Biotech Values

[DewDiligence]

SNY’s revised EPS guidance allows for only modest price concessions on US sales of Lovenox, according to my calculations. However, these calculations involve manifold estimates of unknown quantities, so reasonable people may disagree about what it all means for MNTA investors.

Since this analysis is quite involved, let’s take it one step at a time:

1. SNY’s 2010 full-year EPS guidance as of 4/29/10 was a change of +2% to +5% relative to full-year 2009 EPS (http://en.sanofi-aventis.com/binaries/20100429_q1_2010_en_tcm28-28188.pdf ).

2. SNY reported 2Q10 on 7/29/10, six days after the launch of generic Lovenox. In its 7/29/10 PR, SNY changed its 2010 full-year EPS guidance to a range of -4% to 0% relative to 2009 (http://en.sanofi-aventis.com/binaries/20100729_Q2_2010_Results2_en_tcm28-29020.pdf ).

3. Based on #1 and #2, the delta in SNY’s 2010 EPS guidance was a range of : -6% to -5%. For the sake of simplicity, let’s call the delta -5.5%.

4. As of 7/29/10, there were 162 days remaining in 2010. Thus, SNY’s downward revision to 2010 EPS guidance implies that SNY reduced the annualized EPS run rate by (0.55)/(365/162), which is about 12%.

5. How much of the 12% reduction in SNY’s EPS run rate is attributable to Lovenox? We don’t know exactly, but it’s clear that that the most consequential item in SNY’s guidance reduction was government action in several EU countries to cut the prices for prescription drugs more sharply than SNY had expected (in response to the debt crisis in such countries as Spain, Portugal, and Greece). Based on the disclosures by other Big Pharma during their 2Q10 CC’s and the high proportion of SNY’s overall sales that come from Europe, I estimate that the steeper-than-expected price cuts in Europe were responsible for a reduction of 7-8% in SNY’s EPS run rate. This leaves 4-5% to account for, and I think the launch of generic Lovenox on explains essentially all of this 4-5%.

6. In 2Q10, US sales of Lovenox comprised 6.6% of SNY’s overall corporate sales and about 10% of its operating income (because Lovenox is a high-margin drug and operating margins are highest in the US). Thus, the 4-5% reduction in #5 above represents a 40-50% reduction in SNY’s operating income from US sales of Lovenox.

7. MNTA disclosed on its 2Q10 CC and a subsequent webcast that NVS is supplying or plans to supply 35-40% of US Lovenox volume in the short run. Assuming that no additional Lovenox demand has been created by the arrival of competition (although this should happen in due course), SNY’s US Lovenox volume has taken (or will soon take) a 35-40% hit.

8. Because SNY’s fixed costs of Lovenox manufacturing are now being spread over less volume, SNY’s gross margin on US Lovenox sales has declined. However, SNY has also cut back to some degree on the number of Lovenox sales reps who call on physicians in the outpatient setting, and it’s reasonable to assume that the decrease in SNY’s gross margin and the decrease in SNY’s selling expenses offset one another. If this assumption is accurate, then SNY’s 35-40% drop in US Lovenox volume causes a 35-40% drop in SNY’s operating income from US sales of Lovenox before taking into account changes in pricing.

9. To get from a 35-40% drop in volume to the 40-50% drop in operating income calculated in #6 above, the reduction in SNY’s average selling price would have to be at most 1.0–(0.50/0.65) = 23%.

10. Perhaps the most consequential take-away from all this is that SNY will not be able to meet its own EPS guidance for 2010 if it were to launch an authorized generic.

Feedback welcome.