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The pharmaceutical industry is awash in M&A activity, which is a topic we have been discussing in Phils Stock World (PSW) daily chats. M&A events are good in this 'challenging' environment, as long as it does not lead to a monopoly. At PSW, we strive to get the most up to date information, and have a long list of members that help in accumulating as much as possible. This guides us in the formation of fundamental stock AND option picks. (Read Phil's 'How to buy a Stock for a 15-20% Discount.') Sanofi-Aventis (SNY) is one company that we are going to look into to see if they fit the bill. Join here and get the latest trades (with a discount for joining)….we have had some good trades recently, including two big winners…ARNA (up over 100%), JAZZ (up over 40%). Not all are going perfectly, as DCTH was a BIG winner and then proceeded to implode, but we are holding strong as the science speaks for itself.
The formation of Sanofi-Aventis (SNY) is one that is convoluted and long. Briefly, Sanofi-Aventis was formed in 2004 when Sanofi-Synthélabo acquired Aventis. Sanofi-Synthélabo was formed in 1999 when Sanofi (former subsidiary of Total) merged with Synthélabo (former subsidiary of L'Oréal). The merged company was based in Paris, France. Aventis was formed in 1999 when French company Rhône-Poulenc S.A. merged with the German corporation Hoechst Marion Roussel, which itself was formed from the 1995 merger of Hoechst AG with Roussel Uclaf and Marion Merrell Dow (MMD was also 3 separate companies!). The merged company, Aventis, was based in Schiltigheim, near Strasbourg, France. In early 2004, Sanofi-Synthélabo made a hostile takeover bid worth €47.8B for Aventis. Initially, Aventis rejected the bid because it felt that the bid offered inferior value based on the company's share value. The three-month takeover battle concluded when Sanofi-Synthélabo launched a friendly bid of €54.5B in place of the previously rejected hostile bid. French government intervention also played an active role. The French government, desiring what they called a "local solution", put heavy pressure on Sanofi-Synthélabo to raise its bid for Aventis after it became known that Novartis, a Swiss pharmaceutical company, was in the running.
The M&A activity that created of Sanofi-Aventis has provided the company with a broad base, comprising prescription pharmaceuticals (e.g., Allegra, Plavix), over-the-counter (OTC) products, generics, animal health (Merial) and vaccines (Sanofi Pasteur) – one of its stronger divisions. In-line with a diversified business, the company has subsequently sourced acquisition targets to boost its existing business segments and to also encourage geographic expansion including:
- In 2008, Sanofi acquired British vaccine-maker Acambis and Czech generics player Zentiva.
- '09 was a very active year, where Sanofi-Aventis acquired Mexican generics company Laboratorios Kendrick, Brazilian generics giant Medley, the Indian vaccines specialist Shantha Biotechnics, followed by generics maker Helvepharm from Swiss health care group Von Rose. Outside of prescription sales, Sanofi-Aventis acquired the remaining 50% stake in animal health business, Merial, in October '09, which is presently a joint venture with Merck &Co. and was previously not consolidated by Sanofi-Aventis.
- Also in 2009, SNY acquired Fovea, a French eye care company for €370. Fovea has 4 compounds in development for allergic conjunctivitis, macular edema, and retinitis pigmentosa.
- To its consumer care business, SNY, in 2008, purchased the Australian consumer health company Symbion, Oenobiol (France), Kernpharm (Netherlands) and Gramon (Argentina). In Q1 2010 it also signed agreements to establish a new Consumer Health Care joint venture in China with Minsheng Pharmaceutical Group. The intended joint venture with Minsheng will primarily focus on Vitamins and Mineral Supplements, the largest consumer healthcare segment in China (Minsheng's strongest presence). In February '10, Sanofi Aventis purchased Chattem, offering a key opportunity to develop Sanofi’s US consumer care market presence which will allow them to convert their prescription medicines, such as Allegra, to over-the-counter status in the US.
- Currently, the company is courting Genzyme for its high margin enzyme/biologics franchises.
In Q2 2010, Sanofi-Aventis reported revenues of €7.78 billion, growth of 4.6% from the quarter last year. Net income growth of 7.6% to €2.47 billion was also reported for the quarter. Growth was largely driven by increase in sales in Emerging Markets that increased by 12.8% at €2.28 billion as well as strong sales in the diabetes division. Net income (€2.47 billion beat €2.32 billion) and Earnings per share (€1.9 beat €1.78) both beat analyst averages. (Company reported information July 2010)
In Q1 2010, Sanofi-Aventis reported revenues of €7.4 billion for the fourth consecutive quarter, representing a 5.8% growth from 2009. Net income growth of 16.2% to €2.4 billion was also reported for the quarter. Growth was largely driven by H1N1 vaccine sales (€413 million) as well as strong sales in the consumer health and diabetes divisions and in emerging markets. This growth helped the company offset over €350 million in lost revenue for the quarter due to generic competition. Earnings beat analyst estimates for the quarter.(Company reported information February 2010)
What does the rest look like? Well, my opinion and several others believe that the next few years are going to be lean and flat due to the patent expiration that SNY is facing. Below is their patent expiry to '15 (and I discussed many of them at PSW here), and they have several drugs scheduled to lose patent exclusivity before 2011, including the thrombosis drug Lovenox (Heparin based) and the cancer drug Taxotere. By 2011, SNY will have lost patent exclusivity to drugs representing 27% of their revenue. By 2015, that percentage will increase to a whopping 64% as blockbuster drugs Aprovel, Plavix, and Lantus lose patent exclusivity. Moreover, SNY spends 16.6% of sales in R&D and MUST compensate for these anticipated losses through the development and/or licensing of novel therapies.
Projected revenues will remain relatively flat over the coming years, and based upon their quarterly and yearly data, there is not much to grow. Data are presented below – and know we know why Genzyme is a target – high growth targets!
The vaccines division, named Sanofi Pasteur, competes with GSK and MRK as an industry leader. In recognition of this, SNY and MRK have developed a joint venture—Sanofi Pasteur MSD—from which SNY reports non-consolidated revenues generated in Western Europe. Based on a combination of consolidated Sanofi-Pasteur sales and non-consolidated joint-venture revenues, SNY reported that it was the market leading vaccines player in 2008!
SNY reports that it has 54 compounds in the pipeline, of which only 18 are in Phase III (PIII). Below is a list of their pipeline information as of February '10:
What I am most excited about are a few things that are in PII and PIII:
- BSI-201 – a Parp inhibitor. It is early, but Parp is a protein involved in a number of cellular processes involving mainly DNA repair and programmed cell death. Inhibiting this causes cells to die, and cancer is an overactive cell that just won't die!!
- aflibercept (VEGF trap) is being co-developed by SNY and Regeneron for cancer. I noted REGN in member chat a few weeks back, noted that four PIII studies of aflibercept, in combination with chemotherapy. The studies are being conducted in first-line metastatic pancreatic cancer (failed), first-line metastatic hormone-refractory prostate cancer (data due out soon), second-line non-small cell lung cancer, and second-line metastatic colorectal cancer (data due out early 2011).
- Lixisenatide (ZP10, AVE0010) is a glucagon-like peptide 1 (GLP-1) receptor agonist that incorporates Zealand Pharma’s SIP®-technology and is targeted to treat Type 2 diabetes. I am not excited by this one as SNY will compete with LLY/Amylin, NovoNordisc and oral DPP-IV compounds by Merck and Novartis.
- AVE5026 is an ULMWH with a high anti-Xa activity associated with residual anti-IIa activity that should provide superior safety to other heparin agents which may translate into improved antithrombotic efficacy with decreased bleeding risk for the management of cancer associated thrombosis.
The biggest concern for SNY is the high exposure to generic risk on many of its leading products (there is a trend in my writings). The risks include Avapro, Allegra, Lovenox, Eloxatin, Delix, Taxotere, Plavix and Ambien which will all keep a lid on share prices. With Eloxatin is already off patent and has generic competition ('09), and the next wave of generic erosion will occur in 2010 when Taxotere loses exclusivity. I also expect Plavix revenues to be eroded into by JnJ/Bayer's new drug, Xarelto (discussed here).
The generic risk to Lovenox is the most concerning at the present time, as Teva and several others are trying to persuade the FDA to allow generics in, and should it materialize, it would cause significant problems for SNY. There are whispers that generic manufacturers are having problems getting a Lovenox substitute approved , the risk remains that Lovenox sales may be compromised. From the '09 sales data above, Lovenox accounted for 10.4% of total sales and a generic alternative would be harsh.
Zack computes SNY's trailing 12-month earnings multiple is 8.1, a significant discount to the 13.6 average for the industry and 27.0 for the S&P 500. The stock is currently trading at 8.3x from its 2010 EPADS. While new product launches may make significant revenue contributions in the early part of the decade, as with the rest of the industry (aka LLY, PFE), the revenues lost will not be enough to compensate for increased generic erosion. Gross margins will likely contract now that Lovenox and Plavix (EU) sales are at or near peak levels, combined with softer pricing on current and soon-to-be off-patent drugs. Based on our concerns regarding the generic threat to key products, we are downgrading our recommendation on Sanofi to Underperform with a target price of $32, which is based on 7.3x our 2010 EPADS of $4.36.
Overall, like the rest of the Pharma companies, SNY faces many headwinds in the coming years. Merck lost Zocor a few years back, and with the merger with SGP, they seem to be navigating the waters. Cost cutting is one way to keep revenue in check, but those measures only get the company so far in the game. The Genzyme acquisition (should it happen), will aid in the revenue stream and allow SNY to continue on the path to success, but it is not the be-all end-all for them. The company needs a few more targeted products to continued success in the Pharma sector. Please join us in chat to get the most up to date picks over at Phil's Stock World.