Sanofi Poised for Eventful Year

Highlighted stocks include Sanofi-Aventis (SNY) and Biogen-Idec (BIIB).

On February 11, 2009, Sanofi-Aventis (SNY) announced financial results for the 4th quarter 2008. Revenue of EUR7,456 million increased by 3% from the 4th quarter of 2007, and was ahead of our estimate of EUR7,101 million. Revenue benefitted from strong sales of Lantus, Lovenox, Plavix and Ambien CR.

Revenue was also positively impacted by foreign exchange translation. EPS, adjusted for non-recurring charges, was EUR1.25 in the 4th quarter, compared to our estimate of EUR1.24. Relative to our expectations, EPS was negatively impacted by higher R&D and SG&A spend and a slightly tighter-than-expected gross margin, partially offset by a lower tax rate.

For the full-year 2008, revenue of EUR28.8 billion was down 1% from 2007, while EPS increased by 2% to EUR5.36. Foreign exchange negatively impacted sales and EPS by 5% and 8%, respectively, for the full-year. The company has been aggressively paying down debt during 2008 and exited the year with net debt of only EUR1.8 billion, down from EUR4.2 billion at the end of 2007.

Management's EPS guidance for 2009 is for an increase of at least 7%, assuming that the average exchange rate in 2009 is equal to the average rate throughout 2008.

On the earnings conference call with analysts, Chris Viehbacher, Sanofi's newly appointed Chief Executive Officer, outlined several new planned initiatives in order to rationalize costs and help accelerate revenue growth. The company will conduct an extensive review of its research and development (R&D) operations in order to reallocate resources to the highest growth and most promising development programs.

A new operating model will be implemented which is expected to target cost-cutting in R&D and SG&A to further improve the company's already strong operating margins. The company also expects to be more focused on growing through new partnership arrangements as well as through "disciplined" acquisitions. In order to accelerate business development activities, the company created a Chief Strategic Officer.

We believe Sanofi has a growing concern over significant patent expirations and slowing growth of key drugs in the next few years. A number of Sanofi's blockbuster products will soon be exposed to generic competition, including Plavix (anticoagulant), Taxotere (cancer) and Avapro (hypertension). We believe Sanofi is very likely to make a small-to-mid sized acquisition in order to help address these patent issues.

While Mr. Viehbacher did not rule out a large acquisition, he clearly feels that this is not where Sanofi should be focusing their efforts. We expect Sanofi to be looking to the high-growth biotech space and believe Biogen-Idec (BIIB) makes the most sense as an acquisition candidate.

Biogen fits the "mid-size" definition and would help diversify the company's product base and geographical reach -- key aspects of Viehbacher's new vision for growth. Biogen would bring with it blockbusters Rituxan (non-Hodgkin's lymphoma), Avonex and Tysabri (both for multiple sclerosis) and would expand opportunities for licensing deals as well as development outsourcing.

We have previous comments on Sanofi and a potential tie-up with Biogen here: http://www.zacks.com/stock/news/17153/Sanofi+Eyeing+Major+Acquisition. Our case for why investors should own Biogen-Idec, regardless of an acquisition by Sanofi-Aventis, or anyone for that matter, can be found here: http://www.zacks.com/stock/news/17266/Biogen+Too+Attractive+to+Ignore.

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Read the full analyst report on SNY

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