Regulatory obstacles, lower sales, and stiff competition have seen the pharma's stock drop below S&P's target range. Ironically, that earns it an upgrade
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Like its Big Pharma brethren around the globe, Sanofi-Aventis (SNY), the third-largest pharmaceutical company in the world, is facing regulatory hurdles and challenges from makers of generic drugs. In particular, the delayed approval of the company's Acomplia, or rimonabant, for weight control (with a nonapproval letter from regulators for smoking cessation), the sale to Pfizer (PFE) of its worldwide rights to Exubera, and the generic threat to its No. 1 and No. 2 products -- Plavix and Lovenox -- all cast a shadow in the near and medium term.
Because Sanofi's share price dropped to our valuation range, we changed our recommendation to 3 STARS (hold) from 2 STARS (sell) on Mar. 1.
Sanofi's top 15 brands accounted for 60% of the company's total sales in fiscal 2005. We forecast moderate sales erosion for its blockbusters, due to prospective generic entries. Sanofi is trying to boost its vaccine business, including preparation for H5N1 flu (Avian flu) shots. The key issue is that current egg-based production is a long, arduous process that can't meet seasonal demand, while new and efficient cell culture-based production will take a few years to scale up at its facility.
SLIDING SALES Pipeline research and development has several overlaps. We had already included some of its promising late-stage pipeline products -- such as dronedarone (antiarrhythmia), xaliproden (cognitive disorders), indraparinux (anticoagulant), and SR58611 (antihypertension) -- in our model.
The company's fourth-quarter 2005 sales were slightly below our projections, with generics affecting sales of Allegra antihistamine and Amaryl treatment for Type 2 diabetes. Sales of vaccines also fell short of our forecast, as government contracts for flu vaccines did not materialize in 2005. They should contribute to 2006 results, however. Meanwhile, adjusted earnings per share were in line with our expectation.
We were also disappointed that Sanofi sold its rights to Exubera, an inhaled-insulin drug, to Pfizer. Although it will receive $1.3 billion, net of German taxes, we think this drug could have been a groundbreaking product for Sanofi. While we expect the FDA to approve Accomplia for weight control, several prescription antiobesity drugs are already on the market, with an OTC Xenical recently winning an FDA panel recommendation. Finally, Sanofi faces patent litigation and possible generic competition on its key Plavix anticoagulant. The trail has been rescheduled to Jun. 12, 2006, from Apr. 3.
COMPETITIVE PRESSURES. Net sales should increase about 4% in 2006, in our view, to about $34 billion, based on current exchange rates. Key brands, such as Plavix, Taxotere and Eloxatin oncology treatments, Lantus antidiabetes agent, and Avapro -- an antihypertensive -- will likely drive the gain. However, we forecast a 50% sales decline of Allegra due to significant generic erosion as well as a 10% drop in sales of the Lovenox anticoagulant.
Also, increased competitive pressures in the insomnia-drug market from Sepracor's (SEPR) 2005 launch of Lunesta and Pfizer's (PFE) planned release of Indiplon will likely affect sales of Sanofi's Ambien sleep aid. We also see recent reports of liver disease risks affecting sales of the Ketek antibiotic. Vaccine sales will likely rise about 14% in 2006.
S&P estimates Sanofi will report net profits per American depositary receipt (ADR) before adjustments of $3.47, based on recent exchange rates.
We maintain our 12-month target price on the ADRS of $43, based on a combination of our discounted cash-flow, p-e to growth (PEG) ratio, and multiple-based comparisons.
Risks to our recommendation and target price include an outcome in the upcoming Plavix patent litigation, clinical trial outcomes, regulatory changes, CEO succession, politically driven deals, litigation, currency fluctuations, consolidations, and irrational market sentiment arising from these events.
Glossary
S&P STARS: Since January 1, 1987, Standard & Poor's Equity Research Services has ranked a universe of common stocks based on a given stock's potential for future performance. Under proprietary STARS (STock Appreciation Ranking System), S&P equity analysts rank stocks according to their individual forecast of a stock's future capital appreciation potential versus the expected performance of a relevant benchmark (e.g., a regional index (S&P Asia 50 Index, S&P Europe 350 Index or S&P 500 Index), based on a 12-month time horizon. STARS was designed to meet the needs of investors looking to put their investment decisions in perspective.
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A+
Highest
B
Lower
A
High
C
Lowest
A-
Above Average
D
In Reorganization
B+
Average
NR
Not Ranked
B-
Below Average
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Required Disclosures
In the U.S. As of December 31, 2005, research analysts at Standard & Poor's Equity Research Services U.S. have recommended 28.2% of issuers with buy recommendations, 61.3% with hold recommendations and 10.5% with sell recommendations.
In Europe As of December 31, 2005, research analysts at Standard & Poor's Equity Research Services Europe have recommended 33.8% of issuers with buy recommendations, 46.8% with hold recommendations and 19.4% with sell recommendations.
In Asia As of December 31, 2005, research analysts at Standard & Poor's Equity Research Services Asia have recommended 24.8% of issuers with buy recommendations, 53.1% with hold recommendations and 22.1% with sell recommendations.
Globally As of December 31, 2005, research analysts at Standard & Poor's Equity Research Services globally have recommended 28.7% of issuers with buy recommendations, 59.1% with hold recommendations and 12.2% with sell recommendations.
5-STARS (Strong Buy): Total return is expected to outperform the total return of a relevant benchmark, by a wide margin over the coming 12 months, with shares rising in price on an absolute basis. 4-STARS (Buy): Total return is expected to outperform the total return of a relevant benchmark over the coming 12 months, with shares rising in price on an absolute basis. 3-STARS (Hold): Total return is expected to closely approximate the total return of a relevant benchmark over the coming 12 months, with shares generally rising in price on an absolute basis. 2-STARS (Sell): Total return is expected to underperform the total return of a relevant benchmark over the coming 12 months, and the share price is not anticipated to show a gain. 1-STARS (Strong Sell): Total return is expected to underperform the total return of a relevant benchmark by a wide margin over the coming 12 months, with shares falling in price on an absolute basis.
Relevant benchmarks: in the U.S. the relevant benchmark is the S&P 500 Index, in Europe the S&P Europe 350 Index and in Asia the S&P Asia 50 Index.
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Matsubara is a London-based equity analyst following health-care stocks for Standard & Poor's Equity Research Services
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