Generics Continue to Hurt Sanofi

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Sanofi (SNY) reported fourth quarter 2012 business earnings of 77 cents per American Depository Share (ADS), in line with the Zacks Consensus Estimate but below the year-ago earnings of $1.05 per ADS. Full year earnings came in at $3.98 per ADS, below the Zacks Consensus Estimate of $4.07 and the year-ago earnings of $4.63.

Fourth quarter net sales increased 0.2% on a reported basis but fell 1.7% at constant exchange rates (:CER). The strong performance of growth platforms was mitigated by generic competition, European austerity measures, divestment of the Dermik assets and the return of Copaxone assets. Full year net sales increased 4.7% on a reported basis (up 0.5% at CER).

Segmental Performance

Sanofi operates through the following segments: Pharmaceuticals, Human Vaccines and Animal Health. All growth rates mentioned below are on a year-on-year basis and at CER.

Pharmaceutical segment sales decreased 4.8% to €7.0 billion. Weaker revenues were primarily due to generic competition (€499 million), European pricing pressure, return of Copaxone assets (€86 million) and Dermik divestment (€35 million). The diabetes franchise (up 20.9% to €1.5 billion) continued performing well with growth driven by Lantus (up 22.6% to €1.3 billion). Apidra sales went up 82.9% to €65 million in the fourth quarter of 2012.

We note several of Sanofi’s key products are facing generic competition. In the fourth quarter of 2012, Eloxatin sales nosedived 80.0% to €68 million due to generic competition. The product went off patent in the US on Aug 9, 2012.

Generic competition also affected Plavix revenues, down 6.2% to €503 million and Aprovel/Avapro/Karvea/Avalide revenues, down 34.1% to €212 million. We remind investors that Plavix and Avapro went off patent in the US in May 2012 and Mar 2012, respectively.

Following the genericization of Plavix and Avapro in major markets across the globe, Sanofi and its partner Bristol-Myers Squibb Company (BMY) revamped their long-standing alliance regarding the drugs. As per the new agreement, effective from Jan 1, 2013, Sanofi sells Avapro/Avalide globally and Plavix in all markets, except the US and Puerto Rico.

Lovenox (down 13.1% to €441 million) also performed disappointingly due to generic competition in the US.

Newly launched multiple sclerosis drug, Aubagio, generated US sales of €7 million in the fourth quarter of 2012. In the EU, the Committee for Medicinal Products for Human Use (CHMP) is expected to give an opinion on the approval of Aubagio in the first quarter of 2013.

New Genzyme sales increased 22.2% to €481 million. Cerezyme sales increased 26.1% to €171 million. Myozyme/Lumizyme sales increased 11.1% to €121 million.

Fabrazyme sales were €84 million, up 74.5%. Higher revenues reflected patients switching to Fabrazyme from Shire’s (SHPG) Replagal and better product supply.

Sales in the consumer health care business climbed 11.2% to €732 million, driven by strong performance in the emerging markets in the fourth quarter of 2012.

The Generics sub-group at Sanofi performed disappointingly in the final quarter of 2012 with sales declining 7.2% to €458 million. Reduced sales of the authorized generic versions of Lovenox hurt results during the quarter.

Fourth quarter 2012 Human Vaccines revenues were €1.0 billion, up 20.5%. Sales of the Animal Health segment increased 6.6% to €506 million in the fourth quarter of 2012, supported by Emerging Markets (up 14.0%).

Outlook

The company expects 2013 business earnings per share to remain flat to down 5% from 2012 levels (at CER). The Zacks Consensus Estimate for 2013 is currently pegged at $4.13 per share.

Business net income will be impacted by around €800 million in the first half of 2013 due to Plavix and Avapro genericization.

In 2013, US healthcare reform is expected to impact revenues by almost €500 million, while European pricing pressure is expected to have an impact of €300 million.

Sanofi is looking to combat the generic threat confronting most of its key drugs by signing deals and making acquisitions. We are pleased with Sanofi’s efforts to develop its pipeline and believe that newly approved products in Sanofi’s portfolio hold huge commercialization potential.

Since the start of 2013, several of Sanofi’s pipeline candidates gained approval including approval of diabetes candidate, Lyxumia (lixisenatide) and oncology drug, Zaltrap (aflibercept) in Europe and Kynamro for homozygous familial hypercholesterolemia (HoFH) in the US.

At the beginning of Feb 2013, Sanofi’s pipeline consisted of 64 new molecular entities and vaccines in clinical development, of which 17 were either undergoing phase III studies or are under regulatory review.

Sanofi carries a Zacks Rank #1 (Strong Buy) in the short run. Novo Nordisk (NVO) is an example of another equally attractive large-cap pharma stock. It also carries a Zacks Rank of #1.

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