Sanofi Warrants Cheaper Valuation

Sanofi-Aventis (SNY - Analyst Report) is the third largest pharmaceutical company in the world in terms of revenues. While valuation on the combined company is reasonable, we would like to see more visibility on some of the patent issues before we recommend buying the shares. We rate the shares a Hold.

We believe Sanofi-Aventis should earn pro-forma adjusted EPS of $4.22 in 2008. This is growth of approximately 4 percent over 2007 at constant exchange rates. Continued significant sales growth from anti-clotting drug Plavix, insulin drug Lantus and the vaccine business will be offset by lost market share and softer pricing due to generic products. Bottom-line growth will come from a reduction in selling, gross and administrative expenses, continued strong contribution from Plavix U.S. sales and share repurchases.

Based on a current price of approximately $33.13 per share, Sanofi-Aventis trades at a P/E ratio of 7.8x 2008 EPS. We calculate the peer group average at about 13.6x 2008 EPS with roughly 6 percent estimated four-year growth, compared to 5 percent for Sanofi. We believe Sanofi’s cheaper valuation is warranted given meager top-line growth and lingering generic risk to blood-thinning drug Lovenox.

We were encouraged to see that Sanofi has several candidates in advanced phases of clinical development in different therapeutic areas the company is targeting 31 potential submissions by the end of 2010. In addition, there are currently 48 candidates in phase II or phase III development.

While we remain impressed with Sanofi’s significant pipeline, we believe caution is warranted given the uncertainty surrounding Lovenox. We reiterate our six-month price target of $36, based on approximately 8.6x our 2008 EPS estimate.

Jason Napodano, CFA, contributed to this report.

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