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Morningstar Note on Sanofi.



New Product Sales Boost Sanofi's 3Q Despite Generic Competition to Lovenox

by Damien Conover, CFA | 10-28-10 | 11:08AM

Sanofi-Aventis reported third-quarter results that slightly exceeded our expectations, but we don't expect any changes to our fair value estimate based on the minor outperformance. Total sales decreased operationally by 2% year over year, largely because of new generic competition to anticoagulant drug Lovenox. The acquisition of Chattem added 1 percentage point to growth in the quarter. Earnings per share decreased 2% versus the prior-year period at constant exchange rates. We believe the steady quarter enabled Sanofi to increase its 2010 earnings per share growth forecast to 0%-2% from negative 4%-0%. We expect Sanofi will reach the top end of its guidance range as a result of strong new product growth and slowing generic competition to Lovenox.

Generic competition to Lovenox in the United States weighed on total sales growth in the quarter. The July launch of a generic competitor caused the drug to decline 50% year over year in the U.S. However, given the complexity of manufacturing the drug, we don't expect other generic launches in the U.S. for several quarters, which should allow Sanofi to hold on to close to 20% of its market share in the near term because of limited competitors. Also, since Europe has requested a more rigorous review for a generic Lovenox, we don't expect generic competition in Europe until after 2012.

Partly offsetting generic competition in the quarter, new products posted surprisingly strong sales growth. In particular, cancer drug Jevtana generated EUR 44 million in the quarter, well above our estimate. Given the drug's July approval in the U.S., we believe Jevtana is off to a very strong start. The combination of strong starts for Jevtana and cardiovascular drug Multaq give Sanofi two of the best starts for new drugs in the entire industry over the past two years.

Costs increased year over year as a percentage of total sales largely because of the lost sales from Lovenox, which carries high margins. We expect cost-cutting efforts will mitigate the margin erosion caused by patent losses on high-margin drugs over the next several quarters.

Sanofi will be presenting at the Morningstar Stock Forum on Nov. 4. For more information on the conference, please go to this URL: http://global.morningstar.com/2010StocksForum.