Sanofi-Aventis Beats Sales Expectations Despite Generic Competition in Q2

French pharmaceutical company Sanofi-Aventis has reported a 4.6% y/y increase in second-quarter (Q2) sales to reach 7.8 billion euro (US$10.2 billion), helped by favourable currency fluctuations as sales at constant currency declined 1.2% y/y. Meanwhile, Sanofi's first-half (H1) sales were up 4.3% y/y on a reported basis to 18.2 billion euro, boosted by a continuous penetration in emerging markets and by a strong performance of its diabetes portfolio, up 11.6% y/y over the period. Generic competition on Plavix (clopidogrel), Eloxatin (oxaliplatin) and Allegra (fexofenadine hydrochloride) were partly compensated by Sanofi's generic and consumer healthcare businesses which continued to perform well. Meanwhile, Sanofi continued its cost-cutting strategy in the first half with a 3.1% y/y decrease in research and development costs and a flat growth in selling and general expenses. As a result, Sanofi's operating income—calculated by IHS Global Insight as net sales minus cost of sales, R&D, and selling and general expenses—rose 3.5% y/y to reach 5.2 billion euro in the first half. Exchange-rate fluctuations had a favourable effect of 2.1 percentage points mainly due to appreciation of the Brazilian real, Australian dollar and Canadian dollar against the euro. At constant exchange rates, and including structural changes such as the acquisition of U.S. consumer health business Chattem, French leader in nutritional supplements Oenobiol and Czech generics producer Zentiva, net sales increased 2.2% y/y in the first half. Net income was up 8.6% y/y in the first half of 2010 to 4.9 billion euro.

Meanwhile, Sanofi's revenues decreased 6.9% y/y at constant exchange rate to reach 4.7 billion euro in Europe, where sales were largely impacted by generic competition to Plavix. Sanofi did not perform better in the United States, where first-half sales were impacted by the healthcare reform and by generics versions of Eloxatin. First-half sales were, as a result, down 7.1% y/y in the region to 4.4 billion euro. In parallel, Sanofi continues to strengthen its presence in emerging markets with a strong 25.9% y/y growth recorded in the first half. Sales were mainly fuelled by a very good performance in Latin America, with an impressive sales growth of 55.3% in Brazil in the second quarter, and in China and Russia which respectively generated growth of 18.1% y/y and 40.9% y/y in H1. The strong growth in these regions is attributable to both organic and inorganic growth as the impact of acquisitions of Medley (Brazil) and Czech generic producer Zentiva largely contributed to boost Sanofi's performance.

The impact of generic competition is starting to be felt as Sanofi's net sales declined 1.2% y/y at constant exchange rate to 7.8 billion euro in the second quarter. Pharmaceutical sales of Sanofi were however driven by its diabetes, generics and consumer healthcare divisions which all recorded double-digit growth over the second quarter and largely helped offset heavy losses incurred by generic competition to its lead products Plavix and Eloxatin. Sanofi's efforts to diversify its business continue to bear fruit as sales generated through its generic division grew 34.2% y/y in the second quarter to reach 381 million euro, while its consumer health business, mainly composed of the recently acquired Chattem (U.S.), generated sales of 578 million euro. Meanwhile, net sales of its diabetes division jump 10.6% y/y in the second quarter to reach 1.1 billion euro, boosted by its best-selling product Lantus (insulin glargine), up 16.9% y/y, and by Apidra (insulin glulisine) which scored a 25.7% y/y growth to 44 million euro. Sanofi's second-best selling product, the blood thinner Lovenox (enoxaparin sodium)—soon to be available in generic versions after Sandoz (part of Novartis, Switzerland) obtained the U.S. FDA go ahead—generated sales of 866 million euro, up 11% y/y in the second quarter (see United States: 26 July 2010: Sanofi Cuts 2010 Outlook After U.S. Approval of Lovenox Copy, Approaches Enzymes for Acquisition). The entry of generic enoxaparin in the United States will add to heavy losses reported in second-quarter sales of Eloxatin (-90.4% y/y in the United States) and to sales erosion for Plavix (-23.6% y/y in the second quarter) as European sales fell 55.4% at constant exchange rate on generic competition.

Outlook and Implications

Sanofi-Aventis has downgraded its 2010 guidance, expecting its growth in business earnings per share to be flat to minus 4% versus 2009, from a previous positive expectation. This follows the FDA surprise approval of a generic version of Lovenox (enoxaparin sodium), manufactured by Sandoz, after four years of review. The current guidance includes the financial impact of the U.S. healthcare reform as well as recent cuts in pharmaceutical prices in certain European countries such as Greece and Spain, which are set to significantly impact the pharmaceutical industry performance in 2010.

In parallel, the French pharma has made no comment related to a potential interest in acquiring Genzyme (U.S.), saying its objective to at least meet its minimum guidance of 2008 sales and profit in 2013 was not dependent on acquisitions, reports the Wall Street Journal, quoting Sanofi Chief Executive Chris Viehbacher. What is certain is that Sanofi-Aventis is in need of fresh sources of revenue in the short term, especially if the company fails to block the entry of Sandoz's copy of Lovenox in the United States (see United States: 28 July 2010: Sanofi-Aventis Sues FDA to Prevent Entry of Generic Versions of Lovenox Into U.S.). Its ambition to shop for acquisitions has never been a secret for Sanofi, and future deals are set to range between US$5 and US$20 billion according to a statement made by Chris Viehbacher. Strengthening its pipeline has become a priority for Sanofi, which is in parallel continuing its cost-cutting strategy. The company could find a good fit in Genzyme as the U.S. firm specialises in biotechnology, an area in which Sanofi is eager to expand.

Meanwhile, Sanofi's focus on diabetes treatment appears as a winning strategy. The company is preparing to market its first blood glucose monitoring system, entering at the same time the medical device market. The product, issued from its collaboration with AgaMatrix (U.S.) is expected to hit the market in early 2011 in Europe and the United States (see France: 31 March 2010: Sanofi-Aventis Inks Deal with AgaMatrix in Blood Glucose Monitoring). Its diabetes division is largely contributing to growth but won't be sufficient to offset generic competition, on track to impact around 20% of Sanofi-Aventis' portfolio by 2013.