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Sanofi in Neutral Lane

Zacks Equity Research

We are maintaining our Neutral recommendation on Sanofi (SNY) with a target price of $47.00. The stock carries a Zacks #2 Rank (Buy rating) in the short run.

Sanofi reported second quarter 2012 business earnings of 95 cents per ADS, above the Zacks Consensus Estimate of 84 cents. However, reported quarter earnings were much lower than the year-ago earnings of $1.18 per ADS. Sanofi expects 2012 business earnings to be 12% to 15% lower on a year-over-year basis at CER.

Several of Sanofi’s products are facing generic competition. Global sales of blood thinner Plavix have plummeted significantly. The genericization of the drug in the US was responsible for the massive decline along with continued loss of market share in Germany and other parts of Europe. Lovenox revenues also tumbled after Sanofi failed in its attempts to stop a generic version of Lovenox from entering the US market.

Aprovel, Taxotere and Xatral revenues are also being affected by generic competition. The company lost sales worth €2.2 billion to generics in 2011. Entry of both Avapro’s (March 2012) and Plavix’s (May 2012) generic versions are expected to negatively impact Sanofi’s business net income by around €1.4 billion in 2012.

In order to address its patent concerns, Sanofi reviewed its cost base and implemented a new operating model. The company conducted an extensive review of its research and development operations in order to reallocate resources to the highest growth and most promising development programs. The new operating model should help in reducing significant R&D and SG&A costs.

Sanofi delivered cost savings of €2 billion by the end of 2011. The company remains on track to generate additional cost savings of €2 billion by 2015. The company expects to realize one-third of this saving by the beginning of 2013. As a part of its cost cutting initiatives, Sanofi plans to reduce its workforce in France by approximately 900 positions by 2015.

We are pleased with Sanofi’s progress with its pipeline. Over the last few months, several of Sanofi’s pipeline candidates gained approval. We are positive on the US approval of Aubagio (teriflunomide), Sanofi’s oral treatment for relapsing forms of multiple sclerosis (:RMS). The oral dosing of the drug should provide MS patients with an additional and convenient treatment option. We believe that Aubagio possesses significant commercial opportunity.

Another important US approval is that of oncology candidate, Zaltrap, as a combination therapy for treatment-experienced patients suffering from metastatic colorectal cancer. Zaltrap, which is being developed for additional indications (including prostate cancer - phase III), has blockbuster sales potential. New product launches should make significant revenue contributions in the upcoming quarters.

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