Sanofi Doing Deals

Sanofi-Aventis (SNY - Analyst Report) posted EPS of €5.36 in 2008, an increase of just 2% from 2007. Revenue fell 1% in 2008 as a number of products experienced significantly declining sales including Ambien, Tritace and Copaxone.

For 2009 we expect revenue growth to return, as generic erosion is more than offset by strong growth of Taxotere, Lantus, Avapro and the vaccines business. We expect revenue growth of 6% in 2009 and EPS of €5.93 ($4.10), up 11% from 2008. EPS should continue to benefit from strong contributions to royalty income from U.S. Plavix sales and operating margin improvement as a result of cost-cutting. We also expect foreign exchange to benefit both revenue and EPS in 2009 as the U.S. dollar strengthens against the Euro.

Generic competition will continue to be a concern, however. While we expect new product launches to make significant revenue contributions in the early part of the next decade, they will not be enough to compensate for increased generic erosion. Gross margins will likely contract now that Lovenox and Plavix (E.U.) sales are at or near peak levels, combined with softer pricing on current and soon-to-be off-patent drugs.

We expect Sanofi to continue look to contain operating costs in order to grow EPS in the face of weakening sales of some of its biggest products. This should help keep EPS at positive, albeit modest, growth over the next few years.

We also expect the company to look to grow revenue through additional partnering deals and acquisitions. We expect Sanofi to look for a small-to-mid sized deal in the high-growth biotech space in order to help plug revenue holes left by patent expirations. We believe Biogen-Idec (BIIB - Analyst Report) makes the most sense as an acquisition candidate.

Biogen would help diversify the company's product base and geographical reach - key aspects of Mr. 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.

Based on a current price of approximately €43.47 ($30.45) per share, Sanofi-Aventis currently trades at a P/E ratio of 7.3x 2009 EPS. This is a discount to the peer group average of 9.2x.

We are 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. The company currently has 51 projects in clinical development, of which 21 are either in phase III or have been submitted for regulatory approval.

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 also believe a mid-sized acquisition is possible in the near future and, depending on the premium required to get it done, could cause material dilution.

We reiterate our Hold recommendation with a six-month price target of €48 ($35), based on approximately 8.1x our 2009 EPS estimate of €5.93 ($4.10).

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