Sanofi Warrants Current Valuation

We expect Sanofi-Aventis (SNY - Analyst Report) to earn pro-forma adjusted EPS of $4.25 in 2008. This is growth of approximately 4% over 2007 at constant exchange rates. We believe the company’s top-line will contract by just over 1% relative to 2007 as a result of intense generic competition. Continued significant sales growth from blood-thinning 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, general and administrative expenses, continued strong contribution from Plavix U.S. sales and share repurchases. Based on a current price of approximately $34.96 per share, Sanofi-Aventis currently trades at a P/E ratio of 8.2x 2008 EPS. We calculate the peer group average is approximately 13.6x 2008 EPS with roughly 8% estimated four-year growth, compared to Sanofi’s expected EPS growth rate of 6%.

We believe Sanofi’s cheaper valuation is warranted given the company’s meager top-line growth and generic risk to blockbuster drugs Lovenox (anticoagulant) and Plavix.

Sanofi 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 very significant generic risk to a number of the company’s existing products.

We would like to see more visibility on the potential longer-term impact of generics before we recommend buying the shares. We reiterate our Hold recommendation with a six-month price target of $39, based on approximately 9.1x our 2008 EPS estimate.

Jason Napodano, CFA, contributed to the report.

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