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Sanofi-Aventis SA 20-F 2007 Table of ContentsUNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 20-F (Mark One)
OR
For the fiscal year ended December 31, 2006 OR
OR
Date of event requiring this shell company report . . . . . . . . . . . . . . . . . . . . For the transition period from to Commission File Number: 001-31368 Sanofi-Aventis (Exact name of registrant as specified in its charter) N/A (Translation of registrant’s name into English) France (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 issuer’s classes of capital or common stock as of December 31, 2006 was: ordinary shares: 1,359,434,683 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.
Table of ContentsPRESENTATION 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, 2006 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 F 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 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:
The data relative to market shares and ranking information presented in “Item 4. Information on the Company — B. Business Overview — Markets — Competition” is based on sales data from IMS Health MIDAS (IMS) and GERS (for France), retail and hospital, for calendar year 2006, in constant euros (unless otherwise indicated).
While we believe that 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). In particular, 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 allow a reconciliation with our basis of consolidation as defined in “Item 5. Operating and Financial Review and Prospects — Presentation of Net Sales,” IMS data shown in the present document have been adjusted and include:
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Product indications described in this report are composite summaries of the major indications approved in the product’s principal markets. Not all indications are necessarily available in each of the markets in which the products are approved. The summaries presented herein for the purpose of financial reporting do not substitute for careful consideration of the full labeling approved in each market.
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.
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Item 1. Identity of Directors, Senior Management and Advisers
N/A
Item 2. Offer Statistics and Expected Timetable
N/A
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, 2006, 2005 and 2004 are included in Item 18 of this annual report.
The consolidated financial statements of sanofi-aventis for the years ended December 31, 2006 and 2005 have been prepared in compliance with IFRS adopted by the European Union and with the IFRS issued by the International Accounting Standards Board (IASB). 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) Interpretations issued by the IASB. The opening balance sheet as of the IFRS 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 is set forth in Note F to the sanofi-aventis audited consolidated financial statements included in this annual report.
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Table of ContentsSELECTED 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.
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Table of ContentsEXCHANGE RATE INFORMATION
Exchange Rates
The following table sets forth, for the periods and dates indicated, certain information concerning the exchange rates for the euro from 2002 through March 2007 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 30, 2007 the Noon Buying Rate was 1.3374 per euro.
B. Capitalization and Indebtedness
N/A
C. Reasons for Offer and Use of Proceeds
N/A
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.
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Table of ContentsRisks Relating to Our Company
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 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, 2006, our debt, net of cash and cash equivalents was €5.8 billion. We make significant debt service payments to our lenders and our current debt level could limit our ability to engage in additional transactions or incur additional indebtedness. For more information on our debt, 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 world’s largest pharmaceuticals market. We have identified the United States, which accounted for approximately 35.1% of our net sales in 2006, 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 a strong position 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 market some of our products in collaboration with other pharmaceutical companies. For example, we currently have major collaborative arrangements with Bristol-Myers Squibb (BMS) for the marketing of Plavix® and Aprovel® in the United States and several other countries, with Procter & Gamble Pharmaceuticals for the osteoporosis treatment Actonel®, with Teva for Copaxone®, and with Merck & Co., Inc. for the distribution of vaccines in Europe. We also have alliances with several Japanese companies for the marketing of some of our products in Japan. See “Item 4. Information on the Company — B. Business Overview — Markets — Marketing and Distribution.” When we market 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 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.
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Table of ContentsThe 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. Additionally, specific conditions must be respected both by the Group and its customers for the storage and distribution of many of our products, e.g., cold storage for certain vaccines. The complexity of these processes as well as strict company and government standards for the manufacture of our products subject us to risks. The occurrence or suspected occurrence of out-of-specification production or storage can lead to lost inventories, and in some cases product recalls, with consequential reputational damage and the risk of product liability (See “— Risks Relating to Our Industry — 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 — B. 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® are 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 medical devices, this could 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 claim 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,
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Table of Contentsthose entities might claim 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 — B. Business Overview — Patents, Intellectual Property and Other Rights” for more information about our patents and licenses.
Claims and investigations relating to marketing practices and competition law could adversely affect our business, results of operations and financial condition.
The marketing of our products is heavily regulated, and alleged failures 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, for example, class action lawsuits and qui tam litigation. See Note D.22.c) to our consolidated financial statements included at Item 18 of this annual report.
Following judgments holding the U.S. patent protection of Lovenox® and of DDAVP® tablets 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. Similar claims have followed an attempt to settle our U.S. Plavix® patent litigation. The proposed settlement of the U.S. Plavix® patent litigation against Apotex by the parties thereto is also the subject of a criminal investigation by the Antitrust Division of the U.S. Department of Justice, of which the outcome and impact on sanofi-aventis cannot reasonably be assessed at this time. See “Item 8. Financial Information — A. Consolidated Financial Statements and other Financial Information — Information on Legal or Arbitration Proceedings” and Note D.22.c) to our consolidated financial statements included at Item 18 of this annual report.
Because many of these cases allege substantial unquantified damages, may be subject to treble damages, and frequently seek significant punitive damages and penalties, it is possible that any final determination of liability or settlement of these claims or investigations 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 2006, approximately 35.1% 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 and maintain 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 2006, we spent €4,430 million on
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Table of Contentsresearch and development, amounting to approximately 15.6 % 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 have an acceptable benefit/risk profile for human use in the proposed indications. 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 2007, we had 125 compounds in pre-clinical and clinical development in our targeted therapeutic areas, of which 58 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 — B. Business Overview — Research & 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 in each country, 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 hold a broad portfolio of 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 product’s sales volume and revenues.
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Table of ContentsObtaining 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 office’s 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 court’s determination that our patent rights are valid, enforceable and infringed, there can be no assurance that we will (i) be successful in obtaining a preliminary injunction to halt further sales and remove the infringing product from the market prior to obtaining a final injunction at trial, and even if we are successful, (ii) be able to obtain an award of sufficient damages from the competitor to repair all harm caused to us and (iii) effectively collect this award. By way of example, following the Group’s failure to obtain a preliminary injunction halting the launch at risk of a generic version of Allegra® in October 2005, the Allegra® franchise in the United States has been substantially eroded and the asserted patent claims have still not gone to trial. While we were successful in obtaining a preliminary injunction halting further sales of a generic Plavix® in August 2006, the significant quantities of generic product already distributed prior to the injunction have had a significant negative effect on 2006 earnings and caused us substantial and persistent commercial harm.
Our patent rights are material to our business, and if we were unsuccessful in asserting them or they were deemed invalid, any resulting introduction of generic versions of our products in the United States, in Europe or in other markets would reduce the price that we receive for these products 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. Additionally, a number of our products acquired through business combinations have substantial balance sheet carrying values, as disclosed at Note D.4 to our consolidated financial statements, which could be substantially impaired by the introduction of a generic competitor, with adverse effects on our financial results and assets.
Significant challenges to our proprietary rights concern such leading Group products as Plavix®, Lovenox®, Eloxatine® and Allegra®. We are also involved in litigation challenging the validity or enforceability of patents related to a number of other products in the United States, the European Union and elsewhere, 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 — A. 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.
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Table of ContentsProduct liability claims could adversely affect our business, results of operations and financial condition.
Product liability is a significant commercial risk for us, and has 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. Not all possible side effects of a drug can be anticipated based on preapproval clinical studies involving only several hundred to several thousand patients. Routine review and analysis of the continually growing body of post-marketing safety surveillance and clinical trials provide additional information — for example potential evidence of rare, population-specific or long-term adverse reactions or of drug interactions that were not observed in preapproval clinical studies — and may cause product labeling to evolve. Several pharmaceutical companies have recently recalled or withdrawn products from the market based on actual or suspected adverse reactions to their products, 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 — A. Consolidated Financial Statements and Other 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, available insurance may not be sufficient to cover all potential liabilities. Further, we face a general trend in the insurance industry to reduce product liability coverage, by excluding products or by imposing 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.
Counterfeit products could harm the business of sanofi-aventis.
The prescription drug supply has been increasingly challenged by vulnerability of distribution channels to illegal counterfeiting and the presence of counterfeit products in a growing number of markets and over the internet. Counterfeit products are frequently unsafe or ineffective, and can be potentially life-threatening. To distributors and users counterfeits may be visually indistinguishable from the authentic version. Reports of adverse reactions to counterfeit drugs or increased levels of counterfeiting could materially affect patient confidence in the authentic product, and could harm the business of companies such as sanofi-aventis. Additionally, it is possible that adverse events caused by unsafe counterfeit products will mistakenly be attributed to the authentic product, entailing substantial reputational and financial harm to the manufacturer of the authentic product.
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:
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Price pressure is considerable in our two largest markets, Europe and the United States, which represented approximately 43.1% and 35.1%, respectively, of our net sales in 2006. Pricing in the German market posed significant challenges for the Group in 2006, including a decision to classify Acomplia® as a non-reimbursed quality-of-life drug; substantial restrictions on the reimbursement of fast-acting analog insulin; and the announcement that the government was evaluating restrictions on additional products. Changes in the pricing environments in the United States or European markets could have a significant impact on our sales and results of operations. See “Item 4. Information on the Company — B. Business Overview — Markets — 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 — B. 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:
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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 — B. 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 have disputes outstanding, for example, with Albemarle and Rhodia over environmental remediation at several sites no longer owned by the Group. An adverse outcome in such disputes 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.
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Table of ContentsOur two largest shareholders own a significant percentage of the share capital and voting rights of sanofi-aventis.
At December 31, 2006, Total and L’Oréal, our two largest shareholders, held approximately 13.1% and 10.5% of our issued share capital, respectively, accounting for approximately 19.3% and approximately 17.3%, respectively, of the voting rights (excluding treasury shares) of sanofi-aventis. See “Item 7. Major Shareholders and Related Party Transactions — A. Major Shareholders.”
To the extent these shareholders continue to hold a large percentage of our share capital and voting rights, Total and L’Oréal 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 L’Oréal 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.
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Table of ContentsItem 4. Information on the Company
Introduction
We are a global pharmaceutical group engaged in the research, development, manufacture and marketing of healthcare products. In 2006, our net sales amounted to €28,373 million. Based on 2006 sales, we are the fourth largest pharmaceutical group in the world and the largest pharmaceutical group in Europe (source: IMS/GERS consolidated sales year end 2006; 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 and human vaccines (Vaccines).
In our pharmaceutical activity, which generated net sales of €25,840 million in 2006, we specialize in six therapeutic areas:
Our top fifteen products in terms of net sales generated in 2006 are Lovenox®, Plavix®, Stilnox®, Taxotere®, Eloxatine®, Lantus®, Copaxone®, Aprovel®, Tritace®, Allegra®, Amaryl®, Xatral®, Actonel®, Depakine® and Nasacort® which together accounted for 66.9% of our 2006 net sales for the pharmaceutical activity, or €17,289 million.
We are a major player in the vaccines industry, with net sales of €2,533 million in 2006; and with leading vaccines in five areas:
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In 2006, our Vaccines activity was favorably impacted by the success of three products launched in 2005 in the United States (Decavac®, Menactra® and Adacel®) and by a favorable influenza season.
We have a strong commitment to research and development. We have 29 research centers and over 19,000 employees (including Vaccines, Industrial Development and Medical/Regulatory staff in subsidiaries) devoted to research and development.
In the description below, the following should be kept in mind:
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. subsidiary’s office is located at 55 Corporate Drive, Bridgewater, NJ 908.981.5000.
We are present in more than 100 countries on five continents with around 100,000 employees worldwide at year end 2006. Sanofi-Synthélabo and Aventis, our legacy companies, bring to the Group more than a century of experience in the pharmaceutical industry.
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. Its first significant venture into the United States market was the acquisition of the prescription pharmaceuticals business of Sterling Winthrop — an affiliate of Eastman Kodak — in 1994, followed by the launch of its first major products: Aprovel® in 1997 and Plavix® in 1998.
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Table of ContentsSynthélabo 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 L’Oréal 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).
Sanofi and Synthélabo merged in 1999.
The formation of Aventis on December 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 the Société Chimique des Usines du Rhône, which was founded in 1895. The company’s 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.-based pharmaceuticals company Fisons in 1995. Rhône-Poulenc’s main therapeutic fields were thrombosis with Lovenox®, oncology with Taxotere® and respiratory diseases with Nasacort®, and vaccines.
Subsequent to a bid to acquire all of the shares of Aventis announced in April 2004, Sanofi-Synthélabo took control of Aventis in August 2004 and changed its registered name to “sanofi-aventis”. On December 31, 2004, Aventis merged with and into sanofi-aventis, with sanofi-aventis as the surviving company.
For a description of our main divestitures since 2004, see Note D.2 to our consolidated financial statements included in Item 18 of this annual report.
Mandatory Offers Subsequent to the Acquisition of Aventis
Hoechst
The outstanding shares of Hoechst AG not already indirectly acquired through the acquisition of Aventis were first tendered into a mandatory offer during 2004. The mandatory offer was then followed by a squeeze-out taking legal effect in July 2005.
Following the squeeze-out, a number of former minority shareholders 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 still ongoing. See Note D.2 to our consolidated financial statements included under Item 18 of this annual report.
Aventis Pharma Limited India
Following the acquisition of Aventis and in execution of its legal obligations under the Securities and Exchange Board of India takeover regulations, on August 11, 2004, sanofi-aventis announced an offer to acquire up to 4,606,125 equity shares of Aventis Pharma Limited India, for a cash offer price of Rupee 792.20 (€13.96) per equity share. As a result of this offer, which closed in August 2006, the Group’s total interest in Aventis Pharma Limited India is now 50.12% of that company’s share capital.
Strategy
As a leading player in the pharmaceutical industry (no.1 in Europe and no.4 in the world based on 2006 sales), sanofi-aventis continues to be dedicated to serving patients worldwide.
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Table of ContentsFocused on our core business — the discovery, development and marketing of innovative molecules and vaccines that drive medical progress and are effective to combat disease — we seek to ensure the development of our Group through our strategy of strong, sustainable and profitable growth. In addition, we continue to be actively engaged to making our drugs accessible to as many people as possible thanks to a well-adapted mix of products in terms of price and therapeutic indications.
In a tough, fast-changing business environment, we remain highly adaptive and responsive in pursuing our major objectives:
Principal Pharmaceutical Products
Within our pharmaceuticals business, we focus on six main therapeutic areas: thrombosis, cardiovascular, metabolic disorders, oncology, central nervous system and internal medicine.
Top 15 products
The following table sets forth the net sales of our top 15 pharmaceutical products for the year ended December 31, 2006.
The sections that follow provide additional information on the indications and market position of our top 15 products in their principal markets. The Group’s intellectual property relating to our top 15 products is material to our operations and is described at “ — Patents, Intellectual Property and Other Rights — Product Overview,” below. As disclosed in Note D.22.b) to our consolidated financial statements included at Item 18 of this annual report, we are involved in significant litigation concerning the patent protection of a number of our top 15 products including notably Lovenox® (the U.S. patent has been ruled unenforceable; we intend to appeal), Plavix®, Tritace®, Eloxatine®, Ambien CR™, Allegra®, Nasacort®, and Actonel®.
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Table of ContentsTop 15 products
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Table of ContentsThrombosis
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 and prevention of thrombosis are:
Lovenox®/Clexane®
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 185 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 benefits of Lovenox® as an effective treatment for deep vein thrombosis (DVT), and for significantly reducing the incidence of DVT in a wide range of patient populations, as well as for its effective treatment of acute coronary syndromes (ACS) when administered concomitantly with other treatments.
In the cardiovascular field, Lovenox® has proven good efficacy and safety in two recent international clinical trials:
In the major field of medical prophylaxis of venous thrombo-embolism (medical, as opposed to surgical), Lovenox® continues to grow and gain patient share from UFH in the United States. (Source: Solucient).
Two major trials with the aim of replacing UFH and expanding the Lovenox® medical prophylaxis indication have been or are going to be presented to the medical community:
In terms of medical practice registry, GRACE (Global Registry of Acute Coronary Events) continues and, as of today, has evaluated more than 50,000 patients with acute coronary syndromes around the world.
In the field of venous thrombosis prevention, ENDORSE will collect hospital medical practice data on a scale never reached so far, i.e. 67,000 patients in 358 hospitals, 32 countries and 5 continents. This registry will enroll medical and surgical patients at risk of venous thrombo-embolism (VTE) and determine the proportion of patients who receive effective types of VTE prophylaxis according to international guidelines.
Lovenox® is the leader in anti-thrombotics in the United States, Germany, France, Italy, Spain and the United Kingdom. (source: IMS/GERS sales full year 2006, all channels).
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Table of ContentsPlavix® / 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) for marketing authorization was approved in January 2006 and launch took place in May 2006. Sales of Plavix® in Japan are consolidated by sanofi-aventis and are outside the scope of our alliance with BMS.
Since 2002, Plavix® has also been indicated for the treatment of non ST segment elevation Acute Coronary Syndrome (ACS; non-Q-wave myocardial infarction and unstable angina) in combination with ASA following the very significant 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 Non ST segment elevation Acute Coronary Syndrome (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).
Also in the cardiology field, the results of the CLARITY and COMMIT clinical trials have led to the approval of a new indication in ST-segment elevation ACS (Q-wave myocardial infarction). This approval was granted by the FDA in August 2006 and by the EMEA in September 2006.
The CLARITY trial, which enrolled nearly 3,500 patients, demonstrated that Plavix®, added to standard therapy including fibrinolytics and ASA, reduced the odds of acute myocardial infarction patients having another occluded artery, a second heart attack or dying after one week of hospitalization, as well as the odds of clinical events such as cardiovascular death, recurrent myocardial infarction and certain recurrent ischemias at 30 days.
The COMMIT trial, which enrolled nearly 46,000 patients, demonstrated that Plavix®, added to standard therapy including ASA, reduced mortality in acute myocardial infarction patients at day 28 in an in-hospital setting.
The indications resulting from the results of the CURE, CLARITY and COMMIT trials make Plavix® a cornerstone therapy in management of ACS patients.
Other studies have also contributed to further explore the role of clopidogrel in various patients’ profiles (mostly atherothrombotic patients):
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The results of the CHARISMA trial were released at the 55th Annual Scientific Session of the American College of Cardiology in March 2006. The CHARISMA trial enrolled over 15,600 patients and aimed to demonstrate the clinical value of Plavix® on top of standard therapy including ASA in patients at high risk of future cardiovascular events. The study findings did not demonstrate an improvement of the risk/benefit ratio but significant differences by sub-group:
Other planned or ongoing clinical trials that are designed to support the long-term value of Plavix® by providing complementary clinical data include:
Since 2003, following an FDA written request for pediatric data, the development of a pediatric indication for Plavix® in the United States is ongoing. The dose ranging Phase II (PICOLO study) has helped determine the right dose to be studied in Phase III (CLARINET).
In addition to randomized controlled trials, one of the largest disease registries was initiated in 2003 to evaluate the real-life risk of patients with atherothrombosis. This registry, called REACH (Reduction of Atherothrombosis for Continued Health) includes 63,000 patients in more than 44 countries. The one-year results show a considerable rate of events, although in a population receiving the contemporary standard of care. This illustrates the high burden of atherothrombotic disease and the need to evolve pharmacological management more aggressively.
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 52 million patients worldwide are estimated to have been treated with Plavix® since its launch, providing significant evidence of real-life efficacy and safety experience with this product.
Plavix® sales in the United States have been negatively impacted by the launch of an at-risk generic of 75 mg clopidogrel bisulfate on August 8, 2006. See Note D.22.b, to our consolidated financial statements, included at Item 18.
Nevertheless Plavix® remains the leading product in the European and the U.S. markets for anti-platelet agents (source: IMS/GERS full year 2006 sales, all channels).
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Table of ContentsCardiovascular
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®/Avapro®/Karvea®
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 the product is licensed/sub-licensed to Shionogi and Dai-Nippon Sumitomo respectively. The application for marketing authorization for the treatment of hypertension was resubmitted at the end of 2006, after it was supplemented with additional studies at the request of the Japanese health authorities.
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 August 2006, the European Medicines Agency (EMEA) approved a new fixed dose combination of 300 mg CoAprovel® with 25 mg of HCTZ. This important introduction to the European market increases the efficacy spectrum of the brand on blood pressure reduction and can result in the achievement of blood pressure goals in over 80% of patients. As less than a third of treated hypertensive patients are currently at the blood pressure goal recommended by international guidelines, this new dosage raises the standard of blood pressure control that can be achieved with CoAprovel®.
The results of two further efficacy trials have been released in 2006, demonstrating the benefits of rapid blood pressure control with CoAprovel® as a first-line treatment in patients with severe and moderate hypertension. The data have been submitted to regulatory authorities in the United States and Europe for inclusion in the label.
To continue to demonstrate the protective effects of Aprovel® beyond the blood pressure lowering efficacy, several clinical trials are ongoing:
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Table of ContentsIn 2006, based on the total sales of Aprovel®/Avapro®/Karvea® and CoAprovel®/Avalide®/Karvezide®, we rank third in Europe and in the United States among the angiotensin II receptor antagonists in the hypertension market. (source: IMS/GERS full year 2006 sales, all channels, class C9C/C9G).
Tritace®/Triatec®/Delix®/Altace®
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 DREAM trial was published in the New England Journal of Medicine in September 2006. The results of DREAM showed the impact of Tritace® on glucose metabolism in individuals with impaired glucose tolerance (IGT) and / or impaired fasting glucose (IFG) with a significant positive effect of Tritace® in the regression of IGT and IFG towards normo-glycemia. DREAM is the first study to demonstrate prospectively that a cardiovascular drug such as Tritace® can have a positive effect on glucose metabolism and insulin resistance. The DREAM trial has demonstrated that Tritace® is a key treatment for hypertensive patients at risk of developing diabetes.
In 2006, Tritace® was the market leader in Canada, Spain and Italy. Tritace® continues to be a leader in Germany, with demand volumes still constant, despite the end of market exclusivity in Germany in January 2004. (source: IMS full year 2006 sales, All channels C9A/C9B).
In Canada, notwithstanding ongoing legal actions relating to a number of patents, the health authorities granted, effective December 12, 2006, a marketing authorization for ramipril generic (see “Item 8. Financial Information — A. Consolidated Financial Statements and other Financial Information — Information on Legal or Arbitration Proceedings” and Note D.22.b) to our consolidated financial statements included herein at Item 18) to a local manufacturer. Additionally, an authorized generic has been launched through a third party agreement.
The U.S. rights to Tritace® were sold to King Pharmaceuticals in 1998.
Metabolic Disorders
The prevalence of diabetes is expected to increase significantly over the next 20 years, as a direct result of sedentary life style, excessive weight and obesity, unhealthy diet and population ageing. Our principal products are Lantus®, an insulin analog and Amaryl®, a sulfonylurea. Sanofi-aventis is planning to strengthen its presence in metabolic disorders in particular with the launch of Acomplia®, a CB-1 receptor blocker critically involved in the regulation of body mass and body weight, lipid metabolism and insulin resistance.
Lantus®
Lantus® (insulin glargine) is a long-acting basal insulin analog which offers improved pharmacokinetic and pharmacodynamic profiles compared with Neutral Protamine Hagedorn (NPH) insulin. Lantus® is indicated for once-daily subcutaneous administration in the treatment of adult patients with type 2 diabetes mellitus (T2DM) 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 (T1DM). Lantus® is the first basal insulin with a peak-less, 24-hour 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 (low blood sugar level) than with NPH.
Studies demonstrate the safety and efficacy of simple Lantus® treatment algorithms that allow patient involvement and empowerment in the titration of the insulin dose and may offer patients with T2DM flexibility with respect to the choice of treatment regimen. In this context, a recent American Diabetes Association (ADA)/European Association for the Study of Diabetes (EASD) consensus statement for the Initiation and Adjustment of
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Table of ContentsTherapy emphasized the importance of achieving and maintaining near normal glycemic goals for T2DM with initial therapy with lifestyle intervention and metformin and early addition of insulin therapy in patients who do not meet target goals.
A number of controlled and randomized studies have investigated the efficacy and safety of Lantus® plus prandial (meal-time) insulins in T1DM. For instance, the Porcellati study evaluated the effects of Lantus® when tight insulin titration is applied. In this one-year study, patients treated with 4 times/day NPH and lispro were randomized to either continuation of this regimen or once daily Lantus® at dinner. A1C (HbA1c, glycosylated hemoglobin) did not change with NPH and decreased with Lantus® (from 7.1 to 6.7%).
A number of controlled and randomized studies have investigated the efficacy and safety of Lantus® plus oral anti-diabetic agents (OADs) in T2DM:
The ORIGIN trial is a large ongoing worldwide morbidity/mortality trial and will determine if Lantus®-mediated normoglycemia reduces cardiovascular events in high-risk dysglycemic patients. The recruitment of ORIGIN has been completed with a total of 12,612 subjects from 40 countries who are being followed for at least 4 years.
Following the approval of OptiClik® for use with Lantus® by the relevant authorities, this reusable pen was launched in the United States and Japan in 2005 and in the United Kingdom, Italy, Spain and Germany in 2006.
Similarly, the reusable pen, Autopen 24 (manufactured by Owen Mumford), has been launched in 32 markets since April 2006 for use with Lantus® and Apidra® (a rapid acting insulin).
In September 2006, the EMEA approved the new disposable insulin pen, SoloSTAR®, for Lantus® and Apidra® administration. SoloSTAR® will be launched in Europe during 2007. U.S. registration of this device is pending.
Overall, Lantus® has been launched in over 70 countries worldwide.
Lantus® has been the leading insulin brand worldwide since August 2005 with sales in value exceeding €1 billion and since August 2006 Lantus® has also become the leading insulin worldwide in units. The United States is the largest contributor of Lantus® sales, followed by Germany and France (source: IMS/GERS full year 2006 sales, all channels).
Amaryl®/Amarel®/Solosa®
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 body’s blood sugar level in two ways: by helping the body to
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Table of Contentsproduce 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: #1), France (rank: #2) and the United States (rank: #3) (source: IMS/GERS year end 2006 sales).
Acomplia®
Acomplia® (rimonabant) is the first in a new class of therapeutics called selective CB-1 receptor blockers which regulates energy balance and body weight, and improves glucose and lipid metabolism. Rimonabant is indicated in the treatment of obese or overweight patients with associated type 2 diabetes or dyslipidemia risk factors.
Throughout an extensive Phase III clinical trial (RIO program) it has been shown that treatment with Acomplia® results in reduction in weight and waist circumference (a key marker of abdominal obesity), together with improvements on HDL-C, TG and glycemic control in a broad range of patients with multiple cardio-metabolic risk factors. Approximately half of the improvements seen with Acomplia® on HDL-C, TG and HbA1C (a marker of glycemic control) is believed to arise directly from blockade of peripheral CB-1 receptors in metabolically active tissues such as the liver, adipose tissues and skeletal muscles.
To establish rimonabant’s efficacy in type 2 diabetes and ultimately demonstrate its role in the prevention of type 2 diabetes and cardiovascular disease, an ambitious life cycle management plan has been set up with 10 Phase IIIb clinical studies. The recent release of SERENADE, a 6-month, randomized, double-blind, placebo-controlled, parallel-group, fixed dose (20 mg once daily) study, further confirms the interest of Acomplia® in improving risk factors of type 2 diabetic patients by demonstrating that rimonabant, as a monotherapy, significantly improved glycemic control in type 2 diabetes patients, with clinically meaningful reductions in HbA1c, associated with robust weight loss, reduced waist circumference and improved lipid profile. The results of SERENADE were submitted to the United States and European regulatory authorities in early 2007.
In Japan, results of a 526-patient Phase IIb study demonstrated an impressive consistency in terms of benefits on weight and cardio-metabolic risk factor reduction as compared to the results of previous European and U.S. studies. Rimonabant demonstrated a good safety profile in this population. In addition, a clear reduction in visceral fat was observed in patients who underwent CT-scan. Phase III studies are currently in progress for two indications: diabetes and weight management. A submission in Japan is planned for 2009.
Acomplia® was been approved in Europe in June 2006 and has already been launched in Germany, the United Kingdom and some other European countries as well as in some countries of Latin America. It has been launched in France in the first quarter of 2007. The New Drug Application (NDA) is being reviewed by the FDA, which has set a user fee goal date of July 26, 2007.
Oncology
Sanofi-aventis is a leading group in the oncology field, primarily in chemotherapy, with two major agents: Taxotere® and Eloxatine®.
Taxotere®
Taxotere® (docetaxel), a drug in the taxoid class of chemotherapeutic agents, inhibits cancer cell division by essentially “freezing” the cell’s 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 first licensed in 1995 in Europe, for use in patients with locally advanced or metastatic breast cancer. The following year, it was granted approval in the United States, Canada and Japan. It is now available in more than 100 countries and, in the 10 years since its launch, Taxotere® has gained approval for use in ten indications in five different tumor types — breast, prostate, gastric, lung and head and neck.
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Table of ContentsTaxotere® is indicated for early stage and metastatic breast cancer, first-line and second-line non-small cell lung cancer (NSCLC), androgen-independent (hormone-refractory) metastatic prostate cancer, advanced gastric adenocarcinoma, including adenocarcinoma of the gastroesophageal junction and for the induction treatment of patients with inoperable locally advanced squamous cell carcinoma of the head and neck. The advanced gastric cancer and head and neck cancer approvals were granted by the FDA in the United States and EMEA in Europe in March and October 2006 respectively.
In breast cancer Taxotere® is now used in a variety of doses and schedules, as first-line and second-line treatment. It has demonstrated a survival benefit in five studies for four indications in this setting: as monotherapy, or in combination with doxorubicin, capecitabine or trastuzumab.
Important new data on Taxotere® were presented at the American Society of Clinical Oncology (ASCO) in 2006. The Tax 324 study is a Phase III trial of Taxotere®, Cisplatin and 5-Fluorouracil (TPF) versus Cisplatin and 5-Fluorouracil (PF) induction chemotherapy, followed by chemoradiotherapy in patients with locally advanced squamous cell carcinoma of the head and neck, which confirmed that Taxotere® based sequential therapy is associated with a significant improvement in survival in head and neck cancer.
Other data was supportive of the major therapeutic indications and especially in breast and non-small cell lung cancer. The BIG-0298 adjuvant breast cancer study provided important information about the best way to include Taxotere® in adjuvant chemotherapy for node positive breast cancer. The BCIRG007 study compared Taxotere® combined with trastuzumab “TH regimen” to Taxotere® combined with platinum salt and trastuzumab “TCH regimen” demonstrating that both regimens are effective therapies for the treatment of HER2-positive metastatic breast cancer and therefore that the “TH regimen” does not benefit from the addition of carboplatin. Finally, a large NSCLC meta-analysis confirmed Taxotere®’s superiority over another 3rd generation chemotherapeutic agent (vinorelbine) in both improved survival and lower toxicity.
The ARD6562 Phase II study of Taxotere® in the treatment of hormone refractory prostate cancer is ongoing in Japan. Results are expected in 2007 and sanofi-aventis plans to file for this indication in Japan in 2007.
The top four countries contributing to the sales of Taxotere® in 2006 were respectively the United States, France, Germany and Japan (based on 2006 net sales).
Eloxatine®
Eloxatine® (oxaliplatin) is an innovative platinum agent and currently the only one indicated both for the treatment of metastatic colorectal cancer and under development 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 2 years when Eloxatine® is used as a first-line treatment in combination with 5-fluorouracil (5-FU) and leucovorin (LV) (the FOLFOX regimen) and Avastin® (TREE2-study presented at ASCO 2006). 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® has 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. FOLFOX is now the standard treatment for stage III colon cancer patients who have undergone complete resection of the primary tumor.
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Table of ContentsA new liquid formulation (Eloxatine® Injection), approved by the FDA and EMEA in 2005, has now been launched in most countries. This new formulation offers additional safety benefits and convenience to pharmacists and nurses since it involves fewer steps in the reconstitution of Eloxatine®. In addition, sanofi-aventis also obtained European approval for a new 200 mg dosage, more adapted to central reconstitution chemotherapy units, in March 2006. This new dosage was launched in the United Kingdom and in Germany in 2006 and will be launched in most European countries in the course of 2007.
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).
Following the end of the Eloxatine® European regulatory data exclusivity in April 2006, a number of oxaliplatin (powder for solution for infusion) generics have received national marketing authorization. In particular, oxaliplatin generics have been approved in some major countries such as United Kingdom in September 2006 and Germany in October 2006. It is expected that all European countries will have one generic of oxaliplatin in 2007.
Central Nervous System
We have long-standing expertise in the Central Nervous System therapeutic area. Our principal products in this area are:
Stilnox®/Ambien®/Myslee®
Stilnox® (zolpidem) is the leading hypnotic worldwide 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, zolpidem CR (controlled release). Two three-week placebo-controlled studies conducted in sleep laboratories, ZOLADULT and ZOLELDERLY, assessed the efficacy and safety of Ambien CR™ (zolpidem CR) in the treatment of patients experiencing insomnia. The studies showed that Ambien CR™ improved sleep maintenance, sleep duration and the ability to fall asleep compared to a placebo. We launched Ambien CR™ in the United Sates in September 2005. 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 2006, the FDA granted a six-month pediatric exclusivity for all formulations (immediate release and controlled release) of Ambien®. The pediatric exclusivity extends the patent exclusivity of the immediate release formulation until April 2007 and extends by six months both the patent and marketing exclusivities for Ambien CR™. The fact that pediatric exclusivity has been granted by the FDA as such does not mean that the product has been approved for use in pediatric patients. For more information, please refer to “Patents, Intellectual Property and Other Rights”.
Stilnox® was first launched in 1988 in France and is marketed today in over 100 countries. In Japan, Stilnox® was launched in December 2000 and 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.
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Table of ContentsStilnox® is the leading hypnotic brand in its three largest markets: the United States, Japan (where sales are not consolidated by sanofi-aventis) and France (source: IMS/GERS full year 2006 sales — N05B1 including trazodone in the United States only).
Generics have been available in France since January 2004; in the United States, we expect zolpidem generics of the immediate release formulation to be available by the end of April 2007 when the U.S. exclusivity for Ambien® (but not Ambien CR™) expires.
Copaxone®
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 twelve years both in reducing relapses and progression of disability. A significant effect on lesions has also been confirmed by nuclear magnetic resonance imaging.
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 100,000 patients worldwide are treated with Copaxone®. The three leading countries for its use are the United States, Germany, and Canada (source: 2006 net sales).
Depakine®
Depakine® (sodium valproate) is a broad-spectrum anti-epileptic that has been prescribed for over 39 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. Depakine® is also registered throughout Europe in the treatment of manic episodes associated with bipolar disorder and in some countries in the prevention of mood episodes. Valproate is recommended as a first-line treatment in the treatment of acute mania associated with bipolar disorder by international guidelines such as the guidelines of the American Psychiatric Association, the United States Expert Consensus Guideline Series and the U.K. NICE Guidance.
We provide a wide range of formulations of Depakine® (syrup, oral solution, injection, enteric-coated tablets and Chrono, a sustained release formulation in tablets) permitting its adaptation to most types of patients. Depakine Chronosphere™, 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, then in France and Germany in 2005 and in the Netherlands, Finland, Switzerland and Poland in 2006. We plan to extend the marketing of 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.
Internal Medicine
Our main products in the internal medicine therapeutic area are in the fields of respiratory/allergy, urology and osteoporosis.
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Table of ContentsRespiratory/Allergy
Allegra®/Telfast®
Allegra® (fexofenadine HCl) is an effective, long-lasting (12- and 24-hour) non-sedating prescription antihistamine for the treatment of seasonal allergic rhinitis (hay fever) and for the treatment of uncomplicated skin manifestations of chronic idiopathic urticaria (hives). It offers patients significant relief from allergy symptoms without causing drowsiness.
We also market Allegra-D® 12 Hour and Allegra-D® 24 Hour, antihistamine/decongestant combination products with an extended-release decongestant for effective non-drowsy relief of seasonal allergy symptoms, including nasal congestion.
The top three markets for Allegra® are the United States, Japan and Australia (based on 2006 net sales).
In October 2006, the FDA approved the supplemental NDA for Allegra® Oral Suspension (6 mg/ml) for the treatment of seasonal allergic rhinitis symptoms in children aged 2-11 years and the treatment of the uncomplicated skin manifestations of chronic idiopathic urticaria. Commercial launch of this product in the United States will take place prior to the 2007 spring allergy season. A 30 mg orally disintegrating tablet for pediatric use is also being developed.
In September 2005, following the first launch at risk by Barr and Teva of a generic version of fexofenadine HCL 180 mg, 60 mg and 30 mg to compete with Allegra®, sanofi-aventis entered into an agreement with Prasco Pharmaceuticals to launch an authorized generic of fexofenadine. For the 180 mg, 60 mg and 30 mg fexofenadine dosage strengths, the authorized generic product, marketed by Prasco, accounted for over 40% of total prescriptions for the month of December 2006 while the Allegra® brand accounted for 5% for the same period (IMS NPA).
Nasacort®
Nasacort® AQ Spray (NAQ) (triamcinolone acetonide) 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. NAQ is an intranasal corticosteroid, which is recommended in treatment guidelines as first-line treatment for moderate to severe allergic rhinitis patients. NAQ offers patients significant relief from allergy symptoms with statistically significant overall preference of sensory attributes by patients versus the market leader.
In May 2006, the HFA (hydrofluoroalkane) formulation that was slotted to launch in the United States late 2006, was terminated. Our leading markets for Nasacort® AQ Spray are the United States, France and Turkey (source: 2006 net sales).
Urology
Xatral®
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 phosphodiesterase inhibitor (PDE5) were released in 2005 and published in “Urology” in 2006, further demonstrating Xatral®’s good cardiovascular safety profile.
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Table of ContentsBesides this symptomatic action, a large clinical program has been launched to document the use of Xatral® in the treatment of Acute Urinary Retention (AUR) and in the prevention of BPH disease progression.
We also completed Phase IIb in 2005 in Japan, where Phase III clinical trials of the once-daily formulation of Xatral® are currently in progress for the treatment of BPH.
Since Xatral® was launched in 1988 in France, we have constantly worked on optimizing its formulation. The once-daily formulation of Xatral® (branded Uroxatral® in the United States) has been registered in over 90 countries and is marketed worldwide except in Australia and Japan. Over 3.6 billion treatment days of alfuzosin have been prescribed worldwide since launch and it is the fastest growing medical treatment for BPH symptoms among urologists in the United States.
Osteoporosis
Actonel®/Optinate®/Acrel®
Actonel® (risedronate sodium) belongs to the bisphosphonate class. The bisphosphonates are antiresorptive treatments that inhibit osteoclast-mediated bone resorption and therefore help to prevent osteoporotic fractures.
Actonel® 5 mg daily is indicated for the prevention of postmenopausal osteoporosis (PMO) in Europe and for the treatment of PMO and 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® 35 mg once-a-week is indicated for treatment of this disease and for treatment of osteoporosis in men in both Europe and the United States, and for prevention of PMO in the United States.
Actonel® 30 mg is approved for the treatment of Paget’s disease, a rare bone disorder.
Actonel® is the only osteoporosis treatment that reduces the risk of vertebral fracture and non-vertebral fractures in just six months (Roux & al.). Actonel® also provides fractures risk reduction at all key osteoporotic sites: vertebral, hip and non-vertebral studied as a composite endpoint (hip, wrist, humerus, clavicle, leg and pelvis) (Harris & al. — McClung & al.).
A recent retrospective cohort study (Silverman & al., Osteoporosis Int.) showed that during the first year of treatment, patients treated with Actonel® weekly decreased their risk of hip fracture by 46% at 6 months and by 43% at 12 months compared to patients treated with alendronate weekly. These data confirmed the early onset of action (as early as 6 months) of Actonel®.
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 previously 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.
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Table of ContentsThe top four markets for Actonel® are the United States, France, Canada and Spain (source : full year 2006 net sales, all available channels except Spain, retail only).
Other pharmaceutical products
In addition to the top 15 pharmaceutical products, sanofi-aventis’ global portfolio comprises a wide range of other pharmaceutical products, including prescription drugs and products sold over the counter (OTC). These products represent a significant part of our pharmaceutical activity (33.1% of 2006 worldwide pharmaceutical net sales). Depending on the country, these products can be strategic products for local markets. Where these products have important growth potential they generally receive targeted promotional investments; if the products’ potential is more limited, the approach will be to capitalize on current prescriptions. Due to their long presence on the market, many of these products have strong brand recognition and are known by healthcare professionals and patients as much for their effectiveness as for their safety.
Sanofi-aventis is active on the market for generic drugs through our brand Winthrop®, combining the promotion of our own molecules with an offensive strategy based on a portfolio of almost 300 generic molecules.
Main Vaccines products
Our subsidiary sanofi pasteur is a fully integrated vaccine business offering the broadest range of vaccines in the industry. In 2006 sanofi pasteur immunized over 500 million people against 20 serious diseases and generated net sales of €2,533 million. Sales were very favorably impacted by the strong growth in markets outside of North America and Europe and the continued growth of Adacel® and Menactra®, both launched recently in the United States. Sales growth was also due to strong global pediatric vaccine sales, the highly successful seasonal influenza vaccine campaigns and pre-pandemic influenza vaccine contracting activity with various governments.
Based on our estimates, sanofi pasteur is the world leader in the vaccine industry with a market share approximating 26% and holds a leading position in most countries. In the United States and Canada, which account for approximately 44% of the worldwide vaccines market, sanofi pasteur is the market leader with a market share approximating 35%.
In Europe, our vaccine products are marketed by Sanofi Pasteur MSD, a 50-50 joint venture between sanofi pasteur and Merck & Co, which serves 19 countries. With a 36% market share Sanofi Pasteur MSD is the market leader in Europe overall and in particular in France and the United Kingdom. In 2006, net sales of Sanofi Pasteur MSD, which are accounted for using the equity method, amounted to €724 million.
Sanofi pasteur has established a leading position in Latin America, has been expanding in Asia, particularly in China and India, and is very active in international publicly-funded markets such as UNICEF. We also have a significant activity in other developed, middle income and emerging markets throughout the world.
Pediatric combination and Poliomyelitis (polio) Vaccines
These vaccines vary in composition due to diverse immunization schedules throughout the world. This group of products — which protect against up to five diseases in a single injection—is anchored by acellular pertussis components. Daptacel®, a trivalent vaccine against pertussis, diphtheria and tetanus, 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 infections is also an important growth driver within the pediatric product line. Pentacel®, which is a vaccine against five diseases (pertussis, diphtheria, tetanus, polio and Haemophilus influenzae type b), is approved in nine countries and has been the standard for preventive care in Canada since its launch in 1997; licensure is expected in the United States in 2007. Pediacel®, another acellular pertussis-based pentavalent vaccine, was launched in the United Kingdom in 2004 and licensed in the Netherlands and Portugal in 2005.
Sanofi pasteur is one of the world’s leading developers and manufacturers of polio vaccines, both oral (OPV) and enhanced injectable (eIPV). We expect the use of eIPV to increase given that the global eradication of
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Table of Contentspolio is within reach, 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 OPV and eIPV vaccines. In 2005, sanofi pasteur developed the first new polio vaccine in nearly 30 years for use in eradication, Oral Monovalent Polio Vaccine-type 1. This product is still being used as part of the WHO strategy to end polio transmission in endemic countries. In 2007, Pentaxim®, an acellular-based pentavalent vaccine containing eIPV, will be launched in Mexico. This will be the first Latin American country to use eIPV in their pediatric immunization schedule.
Influenza
Sanofi pasteur is the world leader in the production and marketing of influenza vaccines. Sales of the influenza vaccines Fluzone® and Vaxigrip®/Mutagrip® have more than tripled since 1995 and annual production was increased to more than 170 million doses in 2006 to better meet an increasing demand. We expect the global demand for influenza vaccines to continue to grow strongly within the next decade, due to an increased disease awareness and wider government immunization recommendations. Given the heightened awareness of a potential influenza pandemic amongst health authorities, medical professionals and the public at large, the demand for influenza vaccines has increased in general. In 2005, we initiated a $160 million investment in the United States for a new influenza vaccine manufacturing facility, which will double our production capacity there and help to meet the increased demand from both inside and outside the United States. An additional €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 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.
In recent years, influenza vaccine demand has experienced strong growth in many other countries — including China, South Korea and Mexico. This trend is expected to continue over the coming years. Sanofi pasteur will remain focused on maintaining its leadership in the influenza market and in meeting the increased demand.
Adult and adolescent boosters
The incidence of pertussis (whooping cough) is on the rise globally, affecting children, adolescents 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®, the first trivalent adolescent and adult booster against diphtheria, tetanus and pertussis, was licensed and launched in the United States in 2005. Adacel® has been the standard of care in Canada since 2004, where most provinces provide routine adolescent immunization. This product will play an important role in efforts to better control pertussis, not only by preventing the disease in adolescents and adults but also by breaking the cycle of transmission to infants too young to be immunized or only partially vaccinated. In late 2006, a new production facility was licensed for the U.S. market, which will more than double the supply of Adacel® available for that market.
Meningitis
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 world. In 2006, sales of Menactra® continued to grow in the United States following the implementation of the recommendations of the Advisory Committee on Immunization Practices (ACIP) for routine vaccination of pre-adolescents (11-12 years old), adolescents at high school entry (15 years old) and college freshmen living in dormitories. Menactra® is indicated for people aged 11-55 years in the United States. A licensure supplement has been filed with the FDA in the United States to lower the minimum age indication to two years of age in order to provide earlier protection against this devastating illness. 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.
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Table of ContentsTravel, Endemic and Measles, Mumps, Rubella (MMR) Vaccines
Sanofi pasteur’s Travel/Endemic vaccines provide the widest range of traveler vaccines in the industry, and include hepatitis A, typhoid, rabies, yellow fever, Japanese encephalitis, cholera, MMR 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 pasteur’s Travel/Endemic activity has realized stable growth. Additionally, sanofi pasteur has several lifecycle and new vaccine projects in development, including vaccines for dengue fever and malaria. These diseases are major burdens of disease-endemic areas in Asia, South America and Africa, and are the leading causes of fever amongst travelers.
Pharmaceutical Research & Development
The objective of sanofi-aventis Scientific and Medical Affairs, our Research & Development (R&D) organization for pharmaceutical activities, is to discover, develop, register and launch worldwide highly innovative compounds answering major unmet medical needs.
Global and focused organizations: Discovery and Development
Discovery Research
In 2006, Discovery Research successfully pursued its efforts to enrich our portfolio with a pipeline of high quality, innovative drugs that should fulfill unmet medical needs or provide improved treatments for patients. In this respect 12 new molecules entered development:
Among these 2006 development entries, we consider that three products are “first-in-class” (SAR566658, SAR479746 and SAR116242).
We benefit from the excellence of our scientists in six major therapeutic areas: Thrombosis, Cardiovascular Diseases, Metabolic Disorders, Oncology, Central Nervous System Diseases (neurology and psychiatry) and Internal Medicine. Our research activities currently target 12 out of the 16 diseases/conditions identified as demonstrating pharmaceutical gaps according to the World Health Organization.
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Table of ContentsFurthermore, in 2006 we reinforced certain key areas of our research, notably:
In terms of organization, we continued our efforts to streamline and render our Discovery operations as productive as possible. In this respect, new improved processes were established to:
Furthermore, in order to help reduce overall development timelines, we have established appropriate interfaces with Development to ensure:
Sanofi-aventis Discovery Research combines the skills of around 3,200 members in a coherent global organization in which each scientist contributes positively his/her multidisciplinary and cultural approach to our drug discovery efforts. 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 patients who are in need of novel drugs to improve their quality of life.
Development
Sanofi-aventis Development 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 preclinical to marketing. The members of the Development team work together in synergy to register and deliver innovative new medicines to patients worldwide, while meeting critical strategic, technical and time-to-market requirements, and according to our high standards of quality and ethics. Each of our projects is designed to enhance the safe use of our compounds by patients and to give healthcare providers the most accurate prescribing information.
One major principle of our matrix organization is the continuity of development from the very beginning (when a molecule enters Development from Discovery) to the end of development (when the last potential indication is approved by regulatory authorities or when the project is terminated). A project is defined by one molecule, even if multiple indications are possible. When a molecule enters development, a “project team” is
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Table of Contentsformed with representatives from all relevant functions (including pharmacologists, clinicians, chemists, toxicologists, regulatory affairs, marketing and many others) who will work together throughout the life of the molecule in development. Throughout development, our global organization aims at strategic and operational excellence.
In 2006, several hundred clinical trials were up and running for our projects under clinical development, including Life Cycle Management (LCM) projects, in more than 7,000 investigational sites worldwide.
As in previous years, most studies were managed through our in-house Clinical Research Units (CRU) network. Two additional CRUs were created in 2006.
The Indian CRU was created officially on April 1, 2006 and has already been involved in nine international studies. The creation of a unit entirely dedicated to the conduct of clinical trials is the foundation for a very significant participation of experts and investigators from this country in the near future.
The new CRU created in Japan in June 2006 incorporated the existing monitoring forces and will be increasingly involved in international studies as has already been the case for two studies.
The Chinese CRU created in 2005 has acquired the appropriate expertise to participate in international clinical programs. Consequently, more and more studies are proposed to this CRU and efforts are being made to reduce the long time-cycle for clinical trial approval by the Health Authorities.
A new business paradigm has been initiated for our clinical monitoring activities with a successful pilot experience in electronic data capture and the launch of project related activities using a new clinical data acquisition and management system. This should pave the way for the deployment of an ambitious plan for Remote Data Capture within the next two years.
In line with pharmaceutical industry commitments (Joint Position Statement issued by the pharmaceutical industry associations in January 2005), we have made public all new and ongoing clinical trials, other than exploratory trials, sponsored by sanofi-aventis R&D since July 2005. We had posted 363 protocol summaries on the publicly available registry website www.clinicaltrials.gov by the end of 2006 (these documents are not incorporated by reference in this annual report). Hundreds of potentially interested patients and practitioners have already taken advantage of this information, mostly in the United States, but also increasingly from other countries and continents.
Non-exploratory clinical trial results, whether positive or not, are also posted on the public site www.clinicalstudyresults.org within a year of the launch of the product as per our commitment (these documents are not incorporated by reference in this annual report).
Portfolio
The research and development process generally takes from 10 to 15 years from discovery to initial product launch and is conducted in various stages. During the “preclinical” stage, research scientists perform pharmacology and toxicology studies on various animal models. Before testing on humans, an application for the compound must be filed with and approved by the regulatory authorities. Trials in humans are performed in different clinical phases to demonstrate the safety and efficacy of a new compound:
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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 from an additional six months to two years or longer. There are two further types of clinical trials: one called Phase IIIb, where additional indications are sought for a marketed product; 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 2006:
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Table of ContentsSanofi-aventis Pharmaceutical Scientific and Medical Affairs are undertaking the development of 101 compounds, in six therapeutic areas (these figures do not include the vaccines portfolio, please refer to specific section). We believe this is one of the most innovative and most promising R&D portfolios in the pharmaceutical industry. The portfolio is well balanced throughout all our therapeutic areas and particularly strong in oncology and in the CNS therapeutic area, where the needs for better drugs to treat neurodegenerative diseases, dementia and psychosis are still considerable. With 55 compounds in early development (preclinical and Phase I), and 46 in Phase II and Phase III, our pharmaceutical portfolio is also well balanced in terms of phase distribution, with a significant reservoir of compounds in the early phases. While the number of molecules in the portfolio is relatively stable as compared to 2005, it should be noted that the number of projects in late clinical development (Phase IIb and III) has increased by 25% as compared to last year.
Sanofi-aventis Scientific and Medical Affairs achievements in 2006
The dynamic profile of the sanofi-aventis portfolio is illustrated by the R&D achievements and project highlights in 2006.
In 2006, 12 new compounds entered preclinical development (see “Discovery Research”). Furthermore, sanofi-aventis and Taiho signed an agreement in July 2006 for the development and marketing of S-1, an oral anticancer agent. S-1 is an oral pyrimidine fluoride-derived agent in which a prodrug of 5-fluorouracil (5-FU), Tegafur®, is combined with two inhibitors of enzymes to increase the amount of circulating 5-FU with less gastrointestinal toxicity. S-1 is marketed in Japan for the treatment of gastric, colorectal, head and neck, non small cell lung, metastatic breast and pancreatic cancers. S-1 is currently in Phase III clinical development for gastric cancer in the United States and Europe.
DL6063, a topical combination of clindamycin analogs and benzoyl peroxide entered development in 2006 and is being developed for acne vulgaris.
In 2006, 11 compounds entered Phase I, while seven projects entered Phase IIb and ten Phase III/IIIb programs were initiated. For Japan, 2006 was a productive year, with the initiation of five Phase I and two Phase III/IIIb development programs.
Several sNDAs were submitted in 2006 in the U.S. and in Europe for major products like Actonel®, Allegra®, Apidra®, Aprovel®, Eloxatine®, Lantus®, Taxotere® and Plavix®. In the United States, further to the submission of a pediatric dossier for zolpidem in September 2006, a six-month pediatric exclusivity was granted to the product by the FDA in November 2006.
In Japan, the Lovenox® dossier was submitted for a deep vein thrombosis (DVT) indication in March 2006, a sJNDA was submitted for Lantus® (SoloSTAR®, a new device) and the Plavix® (clopidogrel) dossier for an acute coronary syndrome indication was submitted in December 2006.
With respect to regulatory approvals obtained in 2006, Acomplia® (rimonabant) was approved in Europe and subsequently launched in several European countries that same year (see “— Principal Pharmaceutical Products — Metabolic Disorders — Acomplia®”).
Several sNDAs were granted in the United States and Europe to major products like Taxotere®, Eloxatine®, Allegra®, Actonel®, Plavix® or Lantus®. SoloSTAR®, an intuitively easy-to-use, state of the art disposable insulin pen, was approved for use with Lantus® and Apidra® in the European Union and is under review in the United States.
In Japan, Plavix® (clopidogrel) was approved for stroke in early 2006, and a pediatric formulation of Allegra® (fexofenadine) was approved in October. A new formulation of Lantus® (insulin glargine) was also approved in this country in 2006. Finally, Ancaron® (amiodarone IV) was approved in Japan on January 26, 2007 for the treatment of severe ventricular arrhythmias.
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Life Cycle Management (LCM) development programs for our top 15 pharmaceutical products are described above in “— Principal Pharmaceutical Products”.
Thrombosis
Five compounds are currently in later-stage development in thrombosis:
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Table of ContentsCardiovascular
Certain of our principal compounds in the field of cardiovascular medicine currently in Phase II or Phase III clinical trials are described below.
Metabolic Disorders
Our main compounds currently in clinical development Phase II or III for metabolic disorders are described below.
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Oncology
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, 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.
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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.
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Internal Medicine
Certain of our principal compounds in the field of Internal Medicine currently in late Phase 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.
Discovery Research
Two types of partnerships are employed to enhance Discovery Research:
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As part of the “Impact Malaria” program, three cooperative programs were continued in 2006. Ferroquine, co-developed with the Université Scientifique et Technique de Lille (France), is currently in Phase I of clinical development.
Sanofi-aventis is engaged in numerous partnerships with academic institutions: such as our research collaborations with INSERM and CNRS in France, with Frankfurt University in Germany, and with Harvard Medical School in the United States.
License and development agreements
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For other products developed under other research agreements with various pharmaceutical companies, such as Alvesco® (ALTANA Pharma AG, a Nycomed company) and Actonel® (P&G) see “— Project Highlights /Internal medicine” for Alvesco® and “— Pharmaceutical Activity/Internal Medecine” for Actonel®.
Vaccines Research and Development
Our human vaccine R&D remains focused on the development of new prophylactic vaccines as well as on a particular area of research aimed at the development of novel therapeutic cancer vaccines.
Sanofi pasteur R&D Pipeline
The table below shows the composition of our Research & Development portfolio. With 24 vaccines in development, including 12 in Phases II and III, the sanofi pasteur R&D portfolio is both rich and balanced. 2006 was an unprecedented year by the number of positive movements in the portfolio. Four products entered the clinical phase and eight products are now in Phase III.
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Table of ContentsProject highlights
Influenza
To sustain our global leadership in the development of influenza vaccine, our R&D efforts are focused on innovative approaches for assessing new formulations and alternate delivery systems as well as diversifying our flu manufacturing technologies for increased vaccine efficacy, acceptance or both. We remain at the forefront of pandemic preparedness activities.
A new delivery program based on the administration of flu vaccines using a novel microinjection system — micro-needles deliver vaccine to the dermal layer of the skin — has been developed in partnership with Becton Dickinson (Becton, Dickinson and Company, a medical technology company located in Franklin Lakes, New Jersey, U.S.). Proof of concept has been demonstrated for this delivery system and Phase III clinical trials were 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 III. This project rationale is based on the fact that the elderly experience a progressive reduction in their immune system with increasing age, as well as reduced antibody responses to inactivated virus vaccines.
As part of our initiative to diversify flu vaccine manufacturing technologies beyond the classic egg-based process, a new cell culture technology (PER.C6®) has been developed under contract with the U.S. Government (under the supervision of the Department of Health and Human Services) and in partnership with Crucell (Crucell N.V., a biotechnology company located in Leiden, the Netherlands). This initiative is aimed at both inter-pandemic and pandemic vaccines. A Phase I study with a seasonal influenza vaccine produced using the PER.C6® cell culture technology was initiated in healthy adults and in the elderly in 2006. The ability to produce the PER.C6® cell culture technology vaccine on a commercial scale has been demonstrated. In addition, the PER.C6® cell based technology was recently used to produce the first clinical batch of a new generation of H7N1 prototype pandemic candidate vaccine which is currently being assessed in a Phase I study. This project is part of FLUPAN, a European Commission project focused on improving preparation for an influenza pandemic.
Pandemic Preparedness — sanofi pasteur remains at the forefront of pandemic preparedness. Concerted efforts for pandemic preparedness continue in Europe and the United States. In the United States, activities are primarily conducted under Government contracts. These activities include year-round egg supply, clinical batch formulation and building H5N1 vaccine reserves. On February 27, 2007 the Vaccines and Related Biological Products Advisory Committee (VRBPAC) of the FDA voted to recommend licensure of 90mcg H5N1 vaccine. The first generation candidate H5N1 vaccine was developed in collaboration with the U.S. Department of Health and Human Services as a first step towards efforts that will enable the government to stockpile vaccine for use during the early stage of a pandemic. In Europe, activities are focused on clinical batch production including H5N1 and H7N1, clinical studies and core dossier submission for registration with the EMEA.
Recent clinical data confirm the need to pursue the pandemic preparedness strategy. Both aluminum hydroxide adjuvanted and non-adjuvanted H5N1 formulations were well tolerated and immunogenic in healthy adult volunteers. Moreover, the H5N1 pre-pandemic vaccine demonstrated the potential to induce protection against additional H5N1 circulating virus not included in the original vaccine formulation. A booster study and a Phase II clinical trial have been initiated with the aluminum hydroxide adjuvanted and non-adjuvanted H5N1 prototype pandemic vaccines. Alternate dose sparing strategies are also being pursued.
Pediatric & Adolescent/Adult Booster Combination Vaccines
A number of pediatric vaccines are in development. Tailored for specific markets, they are aimed at protecting against five or all six of the following diseases: diphtheria, tetanus, pertussis, poliomyelitis (polio), Haemophilus influenzae type b infections and hepatitis B.
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Meningitis Program
Neisseria meningitidis has been a leading cause of meningitis in the United States, Europe and elsewhere, striking the very young as well as adolescents. Five serogroups 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. The primary focus of several ongoing projects related to Menactra® is to decrease the age at which one can first receive this vaccine. As part of this objective, Menactra® was licensed in Canada for ages 2-55 years in 2006 and a supplement to the U.S. Menactra® license lowering the indication to two years of age and effectively increasing the age range to 2-55 years is expected to be approved by the FDA in 2007. Additional international filings will occur subsequently.
Pneumococcal Vaccine Program
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 one million are children. 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 two projects in its pneumococcal R&D program :
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Dengue fever is of growing epidemiological importance due to global socio-climatologic changes, and is a major medical and economic burden in endemic areas of the Asia Pacific, and Latin America; it is also 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 lead candidate has now entered expanded Phase II clinical trials in adults in the United States as well as in adults and children in Latin America and Asia Pacific. Vaccination will target people living in affected areas as well as travelers to these regions. Sanofi pasteur and the Pediatric Dengue Vaccine Initiative (PDVI), a program of the International Vaccine Institute funded by the Gates Foundation, recently agreed to join their efforts to make dengue a vaccine preventable disease and to accelerate vaccine introduction in the pediatric endemic population.
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 sequelae, especially on women. Chlamydia-host immunobiology is characterized by acute infection followed by immunity or by persistent infection that is associated with tissue damage and disease sequelae. 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 who are between 11 and 14 years of age. The project progressed to the pre-clinical stage in 2006.
A proof of concept study to assess the prevention of congenital infection is ongoing and should be concluded in 2007.
The cancer vaccine program is focusing on developing therapeutic vaccines for melanoma and colorectal cancer through specific activation of the immune system to destroy cancer cells. Previous Phase I clinical studies using the proprietary ALVAC (canary poxvirus) technology on 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 fighting melanoma remains an unmet medical need. Evidence suggests that manipulation of the immune response against melanoma may be therapeutic. During 2006, pre-clinical studies with the melanoma multi-antigen vaccine were completed and clinical trial material was produced. The multi-antigen vaccine will proceed to clinical evaluation in 2007.
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 multi-antigen 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.
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Sanofi pasteur takes part in the global efforts made to develop an HIV vaccine. In the nearly 20 years since sanofi pasteur’s HIV vaccine development program was established, the company has collaborated with a number of leading governmental agencies and pharmaceutical companies on many aspects of the program. We have seen the value of these partnerships in research, clinical study design and implementation and believe they will be crucial to help overcome development challenges.
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. More than 16,000 volunteers, the largest number in any HIV vaccine trial, have been enrolled in the Thai trial. The vaccination phase was completed in July 2006. Final results are expected mid 2009.
Recent results from several clinical trials have cast doubts on the feasibility of large pivotal registration trials using a treatment interruption-based approach. As such, sanofi pasteur placed its HIV immunotherapy project on hold in 2006.
Patents, Intellectual Property and Other Rights
Patents
We own a broad portfolio of patents, patent applications and patent licenses worldwide. These patents are of various types and may 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 product’s 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 additional patents, including patents obtained after the product’s 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 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 systems. Certain categories of
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Table of Contentsproducts, 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.
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 2016. 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.
Regulatory Exclusivity
In some markets, including the European Union and the United States, many of our products may also benefit from multi-year regulatory exclusivity periods, during which a generic competitor may not rely upon our clinical trial and safety data in its drug application. Exclusivity is meant to encourage investment in research and development by providing innovators the exclusive use of the innovation represented by a newly approved drug product for a limited time. This exclusivity operates independently of patent protection and may protect the product from generic competition even if the patent on the active ingredient for the approved product has expired.
In the United States, the FDA will not grant final marketing approval to a generic competitor until the expiration of the five-year regulatory exclusivity period that commences upon the first marketing authorization of the reference product. It will accept the filing of an ANDA containing a patent challenge a year before the end of this regulatory exclusivity period (see the descriptions of ANDAs, below). In addition to this exclusivity granted to new drug products, significant line extensions of existing products may qualify for an additional 3-year marketing exclusivity, and under certain limited conditions it is possible to extend any unexpired U.S. regulatory and patent-related exclusivities for an additional period of six months. In the European Union, generic drug applications will not be accepted for 8 years after the first marketing authorization (data exclusivity) or approved for 10 years after the first marketing authorization of the reference product (marketing exclusivity). These exclusivities may be extended in some cases.
A generic drug application for marketing in Canada will not be accepted for 6 years after the first marketing authorization (NOC) or approved for 8 years after the first marketing authorization but only for products where the first NOC issued after June 2006. The 8 year period can be extended to 8.5 years with a pediatric extension. Essentially no data protection is available where the initial NOC issued before June 2006.
In Japan, the regulatory exclusivity period varies from 4 years (for medicinal products with new indications, formulations, dosages, or compositions with related prescriptions) to 6 years (for drugs containing a new chemical entity or medicinal composition, or requiring a new route of administration) to 10 years (for orphan drugs or new drugs requiring pharmaco-epidemiological study).
Product Overview
We summarize below the intellectual property coverage in our major markets of the products described above at “— Principal Pharmaceutical Products”. In the discussion of patents below, we focus on U.S. patents listed in the FDA’s list of Approved Drug Products with Therapeutic Equivalence Evaluations (the “Orange Book”) because these patents are the most relevant in the event of an application by a competitor to produce a generic version of one of our products or the equivalent of these patents in other countries (see “— Challenges to Patented Products”, below). In some cases, products may also benefit from pending patent applications and from patents not eligible for Orange Book listing (e.g., patents claiming industrial processes). In each case below, we specify whether the active ingredient is claimed by an unexpired patent. Where patent terms have been extended to compensate for regulatory delay, the extended dates are presented below. In those cases where the active ingredient is no longer claimed by an unexpired patent, we set out any regulatory exclusivity from which these products continue to benefit. U.S. regulatory exclusivities presented below incorporate any pediatric extensions
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Table of Contentsobtained. Six-month pediatric extensions are not reflected in patent expiration dates presented below for the products concerned (Aprovel®, Lantus®, Eloxatine®, Ambien®/Ambien CR™ and Allegra®).
We caution the reader that there can be no assurance that we will prevail when we assert a patent in litigation and that there may be instances in which the Group determines that it does not have a sufficient basis to assert one or more of the patents mentioned in this report, for example in cases where a competitor proposes a formulation not appearing to fall within the claims of our formulation patent. As disclosed in Note D.22.b) to our consolidated financial statements included at Item 18 of this report, we are involved in significant litigation concerning the patent protection of a number of products including notably Lovenox®, Plavix®, Tritace®, Eloxatine®, Ambien CR™, Allegra®, Nasacort®, and Actonel®.
Lovenox®. For Lovenox® our principal U.S. patent claims the active ingredient and expires in 2012. This patent was declared unenforceable in February 2007 by a U.S. District Court decision which sanofi-aventis intends to appeal. Lovenox® continues to benefit from patent protection in a number of significant markets outside the United States under patents claiming the active ingredient and expiring in or about 2012, depending on the country.
Plavix®. In the United States, Plavix® benefits from three patents, one covering the crystalline form 1 of the active ingredient expiring in 2011 and two covering the crystalline form 2 each expiring in 2019. In Europe, the product benefits from national patents issued from two European patents, expiring in 2013 and 2019, relating to form 1 and form 2 respectively. In Japan, the pharmaceutical use of form 1 of the active ingredient is claimed by a patent expiring in 2013 and the form 2 of the active ingredient by a patent expiring in 2020.
Aprovel®. Aprovel®’s active ingredient is claimed in the United States by a patent expiring in 2011 and in Europe until 2012.
Tritace®. The active ingredient of Tritace® is no longer claimed by a patent. Other patents, including formulation and method of use, remain in force in a number of countries. In Canada, a generic of this product was recently launched at risk notwithstanding unexpired patent coverage.
Lantus®. The patent covering Lantus®’s active ingredient runs to 2014 in Europe and the United States.
Amaryl®. This product does not benefit from any unexpired Orange-Book patents. Outside the United States, we have neither patent protection nor regulatory exclusivity for this product in our principal markets.
Acomplia®. A patent claiming the active ingredient expires in most countries in November 2014. The protection in Europe will be extended via SPC until 2019 (in progress). In the United States, the patent expiration in April 2014 is expected to benefit from Patent Term Extension (PTE) period of up to 5 years, the exact duration of which is to be determined only after FDA approval. The product benefits from additional patent coverage ranging through 2022.
Taxotere®. Taxotere®’s active ingredient is protected in the United States and Europe until 2010, and the product benefits from additional patent coverage ranging through 2013.
Eloxatine®. We do not own most 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 related to the lyophilized and/or solution formulations and having expiration dates ranging through 2016. Notwithstanding the unexpired patents, a number of generic versions of the lyophilized formulation have recently been launched in Europe. In the United States, Eloxatine® contines to benefit from regulatory exclusivity through February 2008, which prevented the submission for review of a paragraph IV ANDA prior to February 2007.
Ambien®. The patent claiming Ambien®’s active ingredient has expired in all major markets. However the Group holds a U.S. patent expiring in 2019 covering the formulation of Ambien CR™, which was launched in
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Copaxone®. Sanofi-aventis has licensed Copaxone® from Teva, with which we co-promote the product (see “— Alliances” below). In both the United States and Europe the patents claiming the active ingredient expire after the respective termination dates of the relevant licenses.
Depakine®. The patent claiming Depakine®’s active ingredient has expired in all major markets where we commercialize this product.
Allegra®. Although different presentations of Allegra® are covered by a number of formulation, method of use and other patents including a U.S. patent claiming a particular crystalline form having expiration dates ranging through 2017, the original patent claiming Allegra®’s active ingredient has expired in all major markets. Notwithstanding the unexpired patents, generic fexofenadine hydrochloride tablets have been launched at risk in the United States. In Japan, Allegra® benefits from multiple process and formulation patents running through 2015.
Nasacort®. The active ingredient of this product is no longer protected by a patent. In the United States, the Group holds a method of use and a formulation patent, each expiring in 2016. The corresponding European patent expires in 2017.
Xatral®. This product’s active ingredient is not patent protected. A method of use and a formulation patent remain in force through 2007 in the United States (which we expect to be extended to January 2011) and 2017, respectively. In the United States, sanofi-aventis benefits from regulatory exclusivity for this product, expiring in June 2008 and preventing the submission for review of a paragraph IV ANDA prior to June 2007.
Actonel®. We co-market Actonel® with Procter & Gamble Pharmaceuticals, which holds the NDA and the patents for this product in the United States. The U.S. patent on the active ingredient expires in December 2013, and a number of other patents having expiration dates ranging through 2018 cover this product. In Europe, the compound patent has expired in some national markets, but remains in force through December 2010 in a number of countries including France, Germany, the United Kingdom, and Italy. Additional patent coverage in Europe is provided by formulation patents with expiration dates in 2012 and 2018 as well as a process patent.
In the United States, the FDA has invited us by written request to provide additional pediatric data on several of our top fifteen products. Under the Hatch-Waxman Act, timely provision of data meeting the FDA’s requirements may result in the FDA treating the product as if its regulatory exclusivity and patent life had been extended by 6 months, to the extent these protections have not already expired (the so-called “pediatric exclusivity”). In 2006, following the submission of the results of the requested pediatric studies for these two products, the FDA granted pediatric exclusivity to Eloxatine® and to Ambien®. The other Top 15 products having received past FDA grants of pediatric exclusivity are Aprovel®, Lantus®, Amaryl®, and Allegra®. Written requests have also been issued to us with respect to Plavix® and Lovenox®.
A new European regulation on pediatric medicines entered into force on 26 January 2007. This regulation provides for the progressive implementation through 2009 of pediatric research obligations with associated possible rewards including an extension of patent protection (for patented medicinal products) and regulatory exclusivity for pediatric marketing authorization (for off-patent medicinal products). Japanese regulations do not currently offer the possibility of similar extensions in exchange for pediatric study results.
Challenges to Patented Products
In the United States, companies have filed Abbreviated New Drug Applications (ANDAs), containing challenges to 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 company’s approved product, by demonstrating that the 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 (thus the name “abbreviated” new drug application), presenting a significant benefit in terms of time and cost. As a result of regulatory protection of our safety and other technical data, the ANDA may generally be filed only 5 years following the initial U.S. marketing authorization of the
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Table of Contentsoriginal product. This period is reduced to 4 years if the ANDA includes a challenge to a patent listed in the FDA’s 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 in response to the patent challenge 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 — A. Consolidated Statements and Other Information — Information on Legal or Arbitral Proceedings” and Note D.22.b) to our 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” below. We intend to defend our patent rights vigorously in these cases.
Trademarks
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.
Production and Raw Materials
Our principal manufacturing processes consist of three stages: the manufacture of active ingredients, the incorporation of those ingredients into products and packaging.
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
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Table of Contentsthe production of the finished product is outsourced to two manufacturers. In 2006 we transferred the manufacturing of the liquid form of Eloxatine® to our facility in Dagenham (United Kingdom).
Under our partnership with BMS, a multi-sourcing organization and security stock are in place for Plavix® / clopidogrel and Aprovel® / irbesartan.
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 formulations of products like Elitek®, Tranxene®, and Depakine® under a supply agreement until September 2009.
For historical reasons the production of some of our products, mainly non-strategic, is outsourced to external manufacturers. Our main subcontractors are Patheon, Famar, LCO, Haupt and Sofarimex. These subcontractors are required to follow our guidelines in terms of quality, logistics and other criteria.
The repatriation of outsourced production to our factories is a major element of our industrial policy.
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 parts of the world.
All 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, Veresegyhaz in Hungary, Saint Louis and Kansas City in the United States and Laval in Canada. Wherever possible, we seek to have multiple plants approved for the production of key active ingredients and finished products.
To carry out the production of Vaccines, sanofi pasteur uses a wide industrial operations network, with sites located in North America, France and emerging markets, namely China, Thailand and Argentina.
More details about our manufacturing sites are set forth below under “D. Property, Plant and Equipment”.
Health, Safety and Environment (HSE)
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 €122 million in 2006.
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
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Table of Contentsoccur or be discovered at others. In the Group’s case, such sites are mainly located in the United States, Germany, France, Brazil, Italy 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 constantly assesses the rehabilitation work required and this work has been implemented when appropriate. Among them, long-term rehabilitation work is in progress in Rochester, Portland and Cincinnati in the United States; Frankfurt in Germany; Décines, Valernes, Limay, Beaucaire and Rousset in France; Brindisi in Italy; and on a number of sites divested to third parties and covered by contractual environmental guarantees granted by sanofi-aventis. Remediation works at the Décines and Beaucaire sites will be completed in 2007. Sanofi-aventis may also have potential liability for investigation and cleanup at several other sites. Provisions 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 2006, sanofi-aventis spent more than €42 million on rehabilitating sites previously contaminated by ground pollution. As of December 2006, 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 provisions to approximately €528 million as at December 31, 2006. The Group expects that €355 million of these provisions will be utilized over the period from 2007 through 2011.
Because of the growing cost of environmental regulations governing site remediation the Group’s provisions for remediation obligations may not be adequate due to the multiple factors involved, such as 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. Given the long industrial history of some of our sites and the legacy obligations of Aventis arising from its past involvement in the chemical 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 HSE laws and regulations that could be expected to significantly jeopardize its activities, financial situation or operating income. We also believe that we are in substantial compliance with current HSE laws and regulations and that all the environmental permits required to operate our facilities have been obtained. Regular HSE audits (52 in 2006) are carried out by the Group in order to detect possible instances of non-compliance with regulations and to initiate corrective measures.
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.
Health
From the development of compounds to the commercial launch of new drugs, sanofi-aventis research scientists continuously assess the effect of products on people’s 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 Group.
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.
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Table of ContentsSafety
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 COVALIS and TRIBIO committees described above. 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 (intermediate chemical compounds and active ingredients) 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.
Environment
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. Thirty manufacturing sites and three Research & Development sites are currently certified. This commitment is part of a strategy of continuous improvement practiced at all Group sites through the annual implementation of HSE 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, ten of the Group’s 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 increasing our production relative to the previous year, we nonetheless maintained (and in some fields substantially improved) our performance in terms of consumption and waste measured in relation to our activity levels.
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. In particular, six substances not yet evaluated because they predated current regulations were thoroughly assessed in 2006.
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Table of ContentsMarkets
Marketing and Distribution
The combination of Sanofi-Synthélabo and Aventis into sanofi-aventis has reinforced our Group’s 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, 2006 Compared with Year Ended December 31, 2005.” Accounting for over 48% of global prescription drug sales, the United States is the world’s largest pharmaceutical market and our single largest national market. In 2006, we generated 35.1% of our net sales in the United States. In Europe, our leading markets are France, Germany, Italy, Spain and the United Kingdom. Japan, the world’s second-largest national pharmaceutical market, accounted for 3.4% of our net sales in 2006 (source: IMS/GERS full year 2006 sales, all monthly available channels).
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 doctor’s prescription.
We have a global sales force of 35,900 representatives, including approximately 12,400 in Europe, 8,800 in the United States, 1,700 in Japan and 1,800 in China.
Our 35,900 medical sales representatives, who work closely with health care professionals, use their expertise to promote and provide information on our drugs. These representatives embody our 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.
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. We sometimes use specific media channels to market our products. 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.
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. Our major alliances are detailed below under “— Alliances”.
Our Vaccines are sold and distributed through multiple channels, including physicians, pharmacies and distributors in the private sector, and governmental entities and non-governmental organizations in the public and international donor markets, respectively.
Alliances
We have three major alliances through which four of our top 15 products are marketed. The first, with Bristol-Myers Squibb, governs the development and marketing of Plavix® and Aprovel®. The second, with Procter & Gamble Pharmaceuticals, 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 under “Item 5. Operating and Financial Review and Prospects — Financial Presentation of Alliances.”
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Table of ContentsBristol-Myers Squibb (BMS)
We market Plavix® and Aprovel® 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. Since July 2006, BMS has sublicensed its Japanese rights to irbesartan to Dainippon Sumitomo Pharma Co. Ltd. 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 (P&G)
We in-license Actonel® from P&G. 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.
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Table of ContentsUnder the alliance arrangements with P&G, there are four principal territories with different marketing arrangements:
Teva Pharmaceuticals (Teva)
We in-license Copaxone® from Teva and market it through an alliance agreement with Teva, which was originally concluded in December 1995, and amended several times, most recently in 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. In March 2008, Teva will assume the Copaxone® business, including sales of the product, in the United States and Canada. Sanofi-aventis will no longer share certain marketing expenses and, for a period of two years, will receive from Teva a remuneration of 25% of in-market sales.
Competition
The pharmaceutical industry is currently experiencing significant changes in its competitive environment. Innovative drugs, a broad product range, and a presence in all geographical markets are key factors in maintaining a strong position relative to the competition.
The industry is also continuing its horizontal consolidation as companies look to build the critical mass needed to compete effectively and cope with rising research, development and marketing costs.
There are three types of competition in the pharmaceutical market:
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Table of ContentsWe compete with other pharmaceutical companies in all major markets to develop innovative new products. We may develop new technologies and new patented products wholly in-house, but we also enter into collaborative R&D agreements in order to access new technologies.
Our prescription drugs compete in all major markets against patented drugs from major pharmaceutical companies like Novartis in hypertension and oncology; Pfizer in antibiotics, oncology and allergies; AstraZeneca in cardiovascular disease and oncology; Bristol-Myers Squibb in oncology; Boehringer-Ingelheim in atherothrombosis and benign prostatic hyperplasia; Eli Lilly in osteoporosis, diabetes and oncology; GlaxoSmithKline in oncology, allergies 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 our Vaccines business, we compete primarily with GlaxoSmithKline, Merck & Co, Wyeth and Novartis.
We also face competition from generic drugs that enter the market when our patent protection or regulatory exclusivity expires, or when we lose a patent infringement lawsuit (see “— Patents, Intellectual Property and Other Rights” above).
Competition from producers of generics has increased sharply in response to healthcare cost containment measures and to the increased number of products going off patent.
In addition, generics manufacturers who have received all necessary regulatory approvals for a product may decide to launch a generic version either before the patent expiry date or before a court decision on 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; however, they may also significantly impair the profitability of the pharmaceutical company whose product is challenged.
We also face competition from over-the-counter (OTC) products, which pharmacies sell without a prescription. These products are generally sold at lower prices than those requiring a doctor’s prescription.
Another competitive issue drugs manufacturers are facing is the increasing incidence of parallel trade, also known as reimportation. This takes place when drugs sold abroad under the same brand name as in a domestic market are then imported into that domestic market by parallel traders, who may repackage or resize the original product or sell it through alternative channels such as mail order or the internet.
Parallel traders take advantage of the price differentials between markets for a product arising from factors including sales costs, market conditions (such as intermediate trading stages), tax rates, or national regulation of prices. There are indications (source: IMS data) that parallel trade is affecting markets in several regions, especially in European Union countries.
Finally, pharmaceutical companies face illegal competition from counterfeit drugs. The WHO estimates that counterfeit products account for 10% of the market worldwide, rising to as much as 30% in some countries. However, in markets where powerful regulatory controls are in place, counterfeit drugs are estimated to represent less than 1% of market value. The WHO also estimates that 50% of sales over the internet are of counterfeit drugs.
Note: The following market shares and ranking information is based on sales data from IMS Health MIDAS and GERS (France), retail and hospital, for calendar year 2006, in constant euros (unless otherwise indicated). For more information, see “— Presentation of Financial and Other Information” above.
United States
We rank ninth in the United States with a 4.0% market share.
In 2006, we slipped one place in the rankings due to the introduction late in 2005 of generics of four products, including Allegra®.
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Table of ContentsOther key events in 2006 were:
France
We are France’s leading pharmaceutical company, but were affected during 2006 by growing competition from generics for several of our products. Our market share is 15.2%. Plavix®, Lovenox® and Taxotere® are the top-selling products in their respective fields.
Germany
We rank second in Germany, with a 6.5% market share. Our major products are Plavix®, Lovenox®, and the diabetes treatments Insuman® and Lantus®.
Japan
We rank nineteenth in Japan with a 1.6% market share.
Our main products are Allegra®, Amaryl®, and zolpidem (sold under the brand name Myslee®).
Plavix® was launched in May 2006, all the commercial rights having been acquired from Daiichi Pharmaceutical Co. in July 2005.
Regulation
The global pharmaceutical industry is highly regulated. National and supranational regulatory authorities administer numerous laws, directives and regulations covering the testing, the quality, safety and efficacy of a new drug, until approval. Regulatory authorities also regulate labeling, manufacturing, importation and exportation, marketing as well as post-approval commitments of drugs.
Of particular importance is the requirement to obtain regulatory approval for a pharmaceutical product from a country’s 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 to determine product recalls, and seizure of products.
Europe, the United States and Japan all have very high standards for pharmaceutical 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 development and submission 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 rates with government regulators can
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Table of Contentssubstantially extend the time to market after initial marketing approval is granted. While marketing authorizations for new pharmaceutical products in the European Union have been substantially centralized with the European Medicines Agency (EMEA), pricing and reimbursement remain 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 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 (for approved, withdrawn or rejected projects), which will now be more detailed. New initiatives are proposed with regards to the publication of question 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 specific centers of 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 (NDA) is filed with the FDA with data that sufficiently demonstrate the drug’s quality, safety and efficacy. The FDA could require post-approval commitments. 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 “— 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 in humans as the innovator’s product. Consequently, the length of time and cost required for development of such product can be considerably less than for the innovator’s drug. See “— Patents, Intellectual Property and Other Rights”, above, 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 assessment of adverse
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Table of Contentsreactions. 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 require local development studies and can also 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.
Pricing
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. Especially in the EU Member States, the accumulation of controls and the cross-fertilization among countries are major trends combined with various policies in each country.
We believe that the governments will continue to enact measures in the future aimed at reducing the cost of pharmaceutical products. 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. Stricter budgeting and price controls, including the incorporation of patent protected drugs into national reference price systems, changes to approved drug lists and other similar measures may continue to occur in the future. We expect that market access delays, inadequate reward for innovation, rebates/payback mechanisms and the lack of transparency and objectivity will continue and may increase.
United States
The United States does not have a universal regulatory drug pricing control system. It is the closest to a free market because of the relatively low involvement of the government in influencing pricing. Instead, drug pricing and reimbursement controls are more reliant on reimbursement policy. The United States is moving toward cost-containment, which brings with it greater use of higher patient co-payments for brand products, step therapy/fail first methods, and prior authorization, which contribute to the construction of positive and negative lists.
In the United States, the initiation of the new Medicare Part D drug benefit program, combined with Medicaid and other federal programs, 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 manufacturer’s “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 controls on reimbursed products in the program through a discount bid process as well as the historical preference for generic product usage. Estimated total drug spending in Medicaid has been reduced significantly 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. Benefit managers, both in Part D as well as for the private sector plans, dynamically manage the formulary process and utilization controls to manage overall cost trends.
The “doughnut hole” is the gap in Part D coverage when beneficiaries’ annual drug costs are between US$2,250 and US$5,100 during which Medicare beneficiaries bear the brunt of their drug costs if their plan does not provide continuous coverage.
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Table of ContentsFrance
In France, the government regulates prices of new prescription and non-prescription drugs and price increases and decreases 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 l’Assurance 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 government’s 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 Santé), is in charge of evaluating medicines and other forms of treatment, offering recommendations on what the health insurance system should reimburse, and issuing guidelines on good clinical practice. Growth in pharmaceutical spending for 2006 stagnated in France for the first time since 1990. The situation for 2007 will not improve as the industry will see an ongoing 1% special tax on reimbursed medicine sales, ongoing generic substitution, price-cuts for a wide range of both generic and branded products, and the ongoing effects of the pact on rational prescribing signed with the doctors’ organization in the year 2005.
Germany
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 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 parallel imported drugs. 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, Germany’s newly created Institute for Quality and Economic Efficiency (IQWiG) has began to conduct Health Technology Assessments; it has been criticized as having cost-control, rather than health benefits, as its principal objective, using criteria lacking transparency and basing its assessments only on randomized clinical trials. IQWiG is an advisory body, but its recommendations have an impact on pricing and reimbursement decisions for innovative drugs, as seen in their evaluation on short-acting insulin analogs judged to have no therapeutic advantage over short-acting human insulin in the treatment of type 2 diabetes mellitus.
With the Economic Efficiency of Pharmaceutical Care Act of May 2006 reference prices for some drugs are to be cut, a price moratorium for 2 years has come into place as well as a 10% manufacturer’s rebate for patent free products, patients have been exempted from co-payments if the prescribed drug is priced 30% or more below the reference price level and a bonus/penalty system for physicians started in January 2007. The pharmaceutical industry expects from the SHI Competition Enhancement Act being introduced in the year 2007 a cost-benefit assessment of pharmaceuticals in line with international standards.
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Table of ContentsJapan
The Ministry for Health, Labor and Welfare (MHLW) controls the pricing of pharmaceutical products in Japan. The MHLW determines the reimbursement price paid by the National Health Insurance (NHI) to medical institutions for each prescription drug. 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 other year), the MHLW carries out a revision of drug reimbursement prices aimed at bringing NHI prices closer to the market prices. The pricing round in April 2004 averaged a decrease of 4.2%, which was the lowest in two decades. The government has recognized the need for reforms to its pricing and reimbursement system in light of the country’s demographic problems. The reforms include raising co-payments from 20% to 30% for the elderly with higher incomes from 2006, 10% to 20% for 70- to 74-year old people from 2008, and promoting generic substitution by changing a prescription. The April 2006 price cut was on average 6.7% while long listed, off-patent products suffered an additional reduction of 2-8% according to the date of first listings. On the positive side innovative products will be more rewarded than now resulting in increased premium rates for new products with better usefulness (efficacy and/or safety) and innovativeness (new chemical entity and/or new mechanism of action). To further reduce pharmaceutical spending, MHLW uses various measures to accelerate usage of generics. In addition, MWLH showed their intention to introduce more frequent (once a year) price revisions.
Italy
A reference price reimbursement system for off-patent products 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), took 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 on any necessary changes. In line with its powers, in 2006, 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, leading to several price cuts. Price cuts have also been implemented as part of direct volume limitations, which focus on imposing a proportional price discount for drugs with a higher than average expenditure level. The level of discount is calculated such that it realigns the sales growth of these drugs to the average growth of the overall pharmaceutical expenditure.
Moreover, several Italian regions encourage additional initiatives, such as for hospitals to provide drugs for home use to patients upon discharge, thus saving distribution margins (wholesalers and pharmacists). The increasing role of hospitals in supplying medicines for out-patients could be one of the reasons the central government changed the pharmaceutical spending threshold from 13% for retail drug sales as a percentage of total healthcare spending to 16% for combined.
In October 2006 AIFA announced the latest cost-containment measures to cover the 2006 pharmaceutical overspending and confirmed the measures to cover the overspending for 2005:
United Kingdom
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. A five-year price-regulation agreement called the Pharmaceutical Price Regulation Scheme (PPRS) has been concluded between the industry association and the Department of Health.
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Table of ContentsWithin a framework relating to profit, manufacturers are free to set initial prices but restricted in making subsequent price changes. 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. In England, 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. In Scotland, the role of NICE is performed by the Scottish Medicines Consortium (SMC).
Spain
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 the health care system significantly influenced the development of the market, as regional governments have sought greater control over pricing and reimbursement. In recent years the pharmaceutical industry has been confronted mainly with a reduction in patented drugs prices of 4.2% in 2005 and another 2% in 2006, and a modification of the reference pricing system to boost the generic market. In November 2006 the Council of Ministers approved the royal decree to activate changes to the reference price system as provided for by the new Medicines Law. The system will be in place for a minimum of three years and the government hopes that it will save €600 million each year. In addition the pharmaceutical spending is subject to a government claw-back system.
Insurance and Risk coverage
We have four main insurance programs. This insurance is provided by corporate insurance and reinsurance companies, a mutual insurance company formed by various pharmaceutical Groups, and CARRAIG, our captive insurance company.
The Property & Business Interruption insurance program covers all of our sites. This program also includes efforts to improve safety and security.
The Stock & Transit programs protect 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. This program also includes efforts to improve safety and security.
The 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 reduced our coverage under this program by excluding certain products, accepting various restrictions, and also by increasing our exposure. Due to heavy exposure in the U.S., our cover integrates differentiated limits.
The Directors & Officers Liability program protects all of the Group’s legal entities and their directors and officers.
These insurance programs are backed by best in class insurance and reinsurance groups and protect every aspect of our operations. The amounts of coverage have been adjusted in accordance with our 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 world’s leading animal healthcare companies dedicated to the research, development, manufacture and delivery of innovative pharmaceuticals and vaccines used by veterinarians, farmers and pet owners.
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Table of ContentsThe animal healthcare product range comprises four major segments: parasiticides, anti-infectious drugs, other pharmaceutical products (such as anti-inflammatory agents, anti-ulcerous agents, etc.) and vaccines. The company’s 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.
Merial’s major markets are the United States, France, Italy, the United Kingdom, Brazil, Australia, Japan, Germany, Spain and Canada.
Merial operates through a network of 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 employs approximately 5,000 employees worldwide.
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, 2006. 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 Vaccines.
The sanofi-aventis parent company owns some shares in Group companies directly. During 2006, we continued the rationalization of our legal structure which we began in 2005. As part of this process, many equity holdings were transferred between Group entities.
The patents and trademarks of the pharmaceuticals activity are primarily owned by the sanofi-aventis parent company, Aventis Pharma (France) and Hoechst GmbH (Germany).
Within the Group, the holding company oversees research and development activities, by defining strategic priorities, coordinating work, and taking out the industrial property rights under its own name and at its own expense. In order to fulfill this role, sanofi-aventis subcontracts research and development to its specialized French and foreign subsidiaries, in many cases licensing its patents, manufacturing know-how and trademarks. In these cases, the licensee subsidiaries manufacture and distribute the Group’s products, either directly or via local distribution entities.
In several countries, sanofi-aventis carries out part of its business operations through ventures with local partners. In addition, the Group has signed worldwide alliances 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 symmetrical monthly transfers between the two groups. The holding company also operates a centralized foreign exchange risk management system, which enters into positions to manage the operational risks of its main subsidiaries.
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Table of ContentsD. 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 offices and research, production and logistics facilities on approximately 700 sites worldwide. All our support functions operate out of our office premises.
A breakdown of these sites by function, ownership/leasehold status, and location (France and worldwide) are provided below. Breakdowns are based on surface area. All surface area figures are unaudited.
Breakdown of sites by function (France)
Breakdown of sites by function (worldwide)
Research and development sites
Scientific and Medical Affairs R&D activities are housed at 26 sites:
Industrial sites
Production of chemical and pharmaceutical products is the responsibility of the Industrial Affairs Directorate, which is also in charge of most of our logistics facilities (distribution and storage centers).
We have approximately 75 production sites worldwide. The sites where the major sanofi-aventis drugs and active ingredients are manufactured are:
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The headquarters of our Vaccines subsidiary sanofi pasteur are located in Lyon, France. Sanofi pasteur has industrial sites located in France (Marcy l’Etoile, Val de Reuil); in North America (Swiftwater, Pennsylvania, United States; Toronto, Canada); and in emerging markets, namely China, Thailand and Argentina.
We own most of our Research & Development and production sites, either freehold or under finance leases with a purchase option exercisable at expiration.
Breakdown of sites between owned and leased (worldwide)
The carrying amount of our property, plant and equipment at December 31, 2006 was €6,219 million. During 2006, we invested €1,260 million (see note D.3 to the consolidated financial statements) in increasing capacity and improving productivity at our various production and R&D sites.
We believe that our production plants and research facilities are in full compliance with regulatory requirements, well maintained, and generally adequate to meet our needs for the foreseeable future. However, we review our production facilities on a regular basis with regard to environmental, health, safety and security issues, quality compliance, and capacity utilization. For more information about our property, plant and equipment, see Note D.3 to the consolidated financial statements.
Our principal investments in progress during 2007 are in our vaccines business, where construction has begun on two production facilities in France (one for bacterial production, and the other for the formulation of liquid vaccines).
We believe that our existing cash resources and unused credit facilities will be sufficient to finance these investments.
Item 4A. Unresolved Staff Comments
N/A
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Table of ContentsItem 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).
IFRS differ in certain significant respects from U.S. GAAP. Note F to our consolidated financial statements provides a description of the principal differences between IFRS and U.S. GAAP for 2004, 2005 and 2006, 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, 2005 and 2006.
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.
2006 Overview
After two years of strong growth, our Company faced more difficult conditions in 2006. During this year, we felt the full effect of generics competition for some of our products, especially in the United States where generic competitors for Allegra®, Amaryl®, Arava® and DDAVP® were launched between July and October 2005. We were also affected by healthcare system reforms in Europe, mainly in France and Germany. In addition, we were faced in August 2006 with the “at risk” launch of a generic version of clopidogrel bisulfate, even though the Plavix® patent remains in force (see Note D.22.b) to our 2006 consolidated financial statements included at Item 18 of this annual report). Plavix® sales in the U.S. market were severely affected, falling by 16.2% for the year. These sales, recorded by Bristol-Myers Squibb (BMS) under an alliance agreement, are not included in our consolidated net sales. However, the decline in U.S. sales of Plavix® eroded sales of the raw material for the product to BMS in the United States, and also significantly reduced the amount of royalties we received and our share of the post-tax income from the territories managed by BMS.
Faced with these challenges, we were able to benefit from the performance of our flagship pharmaceutical products. Our top 15 products posted comparable-basis growth of 6.4% in 2006 over 2005 (adjusting for exchange rate movements and changes in Group structure, as described below in “— Presentation of Net Sales”) compared to 14.0% in 2005 over pro forma 2004. Excluding the impact of generics of Allegra® and Amaryl® in the United States (i.e., excluding net sales of these two products in the United States for both periods), 2006 comparable-basis growth would have been 12.4%. We were also helped in 2006 by our growing human vaccines business (22.7% comparable-basis growth in 2006 compared to 26.9% in 2005 over pro forma 2004).
Our consolidated net sales reached €28,373 million in 2006, a rise of 3.9% on a reported basis and 4.0% on a comparable basis compared to 2005. Excluding the impact of generics of four products in the United States (following the launch of generics of Allegra®, Amaryl®, Arava® and DDAVP® between July and October 2005), 2006 comparable-basis growth would have been 8.2%. A geographic split of our 2006 net sales shows a balanced mix in our activities worldwide: 43.1% of net sales came from Europe (compared to 44.4% in 2005), 35.1% from the United States (compared to 35.0% in 2005), and 21.8% from “Other countries” (compared to 20.6% in 2005), the region with the fastest rate of growth (+10.5% on a comparable basis in 2006).
Given the increasingly difficult market conditions, we recognized the need to adapt our organizational structures and cost base. In France, we proposed a reorganization of our commercial subsidiary at the end of 2006, involving the loss of around 500 jobs, and additional efforts are being undertaken in the United States and in a number of other European countries. However, we reinforced our research efforts, with research and development expenses rising by 9.5% and representing 15.6% of net sales in 2006 (compared to 14.8% of net sales in 2005). At the same time, we continued to expand in fast-growing markets such as India, China, Mexico and Brazil.
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Table of ContentsOur operating income and net income were affected in 2006, 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 €21 million after-tax charges in 2006 (against €248 million and €342 million respectively in 2005 and 2004), as well as the amortization and impairment of acquired intangible assets, which amounted to €2,935 million after-tax charges in 2006 (against €3,156 million and €795 million respectively in 2005 and 2004), and restructuring charges arising from the acquisition, we recorded operating income of €4,828 million and net income of €4,006 million in 2006 compared to operating income of €2,888 million and net income of €2,258 million in 2005 and operating income of €2,426 million and net income of €1,986 million in 2004. Without the effect of these charges, our adjusted net income amounted to €7,040 million in 2006, versus €6,335 million and €3,527 million in 2005 and 2004 respectively. The 2004 figures reflect the activities of Aventis from August 20, 2004. Adjusted net income is a 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 €6,604 million of net cash provided by operating activities in 2006 against €6,398 million in 2005 and €4,049 million in 2004 (including the net cash flow from the operating activities of Aventis beginning August 20, 2004). Prior to the Aventis acquisition, we typically maintained cash and cash equivalents in amounts that exceeded our debt. In 2004, we incurred significant debt to finance the acquisition. We have reimbursed a substantial portion of this debt in 2005 and 2006. As of December 31, 2006, our debt, net of cash and cash equivalents (meaning the sum of short-term debt and long-term debt less cash and cash equivalents) amounted to €5.8 billion, down from €9.9 billion as of December 31, 2005. Debt, net of cash and cash equivalents, is a financial indicator that is used by management and investors to measure the Company’s overall net indebtedness and to assess the Company’s financing risk as measured by its gearing ratio (debt, net of cash and cash equivalents, to shareholders’ equity). The gearing ratio improved from 21.4% to 12.6% over the period. See “Liquidity and Capital Resources — Consolidated Balance Sheet and Debt”, below.
Impact of Our Acquisition of Aventis in 2004
Our results of operations and financial condition for the years ended December 31, 2004, December 31, 2005 and December 31, 2006 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, 2005 and 2006 consolidated financial statements and their comparability are the following:
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Table of ContentsWe have prepared an unaudited pro forma income statement 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.
In our discussion below (see “Results of Operations — 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. The impact of this accounting effect on our 2006 income is also shown in the table below. For a detailed description of the effect of accounting for Aventis inventory at fair value, see Note D.1.3 to our consolidated financial statements included at Item 18 of this annual report.
The following table presents our net sales, operating income and net income attributable to equity holders of the Company in 2004, 2005 and 2006, on a consolidated basis. In addition, 2004 data are presented on a pro forma basis:
As discussed above, the accounting treatment of the acquisition of Aventis had a significant impact on our consolidated income statement in 2004, 2005 and 2006. 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 associates (i.e. 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. For consistency of application of this principle, adjusted net income is also adjusted for the impact of the acquisition of a minority stake in Zentiva (purchased in 2006). However, the acquisition of our minority stake in this associate did not have a significant impact.
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Table of ContentsWe have calculated our adjusted net income for 2004, 2005 and 2006. We have also calculated adjusted pro forma net income for 2004 based on the same principles but starting with our unaudited 2004 pro forma net income. The following table shows our adjusted consolidated net income for 2004, 2005 and 2006 and our adjusted pro forma net income for 2004, in each case including a reconciliation to consolidated net income attributable to equity holders of the Company or pro forma net income attributable to equity holders of the Company, 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
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Table of Contentsunder licensing agreements and distribution costs. 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 attributable to equity holders of the Company determined under IFRS, adjusted to exclude (i) the material impacts of the application of purchase accounting to acquisitions (primarily the Aventis acquisition) and (ii) 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 attributable to equity holders of the Company.
Non-GAAP adjusted net income excludes the effects of purchase-accounting treatment under IFRS related to acquisitions (primarily our acquisition of Aventis). We believe that excluding these non-cash charges will enhance an investor’s understanding of our underlying economic performance after the combination with Aventis because we do not consider that the excluded charges reflect the combined entity’s ongoing operating performance. Rather, we consider that each of the excluded charges reflects the decision to acquire the businesses concerned.
The purchase-accounting effects on net income primarily relate to:
The purchase-accounting effects on 2006 net income of the acquisition of Zentiva primarily relate to the charges to cost of sales resulting from the workdown of acquired inventory that was written up to fair value, net of tax and to the charges related to the amortization and impairment of Zentiva definite-lived intangible assets. Zentiva is accounted for as an associate using the equity method.
We believe (subject to the material limitations discussed below) that disclosing non-GAAP 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 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 for as poolings-of-interest.
As a result of the acquisition of Aventis, we have incurred significant integration and restructuring costs. We believe it is appropriate to exclude these costs from non-GAAP 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 2006, the Company has incurred all the announced integration and restructuring costs related to the acquisition of Aventis and the subsequent merger.
Our management uses and intends to use non-GAAP 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 non-GAAP adjusted net income as a subtotal in reporting our segment information
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Table of Contentsin accordance with SFAS 131 criteria. See Note D.35 to our 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 proposing 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 investor’s 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. 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
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Table of Contentsidentifiable 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 (to the extent not already repaid). See “Liquidity and Capital Resources — 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 and other acquisitions 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 2006, 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 another unaudited non-GAAP indicator that we believe is a useful measurement tool to explain changes in our reported net sales:
A reconciliation of our reported net sales to our comparable net sales is provided at “Results of Operations — Year Ended December 31, 2006 compared with Year Ended December 31, 2005 — Net Sales” and “Results of Operations — Year Ended December 31, 2005 compared with Pro Forma Year Ended December 31, 2004 (unaudited) — Net 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.
BMS Alliance
Our revenues, expenses and operating income are affected significantly by the presentation of our alliance with BMS in our consolidated financial statements.
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Table of ContentsThere 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:
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:
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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 financial impacts of the alliance on the Company’s income statement are described in “Results of Operations”, in particular in “— Net sales”, “— Other Revenues”, “— Share of Profit/Loss of Associates” and “— Net Income Attributable to Minority Interests”.
P&G Alliance
The other principal alliance with a significant effect on our revenues, expenses and operating income 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, which is not included in the alliance and is covered by a separate marketing agreement.
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 2006, we earned 35.1% of our net sales in the United States. A decrease in the value of the U.S. dollar against the euro has a negative impact on our revenues, which is not offset by an equal reduction in our costs and therefore negatively affects our operating income. A decrease in the value of the U.S. dollar has a particularly significant impact on our operating margins, which are higher in the United States than elsewhere, and on the contribution to net income of our alliance with BMS in the United States, which is under the operational management of BMS, as described in “Financial presentation of Alliance — BMS Alliance” above.
For a description of positions entered into to manage operational exchange rate risks as well as our hedging policy, see “Item 11. Quantitative and Qualitative Disclosures about Market Risks.”
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Table of ContentsDivestments
Our main divestment during 2006 was the transfer of our rights to Exubera® and our interest in the Diabel joint venture to Pfizer. On January 13, 2006, we signed an agreement to transfer our rights to Exubera®, an inhaled human insulin, to Pfizer. The terms of the 1998 alliance between Aventis and Pfizer to jointly develop, manufacture and market Exubera® included a change of control clause, which Pfizer decided to exercice following the acquisition of Aventis by Sanofi-Synthélabo.
Under the terms of the agreement signed on January 13, 2006, sanofi-aventis sold to Pfizer its share in the worldwide rights for the development, manufacturing and marketing of Exubera®, along with its interest in the Diabel joint venture (based in Frankfurt, Germany), which owns the insulin manufacturing facility used in the production of Exubera®.
In return for the transfer of these assets and rights, sanofi-aventis received a payment of $1.3 billion (net of German taxes). The impact of this transaction in 2006 was a pre-tax gain of €460 million, recognized in “Gains and losses on disposals, and litigation”, and an after-tax gain of €384 million.
Acquisitions
Our main acquisition during 2006 was as follows: on March 27, 2006, we paid €433 million (including acquisition costs) to acquire the entire interest in Zentiva N.V. (7,487,742 shares) held by Warburg Pincus, and a further 1,998,921 shares held by certain managers and employees of Zentiva. On completion of this transaction, we held a 24.9% interest in the capital of Zentiva. The company’s management, which owns approximately 5.9% of the capital, signed a shareholders’ agreement with sanofi-aventis, which appoints two of the 8 members of Zentiva’s Board of Directors.
Zentiva N.V. is an international pharmaceutical company that develops, manufactures and markets low-cost branded pharmaceutical products. The company has strong positions in the Czech Republic, Slovakia and Romania, and is expanding rapidly in Poland, Russia and the Baltic states.
In 2006, Zentiva generated sales of 14,020 million Czech koruna (CZK), or €495 million, against CZK 11,839 million (€410 million) in 2005. Net income totaled CZK 2,228 million (€79 million) in 2006, against CZK 1,878 million (€65 million) in 2005. The Zentiva group employs over 4,000 people, and has production sites in the Czech Republic, Slovakia and Romania.
We do not control Zentiva, although as a result of our significant interest in Zentiva, this investment is accounted for as an associate using the equity method.
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Table of ContentsResults of Operations
Year Ended December 31, 2006 Compared with Year Ended December 31, 2005
The table below shows the main components of net income in 2006 and 2005:
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