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SNY AT A GLANCE

P/E ► 14.7 AVG EV/EBITDA ► 5.33 VERY LOW ROA ► 6.3% AVG ROE ► 9.4% AVG Debt to Equity ► 0.604 LOW Current Ratio ► 1.65 AVG Interest Coverage Ratio ► 13.4 AVG

 

 

 

 

 

 

Sanofi-Aventis (NYSE: SNY) is the fourth largest pharmaceutical company in the world and the largest in Europe by Revenue with Euro (EUR) 28.8 billion in sales in 2008. Some of Sanofi-Aventis' most successful products include cardiovascular drugs Lovenex and Plavix and insomnia fighter Ambien.

One of the major strengths of Sanofi-Aventis is its strong global presence. In the coming years, Sanofi-Aventis will be able to leverage this advantage to capitalize on key demographic shifts such as rapidly aging populations in developed countries like the US and the rising middle class in emerging markets. The company's strong pipeline of over 120 drugs in development will complement its gains from these trends.

Several challenges cloud these sunny prospects. Some of the company's most profitable drugs face patent challenges or expirations not far down the road. Furthermore, governments in its largest markets are seeking to cut healthcare costs and expand drug availability, which would adversely impact the company's margins. The company has also suffered some major setbacks in drug development. Most recently, US Food and Drug Administration refused to approve obesity drug Acomplia, which had been considered key to short term revenue growth.

In September 2008, Sanofi-Aventis bought the Czech generics manufacturer Zentiva for $1.8 billion euros (US$2.6 billion). The company already held a 24.9% stake in Zentiva since March of 2006. ^[1]

Corporate Overview

Headquartered in Paris, Sanofi-Aventis was formed in 2005 when Sanofi-Synthélabo merged with Aventis in a €54.5B ($73B) transaction. The merger produced one of the world's five largest drugmakers and the number one drug maker in Europe. In fiscal 2006, sanofi Aventis reported €28B ($38B) in consolidated sales and €4B ($5.3B) in gross profit. sanofi Aventis operates in two broad segments: pharmaceuticals and vaccines.

Pharmaceuticals ^[2]

Sanofi-Aventis' pharmaceutical segment brings in the vast majority of the company's revenue and profit. In 2008, the company had a total of six blockbuster drugs which each brought in over €1B in revenue. Sanofi-Aventis concentrates its pharmaceutical efforts in six major therapeutic areas: thrombosis, cardiovascular diseases, metabolic disorders, oncology, central nervous system disorders, internal medicine and vaccines.

Blockbusters & Major Therapeutic Areas

Thrombosis: Plavix & Lovenex. Thrombosis occurs when clots obstruct blood vessels. The most familiar thrombotic diseases are strokes and heart attacks. Sanofi-Aventis has two blockbuster drugs targeting thrombotic disease. Plavix, which impairs clot formation, brought in €2.6B in revenue in 2008. Lovenex, which targets certain heart attack causing clots and clots that form in the legs, brought in €2.7B in revenue.

Cardiovascular Disease: Aprovel. Cardiovascular disease is the leading cause of premature death in the world, accounting for 30% of all human deaths. Hypertension or high blood pressure is the most common of all cardiovascular diseases affecting 25% of the world's population. Hypertension may result in stroke, heart attack or kidney failure. Sanofi-Aventis markets one blockbuster drug that targets hypertension: Aprovel (€1.2B in sales FY 2008.)

Metabolic Disorder (Diabetes): Lantus. Diabetes impairs one's ability to control blood sugar levels. Over 230 million people worldwide suffer from diabetes. Diabetes may lead to further complications including heart attack, kidney failure, amputation and eye problems. Sanofi-Aventis has one blockbuster diabetes drug: Lantus. Lantus is the first 24 hour effective insulin available to victims of type 1 and type 2 diabetes. In FY 2008, Lantus brought in €2.5B in revenue.

Oncology (Cancer Treatment): Taxotere & Eloxatine. Cancer is now the second leading cause of death in the US and Europe after cardiovascular disease. Over 10 million people are diagnosed with cancer on a yearly basis. Sanofi-Aventis is on the leading edge of the fight against cancer. The company currently markets two blockbuster oncology drugs. The first, Taxotere is a chemotherapy drug that inhibits the division of cancerous cells. Taxotere targets solid tumors that cause breast, colon, lung and prostrate cancers, generating €2.0 in sales in 2008. The second drug, Eloxatine, targets colorectal cancer which is particularly prevalent in the US and Europe. Eloxataine generated almost €1.3B in revenue in FY 2008.

Nervous System Disorders: Ambien & Copaxone. Sanofi-Aventis also markets two blockbuster drugs that target nervous system disorders. One of the company's most successful drugs has been Ambien which treats insomnia. Insomnia involves difficulty falling asleep and waking up repeatedly during the night. Approximately 150 million people suffer from insomnia worldwide. Ambien generated over €829M in sales in FY 2008. Yet another important drug targeting central nervous system disorders is Copaxone, which targets multiple sclerosis. Copaxone generated €622M in sales in 2008.

Vaccines ^[3]

Sanofi Pasteur is a subsidiary of Sanofi-Aventis which produces and markets Sanofi-Aventis' wide array of vaccines. In 2008, Pasteur was responsible for vaccinating over 500 million people worldwide against a host of potentially deadly diseases. Pasteur focuses primarily on Polio/Whopping Cough, Booster, Influenza, Travel and Meningitis vaccines. Sanofi-Aventis' vaccine division generated €2.86B in revenues in 2008.

Aventis Pasteur recently gained regulatory approval for a meningitis vaccine. This release, in addition to the release of six other vaccines, including one for bird flu, is expected to more than double the unit's revenue to €5.4B.

Sanofi Aventis sees its vaccines business growing to represent more than 15 percent of total sales 'within the next years', from under 10 percent right now.^[4] The company has spent $150 million to build a flu vaccine plant that will increase U.S. production capacity to 100 million doses by 2009. Several other vaccine factories are slated to open in China and France in the next five years. The company has announced that it expects its global vaccine sales to double to €22 billion by 2016 and will invest €4 billion to expand its production capacity.^[5]

The vaccine industry may offer some key advantages to major drugmakers hurt by generic competition. The U.S. government has given outright grants to vaccine manufacturers in anticipation of a feared worldwide flu outbreak. Government support and the complexity of vaccine manufacturing makes it more difficult for generic drug manufacturers to gain market share.

Sanofi-Aventis has also entered the H1N1 flu market, where it achieved Q3 sales of $78 million. The company expects Q4 revenues to approach $500 million and remain at a similar level in 2010.^[6]

Business Update

Sanofi-Aventis reported a strong Q2 2009. Sales were up 11% from a year earlier to €7.44B, and profits rose 4.9% to €1.06 from a year ago. The firm cited strong sales of major drugs (such as Plavix and Lantus), as well as solid vaccine sales (helped by high global demand for flu vaccines. Cost-cutting measures were also a component as Sanofi decreased labor costs and streamlined operations to mitigate the effects of a growing global recession and the threat of patent loss on major drugs. ^[7]

In Q3 2009, Sanofi-Aventis reported €7.4 billion, an 8% increase over the same quarter of 2008. Sales growth was driven by strong performances from Lovenox, Lantus, and Plavix. Sanofi-Aventis also saw an increased presence in emerging markets, where sales grew 20.9%. Net income for the quarter increased 15.9% to €2.23 billion, as R&D and SG&A expenses as a percentage of sales decreased.^[8] Sanofi-Aventis also estimated revenue and net income in 2013 to be similar to the numbers in 2008, as it announced its plans for €2 billion in cost cutting and an acquisition strategy of mid-sized companies smaller than €15 billion. These estimates are to serve as a floor for the company, assuming that clinical breakthroughs in the pipeline do not occur.^[9]

Research & Development

Researching and developing new drugs is the single most important consideration when identifying the prospects of any pharmaceutical company. The process, which includes a series of clinical trials, is lengthy and extremely costly. During development phases, researchers and scientists must screen hundreds of thousands of compounds. Out of these hundreds of thousands of compounds only one may be effective for treatment. This process represents the pharmaceutical equivalent of finding a needle in a haystack. The hunt for the next blockbuster drug may take in excess of 10 years and can cost as much as $800 million dollars. A successful drug pipeline is critical for pharmaceutical companies because former blockbusters losing patent protection must be constantly replaced by new viable drugs.

In fiscal 2008, sanofi-Aventis had an R&D budget of €4.6B, representing a 1% increase and 16.6% of sales. The company employs over 18,000 researchers and scientists globally. When a drug enters phase II, it is determined safe enough for experimental usage among a few hundred patients. Phase III testing involves calculating the risk/reward ratio of a potential drug. The company estimates that 30 to 40% of its new drugs were "first in class" or unique in their method of action. Despite this, sanofi-Aventis has recently faced several setbacks in drug development. On June 13, 2007, the FDA denied approval of the much hoped for obesity drug Accomplia.

The company plans to file 20 drugs with the FDA in 2008-9 and 23 in 2010-11.

Trends & Forces

Patent Expirations

Proportion of Sanofi-Aventis' revenue that is earned from drugs whose patents will expire or have expired during the time-frame on the x-axis.^[10]

For a detailed discussion of brand name vs. generic medication, see also Generic drugs.

Patent exclusivity is essential within the pharmaceutical industry, where the market exclusivity granted by patents enables companies to enjoy a period of high profitability necessary to justify the high costs of development for a novel therapeutic. Moreover, in the pharmaceutical industry, a single patent covering the active ingredient of the drug can oftentimes represent the entire unique value of that product.^[11]

The United States, European Union, Japan, and most developed nations in the world offer an accelerated generic drug approval process whereby competitors can develop generic versions of brand name drugs with expired patents. The accelerated approvals, known as ANDAs in the US, only require that the sponsor company show that their drug is equivalent to the name-brand drug, enabling that company to bypass the expensive and time consuming clinical trials required of a novel drug.^[12] The relatively cheap cost to develop generics in comparison to name-brand drugs enables generic companies to substantially undercut prices, to the tune of $10 billion total, annually across the industry.^[13]

Sanofi-Aventis has several drugs scheduled to lose patent exclusivity before 2011, including the Thrombosis drug Lovenox and the cancer drug Taxotere. By 2011, Sanofi-Aventis will have lost patent exclusivity to drugs representing 27% of their revenue. By 2015, that percentage will be 64% as blockbuster drugs Aprovel, Plavix, and Lantus lose patent exclusivity.^[14] While this percentage is large, it is important to note that Sanofi-Aventis earns over € 4.5 billion from drugs with expired patents, so it will not lose its entire revenue stream once generic competition enters. Moreover, Sanofi-Aventis spends 16.6% of sales in R&D and will look to compensate for these anticipated losses through the development of novel therapies.^[15]

Aging Populations

One macro trend that is sure to benefit the pharmaceutical industry on a mid to long term horizon is the world's aging population. Increased life expectancy coupled with decreased fertility in developed nations has produced a population that is, as a whole, older. In the United States, Western Europe and Japan median the median age has been on the rise for decades now and this trend is likely to accelerate with the upcoming wave of aging baby boomers. According to the United Nations, the population of people aged over 60 in the world is expected to rise dramatically from 606 million in 2000 to nearly 2 billion in the year 2050. In developed nations, the United Nations predict that people aged over 60 will compose almost 35% of the population by 2050 opposed to under 20% in the year 2000. Additionally, sanofi-Aventis will also benefit from trends in emerging markets such as China's aging population. A rapidly expanding older population represents a key growth opportunity for sanofi-Aventis because this demographic represents the company's core market.

Emerging Markets

Emerging markets across the globe present another strong growth opportunity for sanofi-Aventis. As populations in emerging markets such as BRIC (Brazil, Russia, India and China) grow wealthier, they are gaining access to ever more sophisticated health services. A continuation of this trend will expose hundreds of millions of potential customers to sanofi-Aventis pharmaceuticals and vaccines. In fiscal 2006, sanofi-Aventis reported a 10.5% increase in sales in emerging markets opposed to a 1.1% increase in Europe and a 3.9% increase in the United States. The vast size of the populations of these emerging markets present an exciting opportunity for expansion.

The Weakening Dollar

Another trend affecting sanofi-Aventis is the relative strength of the dollar. Although the company is based in Paris, sanofi-Aventis derives more than a third of its profits from the United States. Because of this, the company is very sensitive to the strength of the dollar. Over the past few years, the euro has been strengthening consistently against the dollar. The weakness of the dollar erodes the value of revenue derived in the United States. If the dollar continues to weaken, it will continue to have an adverse effect on sanofi-Aventis' earnings.

Major Acquisitions

One effective way for pharmaceutical companies to expand their drug portfolios and pipelines is through major acquisitions. One potential acquisition target for sanofi-Aventis is Bristol-Meyers Squibb, with whom it partnered with to produce and market Plavix, the world's second best selling drug. Bullish Wall Street analysts believe that a merger with Bristol-Meyers Squibb could provide substantial cost savings and boost earnings significantly in the short to mid-term. In the longer term, these analysts believe that Bristol's pipeline is much more promising for earnings in the long term, particularly after the year 2012. Bearish analysts caution that the earnings boost in the early years of a merger would decrease substantially looking past a longer term of 4 to 6 years. Additionally, they caution that sanofi-Aventis already has a strong presence in all major geographical regions and that it already possesses broad expertise in most therapeutic areas. Thus, they argue that a merger will not substantially increase sanofi-Aventis' competitiveness.

Unfavorable Legislative Environments

Sanofi-Aventis also faces serious political pressures to increase accessibility to drugs in its two major markets: Europe and the United States. In these two markets, politicians have been pushing aggressively for Sanofi-Aventis to lower drug costs or expand generic licensing. In 2006, European governments such as France and Germany took particularly drastic price reduction measures that adversely affected earnings in these markets. In the United States, legislators have also sought price reductions by giving federal programs such as Medicare and Medicaid increased latitude in its negotiations with pharmaceutical companies.

On November 5, 2008, Sanofi-Aventis announced they would be abandoning research of the weight loss drug Acomplia due to increased regulatory concerns over major psychological side effects. Competitor Pfizer announced that same day it had abandoned research on a drug of the same class.

Comparison to Competitors

The various aspects of patent protection and the extremely high costs of researching and developing drugs marks the pharmaceutical industry with high risk and high competitiveness. It is important to keep in mind when considering a comparison of industry players that competition does not arise between each company as a whole but rather between specific drug areas and their relative advantages in therapeutic treatment. For example, sanofi-Aventis blockbuster Plavix faces intense competition from the world cholesterol drug leader Lipitor, produced by Pfizer. Additionally, blockbuster Ambien faces renewed competition from Lunesta produced by Sepracor. Additionally, sanofi-Aventis' diabetes drug Lantus faces new competition from inhaled insulin drug Januvia produced by Merck. Sanofi-Aventis has outperformed the broader S&P Healthcare Index for the past five years, but the overall performance of the healthcare industry in the recent past can be best described as tepid. Sanofi-Aventis' performance may be credited to the strong performance of blockbusters such as Plavix and Lovenox and its strong pipeline marked by a large number of drugs in the latter phases of development.

Competition in the pharmaceutical industry lies mostly in specific drug markets. For example, a new diabetes drug is not going to have any effect on an existing cholesterol drug, no matter how successful it is. As a result, financial data on the pharmaceutical companies do not tell the whole story. Instead, it may be more appropriate to analyze Pfizer's competitors by each drug market (See section on Major Drugs and Industry Trends).

Note that Eli Lilly's net income is negative largely due to its acquisition of ImClone for $6.5 billion in October of 2008.^[16]

Bulls vs Bears

Bulls

• Sanofi-Aventis' strong global franchise will allow it to take full advantage of key demographic shifts such as aging populations in developed nations and the rising middle class in emerging markets.

• Sanofi-Aventis has a robust pipeline with over 125 drugs in development; 25 of these drugs are set to launch in the next 2 to four years which will provide a substantial boost to earnings.

• Sanofi-Aventis has 40 drugs that are "first in class" which means that they are unique in their method of treatment. First in class in class drugs are particularly attractive because of their blockbuster potential.

Bears

• Sanofi-Aventis revenues and profit are highly concentrated in a few blockbuster drugs like Lovenex and Plavix. Because of a lack of broad diversification, sanofi-Aventis is particularly vulnerable to patent challenges and expirations.

• Sanofi-Aventis recently suffered a major setback when the Food and Drug Administration refused to approve obesity drug Accomplia, its most promising new product, for use in the United States. Accomplia, which is already marketed in 18 countries, was expected to achieve great success and propel growth in the company's US market.

References

1. ↑ Sanofi-Aventis Raises Zentiva Bid to Clinch Takeover.
2. ↑ SNY 2008 Annual Report Pg. 17
3. ↑ SNY 2008 Annual Report Pg. 29
4. ↑ "Sanofi-Aventis sees vaccines share of sales rising to 15 pct within next years." AFX News Limited. January 7, 2008
5. ↑ http://online.wsj.com/article/SB121441818818404085.html?mod=rss_whats_news_us
6. ↑ Glaxo takes biggest slice of swine flu market
7. ↑ The Wall Street Journal. "Sanofi 2Q Net Pft +4.9%, Beats Views, Raises Outlook." 29 July 2009
8. ↑ Sanofi-aventis Delivers a Solid Performance in Third Quarter 2009
9. ↑ Sanofi ups earnings growth goal, plans cost cuts
10. ↑ 2008 Sanofi-Aventis 20-F Annual Report, p. 49
11. ↑ [www.earth.columbia.edu/cgsd/documents/lehman.pdf The Pharmaceutical Industry and the Patent System]
12. ↑ Abbreviated New Drug Application (ANDA): Generics
13. ↑ Trends in FDA Approval of Generic Drugs
14. ↑ 2008 Sanofi-Aventis 20-F Annual Report, p. 49
15. ↑ 2008 Sanofi-Aventis 20-F Annual Report, p. 78
16. ↑ Lilly to Acquire ImClone Systems in $6.5 Billion Transaction