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Sanofi (SNY - Free Report) reported second quarter 2012 business earnings of 95 cents per American Depository Share (ADS), much lower than the year-ago earnings of $1.18 per ADS. The Zacks Consensus Estimate stood at 84 cents per ADS.  

Second quarter net sales increased 6.2% on a reported basis and 0.4% at constant exchange rates (CER). The difference between reported revenues and revenues at CER was primarily due to the weakening of Euro against the US dollar. Strong Japanese yen and Chinese yuan also boosted reported revenues.

Strong performance of growth platforms was broadly offset by the impact of generic competition, European austerity measures, divestment of the Dermik assets and sale of Copaxone.

Segmental Performance

Sanofi operates out of the following segments: Pharmaceuticals, Human Vaccines and Animal Health.

Pharmaceutical segment sales decreased 0.4% to €7.5 billion. Weaker revenues were due to generic competition (€163 million), European pricing pressure, sale of Copaxone (loss of €119 million) and Dermik divestment (loss of €29 million). The diabetes franchise (up 13.7% to €1.4 billion) continued performing well with growth driven by Lantus (up 16.5% to €1.2 billion). Apidra sales were flat at €56 million in second quarter 2012.

Global sales of Plavix, an anti-platelet blood thinner indicated to reduce the risk of heart attack in patients with atherosclerosis (the build-up of plaque and hardening of the arteries), plummeted 43.3% to €1.1 billion in the quarter. US sales of the drug were down 59.9% to €536 million. The genericization of the drug in the US was responsible for the massive decline. Generic competition also affected Plavix revenues in Europe, where it declined 18.5%. However, it grew at a robust rate in both Japan (19.0%) and China (25.2%). Sanofi has a co-promotion agreement with Bristol-Myers Squibb (BMY - Free Report) for Plavix. Plavix went off-patent in the US on May 17, 2012.

Aprovel/Avapro/Karvea/Avalide revenues declined 22.3% to €382 million due to increased generic competition. The product lost its exclusivity in the US on March 30, 2012.

Lovenox, Xatral and Taxotere performed disappointingly due to generic competition in the US. In the second quarter 2012, Eloxatin recorded net sales of €375 million, up 35.9% year over year.

New Genzyme sales increased 9.1% to €434 million. All growth rates mentioned from the New Genzyme division are on a constant structure basis and at constant exchange rates. Cerezyme sales decreased 13.9% to €150 million. Sales were hurt primarily by variability of order patterns.

Myozyme/Lumizyme sales increased 9.1% to €113 million. Fabrazyme sales were €74 million, up 123.3%. Higher revenues reflected patients switching to Fabrazyme from Shire’s (SHPG - Free Report) Replagal and better product supply. In March 2012, the company started rolling out Fabrazyme manufactured at the new manufacturing unit in Framingham.

Sales in the consumer health care business climbed 11.3% to €738 million, driven by strong performance in the emerging markets in the second quarter of 2012.

Generics sales were up 7.8% to €468 million, boosted by the generic Lovenox and Aprovel sales.

Second-quarter Human Vaccines revenues were €783 million, up 3.0%, driven by the strong seasonal influenza vaccines sales in Southern Hemisphere. Sales of Animal Health segment increased 9.1% to €576 million in the second quarter of 2012, supported by the U.S. (up 17.8%) and Emerging Markets (up 10.9%) sales.

Pipeline Update

Sanofi filed for US and EU approval for multiple sclerosis drug Lemtrada  in the second quarter of 2012.

Going forward into third quarter, we look forward to FDA’s final decision on the marketing application of Zaltrap (aflibercept – second line metastatic colorectal cancer) expected on August 4, 2012 and Aubagio (teriflunomide – relapsing multiple sclerosis) expected September 12, 2012.

At the end of July 2012, Sanofi’s pipeline consisted of 64 new molecular entities and vaccines in clinical development of which 18 were either undergoing phase III studies or under regulatory review.

Outlook Maintained

The company reaffirmed its earlier guidance and expects 2012 business EPS to be 12% to 15% lower than 2011 levels (at CER). The Zacks Consensus Estimate for 2012 is currently pegged at $3.87 per share.

Business net income will be impacted by approximately €1.4 billion in 2012 due to the end of patent protection of Plavix and Avapro in the US (company lost €331 million revenues in the second quarter of 2012).

Sanofi expects European austerity measures to have an impact of €300 million on 2012 revenues.

Our Recommendation

We expect Sanofi to contain operating costs in order to increase earnings in the face of weakening sales of some of its key drugs. We also expect the company to pursue bolt on acquisitions. We are pleased with the company’s efforts to develop its pipeline.

We currently have a Neutral recommendation on Sanofi. The stock carries a Zacks #3 Rank (Hold rating) in the short run.

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