with a third-party that owns potentially conflicting rights in order to better protect and defend our trademarks.
Health, Safety and Environment
The manufacturing and research operations of sanofi-aventis are subject to increasingly stringent health, safety and environmental laws and regulations. These laws and regulations are complex and rapidly changing, and as always, sanofi-aventis has and will continue to maintain the necessary spending levels to comply with them. This investment, aimed at respecting health, safety and the environment, varies from year to year and totaled approximately 92 million in 2005.
The applicable environmental laws and regulations may require sanofi-aventis to eradicate or reduce the effects of chemical substance usage and release at its various sites. The sites in question may belong to the company, be currently operational, or they may have been owned or operational in the past. Under some of these laws and regulations, a current or previous owner or operator of a property may be held liable for the costs of removal or remediation of hazardous substances on, under or in its property, or transported from its property to third party sites, without regard to whether the owner or operator knew of, or caused the presence of the contaminants. Sanofi-aventis may also be liable regardless of whether the practices that resulted in the contamination were legal at the time they occurred.
Moreover, as for a number of companies involved in the pharmaceutical, chemical and agrochemical industries, soil and groundwater contamination has occurred at some company sites in the past, and may still occur or be discovered at others. Such sites are mainly located in the United States, Germany, France, Brazil and United Kingdom. As part of a program of environmental audits conducted over the last few years, detailed assessments of the risk of soil and subsoil contamination have been carried out at current and former company sites. In cooperation with national and local authorities, the Group is currently assessing the rehabilitation work required and this work has begun on several sites. Among them, rehabilitation work over several years has been completed or is in progress in Rochester, Portland and Cincinnati in the United States, Frankfurt and Hoechst in Germany, and Beaucaire, Limay, Rousset in France and on a number of sites divested to third parties and covered by contractual environmental guarantees granted by sanofi-aventis. Remediation works at the Massy and
Valernes sites were completed in 2005. Sanofi-aventis may also have potential liability for investigation and cleanup at several other sites. Reserves have been established for the sites already identified as well as to cover contractual guarantees for environmental liabilities for sites that have been divested. Potential environmental contingencies arising from certain business divestitures are described in Note D.22(e) to the consolidated financial statements included at Item 18 of this annual report. In 2005, sanofi-aventis spent more than 45 million on rehabilitating sites previously contaminated by ground pollution. As of December 2005, the most in-depth review possible was carried out of the legacy of environmental pollution. In light of data collected during this review, the Group adjusted the reserves to approximately 529 million.
Because of the growing cost of environmental regulations governing site remediation the Groups provisions for remediation obligations may not be adequate because of the multiple factors involved: the complexity of operational or previously operational sites, the nature of claims received, the rehabilitation techniques considered, the planned timetable for rehabilitation, and the outcome of discussions with national Regulatory Authorities or other potentially responsible parties, as in the case of multiparty sites.
Because some of the sanofi-aventis manufacturing sites have a long history of industrial operations, and given Aventiss legacy of environmental remediation obligations inherited from its former chemical and agrochemical businesses, it is impossible to evaluate precisely what impact these laws and regulations will have in the future.
Given the long industrial history of some of our sites and the legacy obligations of Aventis arising from its past involvement in the chemicals and agrochemical industries, it is impossible to quantify the future impact of these laws and regulations with precision.
To our knowledge, the Group is not currently subject to liabilities for non-compliance with current health, safety and environmental laws and regulations that would significantly jeopardize its activities, financial situation or operating income. We also believe that we are in substantial compliance with current health, safety and environmental laws and regulations and that all the environmental permits required to operate our facilities have been obtained. Regular HSE audits are carried out by the Group in order to detect possible instances of non-compliance with regulations and to initiate corrective measures. Thirty-two audits were carried out in 2005. Sanofi-aventis is committed to providing safe and environmentally sound work places which respect the health and environment of employees and the surrounding communities.
Sanofi-aventis has implemented a worldwide policy on health, safety and the environment to promote the health and well-being of its employees and respect for the environment. We consider this policy to be an integral part of our commitment to social responsibility. In order to implement this policy, 76 rules have been drawn up in the key fields of HSE management, Good HSE Practices, safety in the workplace, process safety, industrial hygiene, health in the workplace and protection of the environment.
From the development of compounds to the commercial launch of new drugs, sanofi-aventis research scientists continuously assess the effect of products on peoples health. This expertise is made available to employees through two committees responsible for chemical and biological risk assessment. The COVALIS committee classifies all chemical and pharmaceutical products handled within the Group and establishes workplace exposure limits for each of them. The TRIBIO Committee is responsible for classifying all biological agents according to their degree of pathogenicity, and establishes rules for their containment and the preventive measures to be respected throughout the Company.
Industrial hygiene practices implemented at our sites are based on the internal standards defined by these two committees. These practices consist essentially of measures regarding containment, and group and individual protection against exposure in all work positions where chemical substances or biological agents are handled.
Sanofi-aventis has set up a rigorous policy to identify and evaluate risks and to develop preventive measures, and methods for checking their efficacy. Additionally, sanofi-aventis invests in training that is designed to instill in all employees a sense of concern for safety, regardless of their professional activity. These policies are implemented on a worldwide scale to ensure the safety of all employees and to protect their health. Each project, whether in research, development or manufacturing, is subject to evaluation procedures, incorporating the chemical substance and process data communicated by the aforementioned COVALIS and TRIBIO committees. The preventive measures are designed primarily to reduce the number and seriousness of work accidents involving our permanent and temporary employees as well as sub-contractors.
The French chemical manufacturing sites in Aramon, Neuville-sur-Saône, Saint-Aubin-les-Elbeuf, Sisteron, Vertolaye and Vitry, as well as the plants located in the Hoechst Industry Park in Frankfurt, Germany, and the chemical production site in Budapest, Hungary, are listed Seveso II in accordance with the relevant European directive. In accordance with the French law on technological risk prevention, the French sites are also subject to heightened security inspections in light of the toxic or flammable materials stored on the sites and used in the operating processes.
Risk assessments of processes and their installations are drawn up according to standards and internal guidelines incorporating the best state-of-the-art benchmarks for the industry. These assessments are used to fulfill regulatory requirements and are regularly updated. Particular attention is paid to any risk-generating changes: process or installation changes, as well as changes in production scale and transfers between industrial or research units.
The laboratories which specialize in process safety testing, which are an integral part of chemical development activities, apply methods to obtain the physico-chemical parameters of manufactured chemical substances (intermediates and drug substances) and apply models to measure the effect of potentially leachable substances in the event of a major accident. All these data guarantee the relevance of the risk assessments.
We believe that the safety management systems implemented at each site, the hazard studies carried out and the risk management methods implemented, as well as the insurance policies covering any third-party material damages, are consistent with the legal requirements.
The main objectives of the environmental policy of sanofi-aventis are to implement clean manufacturing techniques, minimize the use of natural resources and reduce the environmental impact of its activities. In order to optimize and improve our environmental performance, sanofi-aventis is committed to progressively obtaining ISO 14001 certification for all of its sites. Twenty-four manufacturing sites and three R&D sites are currently certified. This commitment is part of a strategy of continuous improvement practiced at all Group sites through the annual implementation of health, safety and environment progress plans. We believe that this strategy clearly expresses the commitment of both management and individuals to health, safety and the environment. As of January 1, 2005, eleven of the Groups European sites were included in the European CO2 emission trading system, which is aimed at helping to reach the targets set by the Kyoto protocol.
The recent efforts of the Group in terms of environmental protection have mainly targeted reductions in energy consumption, improvements in the performance of water treatment installations, volatile organic compound emissions, raw material savings and recycling, and reductions in waste materials or increases in the percentage being recycled. Despite an increased production volume, considerable progress has been made in each of these areas in terms of consumption per unit of production.
In order to assess the environmental impact of the drug substances found in products marketed by sanofi-aventis, a committee of experts called ECOVAL has been set up to develop an environmental risk assessment methodology, and to run programs to collect the necessary data for such assessments.
Insurance and Risk Coverage
We have four main insurance programs. This insurance is provided by conventional insurance and reinsurance companies, a mutual insurance company formed by various pharmaceutical Groups, and CARRAIG, our groups captive insurance company.
The Property & Business Interruption insurance program covers all of the groups sites. This program also includes efforts to improve safety and security.
The Inventory & Transportation program protects all of our goods, regardless of type, when shipped domestically or internationally by any means of transport, and also covers our inventories wherever they may be.
Our General Liability & Product Liability program was renewed, despite the increasing reluctance of insurers and reinsurers to cover the product risk of large pharmaceutical groups. Because of these market conditions we had to reduce our coverage under this program by excluding certain products and accepting various restrictions, and also by increasing our self-insurance.
The fourth insurance program, the Directors & Officers Liability program, protects all of the Groups legal entities and their directors and officers.
These insurance programs are backed by leading insurance and reinsurance groups and protect every aspect of the Groups operations. The amounts of coverage have been adjusted in accordance with the Groups risk profile and insurance market conditions. This centralization of insurance coverage not only reduces costs but also gives local entities access to world-class coverage.
Animal Health: Merial
Merial, a 50-50 joint venture with Merck & Co. Inc., is one of the worlds leading animal healthcare companies dedicated to the research, development, manufacture and delivery of innovative pharmaceuticals and vaccines used by veterinarians, farmers and pet owners.
The animal healthcare product range comprises four major segments: parasiticides, products for the treatment of chronic illnesses, anti-infectious drugs, and other products such as anti-inflammatory agents, anti-ulcerous agents and vaccines. The companys top-selling products include Frontline®, a topical anti-parasitic flea and tick brand for dogs and cats, as well as Ivomec®, a parasiticide for the control of internal and external parasites in livestock, Heartgard®, a parasiticide for control of heartworm in companion animals, and Eprinex®, a parasiticide for use in cattle.
Merials major markets are the United States, France, Italy, the United Kingdom, Brazil, Australia, Japan, Germany, Spain and Canada.
Merial has 16 production sites, with major sites located in France, the United States, Brazil and China. The major R&D sites are located in France and in the United States.
Merial has approximately 5,000 employees worldwide.
As of December 31, 2005, sanofi-aventis held a 8.2% equity stake in the specialty chemicals group Rhodia, which was formerly a unit of Rhône-Poulenc. Rhodia has been listed on the Euronext Paris as well as the NYSE since 1998. Although sanofi-aventis did not dispose of shares of Rhodia in 2005, its percentage interest in Rhodia has decreased significantly from 15.3% as of December 31, 2004. This percentage dilution was caused by a substantial capital increase carried out by Rhodia in 2005 in which sanofi-aventis chose not to subscribe additional shares. Sanofi-aventis shareholding corresponds to approximately 2.8% of Rhodias voting rights, following a decision by Rhodia, and contested by sanofi-aventis, to deny sanofi-aventis the right to vote a part of the Rhodia shares acquired through the merger with Aventis. Rhodias decision was based on its interpretation of French rules concerning declarations of ownership of listed companies, and is being challenged by sanofi-aventis before the Commercial Court of Paris.
As a condition for the U.S. and EU antitrust approvals of the business combination that created Aventis in 1999, a deadline of April 2004 had been set for Aventis to reduce its 25.2% stake in Rhodia to below 5%. In May 2003, Aventis sold 9.9% of Rhodias share capital to Credit Lyonnais, reducing its stake to 15.3% (27.5 million shares). Subsequent to this sale, Aventis considered Rhodia a marketable investment and no longer accounted for it using the equity method. On January 30, 2004, the European Commission agreed to replace a commitment obliging Aventis to sell its stake in Rhodia with a commitment to divest its 49% stake in Wacker Chemie. This divestment took place on August 8, 2005. In April 2005, the U.S. Federal Trade Commission waived its separate deadline for disposal of the Groups stake in Rhodia.
As a result of an agreement with the Wacker family in August 2005, the Groups entire remaining interest in Wacker-Chemie GmbH has been sold to a company affiliated with the Wacker family, which now controls 100% of Wacker-Chemie GmbH. Prior to this agreement, sanofi-aventis held an indirect interest of 49% in Wacker Chemie through the sanofi-aventis subsidary Hoechst AG.
We own a 39% equity interest in Financière des Laboratoires de Cosmétologie Yves Rocher.
C. Organizational Structure
Sanofi-aventis is the holding company of a consolidated group of subsidiaries. The table below sets forth our significant subsidiaries and affiliates as of December 31, 2005. For a complete list of our main consolidated subsidiaries, see Note E to our consolidated financial statements, included in this annual report at Item 18.
Sanofi-aventis and its subsidiaries form a Group, organized around two business segments: pharmaceutical products and human vaccines.
The sanofi-aventis holding company directly holds the shares of a significant portion of its subsidiaries as well as part of the Groups intellectual property rights. Within the Group, the holding company oversees research and development activities, by defining strategic priorities, coordinating work, and in many cases taking out the industrial property under its own name and at its own expense. In order to fulfill this role, sanofi-aventis subcontracts research and development to its specialized subsidiaries, in many cases licensing its patents, manufacturing know-how and trademarks to Group subsidiaries. In these cases, the licensee subsidiaries manufacture and distribute the Groups products, either directly or via local distribution entities.
In several countries, the sanofi-aventis Group carries out part of its business operations through ventures with local partners. In addition, the Group has signed worldwide accords by which two of its products (Plavix® and Aprovel®) are marketed through an alliance with BMS (see Alliances, above).
For most Group subsidiaries, sanofi-aventis provides financing and centrally manages their cash surpluses. Under the alliance arrangement with BMS, cash surpluses and cash needs arising within alliance entities give rise to symmetric monthly transfers between the two Groups. The Company also operates a centralized foreign exchange risk management system, which enters into positions to manage the operational risks of its main subsidiaries.
D. Property, Plant and Equipment
Our worldwide headquarters and principal executive offices are located in Paris, France. Our U.S. headquarters are located in Bridgewater, New Jersey. We operate our business through a number of offices, research facilities and production sites throughout the world. We present our principal sites below by use. All areas are presented in thousands of square meters and are non-audited.
For our pharmaceutical activity, we own and lease space around the world for sales and marketing, administrative support and customer service functions.
Our Scientific and Medical Affairs are organized across 12 sites located in France and 13 sites located in the rest of Europe, North America and Japan. These sites are either owned or leased. The list of our principal sites is as follows:
We have a total of 75 sites around the world under the responsibility of our Industrial Affairs division in which we carry out chemical manufacturing, pharmaceutical manufacturing or both. Our principal manufacturing sites are listed below.
Legend: (P) Pharmaceutical Manufacturing, (C) Chemical Manufacturing
For our distribution, we either operate from some of our industrial or R&D sites or from independent sites that we either own or lease. Our major distribution centers located on independent sites are as follows:
The headquarters of our human vaccines subsidiary sanofi pasteur are located in Lyon, France. Sanofi pasteur has a industrial sites located in North America and Europe, as well as in emerging markets: China, Thailand and Argentina. The location and size of our main manufacturing facilities for human vaccines are as follows:
We both own and lease our facilities. We have entered into material leasing agreements with respect to real estate properties located in France in Paris, Amilly, Gentilly, Chilly-Mazarin and Bagneux. Under our leases, our real estate properties include buildings constructed pursuant to the operating lease agreements, under which we pay periodic rent and have a purchase option exercisable at expiration. We are responsible for all repairs, taxes and other costs during the term of the lease. These leases are classified as debt in our consolidated balance sheet.
The overall net book value of our property, plant and equipment was 6,184 million as of December 31, 2005. In 2005, we spent 1,018 million primarily to increase capacity and improve productivity at our various manufacturing and R&D sites. We believe that our production plants and research facilities are in full compliance, well maintained and generally adequate to meet our needs for the foreseeable future. However, we conduct on a regular basis reviews of our production plants with regard to environment, health and safety issues, quality compliance and capacity utilization. Based on this review, we record, if necessary, impairment losses for the modernization, divestment or closing of specific production plants. We are not aware of any environmental issues that we believe could have a significant effect on the utilization of our industrial assets. For more information on our Property, Plant and Equipment, see Note D.3 to our consolidated financial statements included in Item 18 of this annual report.
The Groups principal capital expenditures underway for 2006 include a new vaccine production facility in the United States and a vaccine formulation and filling facility in France (See Human Vaccines Activity Main Areas Influenza, above). We anticipate that the Groups internally generated cash and the unused portion of existing credit facilities will be sufficient to finance these investments.
Item 5. Operating and Financial Review and Prospects
You should read the following discussion in conjunction with our consolidated financial statements and the notes thereto included in this annual report at Item 18. Our consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS).
The U.S. Securities and Exchange Commission (SEC) has adopted an accommodation permitting eligible foreign private issuers for their first year of reporting under IFRS to file two years rather than three years of statements of income, changes in shareholders equity and cash flows prepared in accordance with IFRS. The financial year 2005 is sanofi-aventis first year of reporting under IFRS as published by the International Accounting Standards Board (IASB), and this annual report on Form 20-F has been prepared in reliance on the SEC accommodation. As a result, the operating and financial review that follows covers the financial year 2005 and the comparable financial year 2004.
IFRS differ in certain significant respects from U.S. GAAP. Note G to our consolidated financial statements provides a description of the principal differences between IFRS and U.S. GAAP for 2004 and 2005, as they relate to our company, and reconciles our shareholders equity and net income to U.S. GAAP as of and for each of the years ended, December 31, 2004 and 2005.
Unless otherwise indicated, the following discussion relates to our IFRS financial information.
The following discussion contains forward-looking statements that involve inherent risks and uncertainties. Actual results may differ materially from those contained in such forward-looking statements. See Cautionary Statement Regarding Forward-Looking Statements at the beginning of this document.
The period from 2004 to 2005 has been one of substantial growth for our Company, including external growth resulting from our acquisition of Aventis in August 2004. As a result of the acquisition and growth in our business, our consolidated net sales almost doubled in 2005, increasing from 14,871 million in 2004 to 27,311 million in 2005. Aventis was only included in our scope of consolidation beginning on August 20, 2004. Our pro forma net sales in 2004, determined in accordance with the principles described below, amounted to 25,199 million in 2004 on a reported basis and to 24,984 million on a comparable basis (adjusting for exchange rate and scope of consolidation differences as described below in Presentation of Net Sales).
We also recorded substantial growth in sales of our principal products in 2005. Sales of our top 15 products in our pharmaceuticals activity increased by 13.6% (14.0% on a comparable basis) in 2005 over pro forma 2004. Our human vaccines activity as a whole has experienced significant growth, rising 27.0% (26.9% on a comparable basis) in 2005 over the prior year pro forma figure.
Our operating profit and net income were affected in 2005 and 2004 by the accounting treatment of the Aventis acquisition, which led to our recording the inventory of Aventis at fair value rather than historical cost, leaving us with significantly reduced margins when we sold its inventory. Because of the effect of this item (which amounted to 342 million in after tax charges in 2004 and 248 million in 2005) as well as the amortization and impairment of acquired intangible assets (which amounted to 795 million in after tax charges in 2004 and to 3,156 million in after tax charges in 2005) and restructuring charges arising from the acquisition, we recorded an operating profit of 2,426 million and a net profit of 1,986 million in 2004, and an operating profit of 2,888 million and a net profit of 2,258 million in 2005. Without the effect of these charges, our adjusted net income amounted to 3,527 million in 2004 and 6,335 million in 2005. Adjusted net income is an unaudited non-GAAP financial measure which our management uses to monitor our operational performance, and which is defined at Sources of Revenues and Expenses Adjusted Net Income, below.
Our operations generate significant cash flow. We recorded 4,049 million of net cash flow from operating activities in 2004 (including the net cash flow from the operating activities of Aventis beginning August 20, 2004) and 6,398 million in 2005. Prior to the acquisition, we typically maintained cash and cash equivalents in amounts that exceeded our debt. We incurred significant debt to finance the acquisition. We have reimbursed a
portion of this debt, and refinanced the remainder. As of December 31, 2005, our consolidated net debt (meaning the sum of short-term debt and long-term debt less cash and cash equivalents and short-term investments) amounted to 9.9 billion.
Impact of Our Acquisition of Aventis in 2004
Our results of operations and financial condition for the year ended December 31, 2004 and for the year ended December 31, 2005 have been significantly affected by our August 2004 acquisition of Aventis and certain subsequent transactions (including the merger of Aventis with and into our Company in December 2004). The principal impacts of these transactions on our 2004 and 2005 consolidated financial statements and their comparability are the following:
We have prepared an unaudited pro forma statement of income for 2004 that presents our results of operations as if the acquisition had taken place on January 1, 2004. For a detailed description of the principles used to establish the 2004 pro forma financial statements, see Note D.1.3 to the consolidated financial statements included at Item 18 of this annual report.
The unaudited 2004 pro forma financial data are presented for illustrative purposes only and are not necessarily indicative of the operating results or financial condition of the combined entities that would have been achieved had the transactions been consummated on the dates used as the basis for the preparation of the pro forma financial data. They are not necessarily indicative of the future results or financial condition of sanofi-aventis. Nonetheless, because the unaudited 2004 pro forma income statements provide information that we believe is useful in analyzing trends in our business, we have discussed our 2004 pro forma results of operations, as well as our historical results of operations, in the comparisons of the years 2004 and 2005 below.
2005 is presented as reported. In our discussion below (see Year Ended December 31, 2005 Compared with Pro Forma Year Ended December 31, 2004 (Unaudited)), we identify the 2005 line items affected by our accounting for Aventis inventory at fair value rather than at cost and specify the magnitude of this effect. Because we compare 2005 reported results to 2004 pro forma results which do not use fair value accounting for this inventory, we believe it is useful for investors to be aware of this accounting effect. For a detailed description of the effect of accounting for Aventis inventory at fair value, see Note D.1.3 to the consolidated financial statements included at Item 18 of this annual report.
The following table presents our net sales, operating income - current, operating income and net income in 2004 and 2005, on a consolidated basis. In addition, 2004 data are presented on a pro forma basis:
As discussed above, the accounting treatment of the acquisition had a significant impact on our consolidated income statement in 2004 and 2005. In addition to the impact of the allocation of a portion of the purchase price to inventory at fair value, the acquisition gave rise to significant amortization charges for acquired intangible assets. Similar effects were recorded in respect of companies accounted for by the equity method. In addition, we recorded significant restructuring charges as a result of the acquisition.
In order to isolate the impact of these items, we use as an evaluation tool a non-GAAP financial measure that we refer to as Adjusted Net Income. For a further discussion and definition of Adjusted Net Income, see Sources of Revenues and Expenses Adjusted Net Income, below.
We have calculated our adjusted consolidated net income for 2004 and 2005. We have also calculated adjusted pro forma net income for 2004 based on the same principles but starting with our unaudited pro forma net income. The following table shows our adjusted consolidated net income for 2004 and 2005 and our adjusted pro forma net income for 2004, in each case including a reconciliation to consolidated net income or pro forma net income, as the case may be.
Sources of Revenues and Expenses
Revenue. Revenue arising from the sale of goods is presented in the income statement under Net sales. Net sales comprise revenue from sales of pharmaceutical products, vaccines, and active ingredients, net of sales returns, of customer incentives and discounts, and of certain sales-based payments paid or payable to the healthcare authorities. The discounts, incentives and rebates described above are recognized in the period in which the underlying sales are recognized as a reduction of sales revenue. The same applies to sales returns. See Note B.14 to the consolidated financial statements included at Item 18 of this annual report. We sell pharmaceutical products and human vaccines directly, through alliances, and through licensees throughout the world. When we sell products directly, we record sales revenues as part of our consolidated net sales. When we sell products through alliances, the revenues reflected in our consolidated financial statements are based on the overall level of sales of the products and on the arrangements governing those alliances. For more information about our alliances, see Financial Presentation of Alliances, below. When we sell products through licensees, we receive royalty income that we record in Other revenues.
Cost of Sales. Our cost of sales consists primarily of the cost of purchasing active ingredients and raw materials, labor and other costs relating to our manufacturing activities, packaging materials, payments made under licensing agreements, and distribution costs.
Our cost of sales also includes our royalties paid relating to license agreements for products. We have license agreements under which we distribute products that are patented by other companies and license agreements under which other companies distribute products that we have patented. When we pay royalties, we record them in cost of sales, and when we receive royalties, we record them in Other revenues as discussed above.
Adjusted Net Income. We believe that investors understanding of our operational performance following the combination of Sanofi-Synthélabo and Aventis is enhanced by disclosing our adjusted net income.
We define adjusted net income, an unaudited non-GAAP financial measure, as net income determined under IFRS, adjusted to exclude the material impacts of purchase accounting for the Aventis acquisition and certain acquisition-related integration and restructuring costs. We view adjusted net income as an operating performance measure and believe that the most directly comparable IFRS measure is net income.
Adjusted net income excludes the effects of purchase-accounting treatment under IFRS related to our acquisition of Aventis. We believe that excluding these non-cash charges will enhance an investors understanding of our underlying economic performance after the combination with Aventis because we do not consider that the excluded charges reflect the combined entitys ongoing operating performance. Rather, we consider that each of the excluded charges reflects the decision, in 2004, to acquire the businesses of Aventis.
The purchase-accounting effects on net income primarily relate to:
We believe (subject to the material limitations discussed below) that disclosing adjusted net income also enhances the comparability of our ongoing operating performance. The elimination of the non-recurring items, such as the increase in cost of sales arising from the workdown of inventories remeasured at fair value, improves comparability between one period and the next. Lastly, we believe that the elimination of charges related to the amortization of Aventis definite-lived intangible assets also enhances the comparability of our ongoing operating performance relative to our peers in the pharmaceutical industry that carry these intangible assets (principally patents and trademarks) at low book values either because they are the result of in-house research and development that has already been expensed in prior periods or because they were acquired through business combinations that were accounted as poolings-of-interest.
As a result of the acquisition, we have incurred significant integration and restructuring costs. We believe it is appropriate to exclude these costs from adjusted net income because these integration and restructuring costs are directly and only incurred in connection with the acquisition of Aventis. As of year-end 2005 the Company has incurred the greater part of the expected integration and restructuring costs related to the acquisition of Aventis and subsequent merger.
Our management uses and intends to use adjusted net income to manage and to evaluate our performance and we believe it is appropriate to disclose this non-GAAP financial measure, as a supplement to our IFRS reporting, to assist investors with their analysis of the factors and trends affecting our business performance. We also report adjusted net income as a subtotal in reporting our segment information in accordance with SFAS 131 criteria. See Note D.35 to the consolidated financial statements included in Item 18 of this annual report. Our management also uses the measure as a component in setting incentive compensation targets, because it better measures the underlying operational performance of the business and excludes charges over which managers have no control. Our management also uses adjusted net income as the basis for determining dividend policy for the enlarged Group, by analyzing dividends paid as a ratio of non-GAAP adjusted net income, which management believes provides a consistent basis for comparison across periods. Accordingly, management believes that an investors understanding of the evolution of our dividend policy is enhanced by disclosing non-GAAP adjusted net income.
We have also decided to report adjusted earnings per share (EPS). Adjusted earnings per share is a specific financial indicator, which we define as adjusted net income divided by the weighted average number of shares outstanding. Our management also intends to give earnings guidance based on adjusted earnings per share.
We remind investors, however, that non-GAAP adjusted net income should not be considered in isolation from, or as a substitute for, net income reported in accordance with IFRS. In addition, we strongly encourage investors and potential investors not to rely on any single financial measure but to review our financial statements, including the notes thereto, and our other publicly filed reports, carefully and in their entirety.
There are material limitations associated with the use of non-GAAP adjusted net income as compared to the use of IFRS net income in evaluating our performance, as described below:
We compensate for the above-described material limitations by using non-GAAP adjusted net income only to supplement our IFRS financial reporting (and any reconciliation of IFRS results to U.S. GAAP that we are required to make under the rules of the SEC) and by ensuring that our disclosures provide sufficient information for a full understanding of all adjustments included in non-GAAP adjusted net income. In addition, subject to applicable law, we may in the future decide to report additional non-GAAP financial measures which, in combination with non-GAAP adjusted net income, may compensate further for some of the material limitations described above.
In determining the level of future dividend payments, and in analyzing dividend policy on the basis of non-GAAP adjusted net income, our management intends to take into account the fact that a significant portion (approximately 10.5 billion) of the purchase price we paid for Aventis (including the purchase price allocated to identifiable intangible assets and goodwill) has been financed with borrowed funds and that this borrowed money will have to be repaid in cash in the medium term. See Consolidated Balance Sheet and Debt, below. Further, our management intends to take into account the fact that the adjustments reflected in non-GAAP adjusted net income have no effect on the underlying amount of cash available to pay dividends, and that although the adjustments relating to the elimination of the effect of the purchase accounting treatment of the Aventis acquisition represent non-cash charges, the adjustments relating to integration and restructuring costs represent significant cash charges in the periods immediately following the closing of the acquisition.
This Item 5 contains discussion and analysis of adjusted net income on the basis of both consolidated and pro forma financial data. Because our non-GAAP adjusted net income is not a standardized measure, it may not be comparable with the non-GAAP financial measures of other companies having the same or a similar name.
Presentation of Net Sales
In the discussion below, we present our consolidated net sales for 2005, and both our consolidated net sales and pro forma net sales for 2004. We break down our net sales among various categories, such as by activity, product and geographical area. We refer to our consolidated and pro forma sales as reported sales.
In addition to reported sales, we also present and discuss two other unaudited non-GAAP indicators that we believe are useful measurement tools to explain changes in our reported net sales:
A reconciliation of our reported net sales to our comparable net sales is provided at Reconciliation of 2004 Consolidated Net Sales to 2004 Pro Forma Net Sales, below,
A reconciliation of our developed sales to our consolidated net sales is provided at Developed Sales, below.
Financial Presentation of Alliances
We have entered into a number of alliances for the development, co-promotion and/or co-marketing of our products. We believe that a presentation of our two principal alliances is useful to an understanding of our financial statements.
Our revenues, expenses and operating profits are affected significantly by the presentation of our alliance with BMS in our consolidated financial statements.
The two products that are subject to the BMS alliance, Aprovel® and Plavix®, accounted for an aggregate of 2,448 million of consolidated net sales in 2004 and 2,918 million of consolidated net sales in 2005. Total developed sales of the two products amounted to an aggregate of 5,480 million in 2004 (on a comparable basis) and 6,298 million in 2005.
The proportion of developed sales of these products represented by our consolidated revenues from these products varies from year to year because differences in the marketing arrangements for these products from country to country affect the presentation of sales of these products. There are three principal marketing arrangements that are used:
The alliance arrangements include two royalty streams that are applied on a worldwide basis (excluding Japan), regardless of the marketing system and regardless of which company has majority ownership and operational management:
In 2005, we received an aggregate of 793 million in royalties under the alliance arrangements, and we paid BMS an aggregate of 77 million in royalties under the alliance arrangements (compared to 650 million and 63 million, respectively, in 2004).
Under the alliance arrangements, there are two territories, one under our operational management and the other under the operational management of BMS. The territory under our operational management consists of Europe and most of Africa and Asia, while the territory under the operational management of BMS consists of the rest of the world. Our alliance with BMS does not cover Plavix® in Japan. In Japan, Aprovel® is under development through agreements between BMS and the Japanese pharmaceutical company Shionogi Pharmaceuticals.
Territory under our operational management. In the territory under our operational management, the marketing arrangements are as follows:
Territory under BMS operational management. In the territory under BMS operational management, the marketing arrangements are as follows:
In countries where the products are marketed by BMS on a co-marketing basis, or through alliances under the operational management of BMS, we also earn revenues from the sale of the active ingredients for the products, which we record as net sales in our consolidated statement of income.
The other principal alliance with a significant effect on our revenues, expenses and operating profits is our alliance with P&G relating to the product Actonel® (risedronate sodium). Actonel®, a new-generation biphosphonate indicated for the treatment and prevention of osteoporosis, is developed and marketed in collaboration with P&G under an agreement signed in April 1997 and amended on October 8, 2004. This agreement covers the worldwide development and marketing of the product, except for Japan.
Under the Actonel® alliance, local marketing arrangements may take various forms:
Impact of Exchange Rates
We report our consolidated financial statements in euros. Because we earn a significant portion of our revenues in countries where the euro is not the local currency, our results of operations can be significantly affected by exchange rate movements between the euro and other currencies, primarily the U.S. dollar and the Japanese yen and, to a lesser extent, the British pound and currencies in emerging countries. We experience these effects even though certain of these countries do not account for a large portion of our net sales. In 2005, we earned 35.0% of our net sales in the United States. A decrease in