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Sanofi Has New Drugs Up Its Sleeve
05/31/2011 2:00 pm EST
With concerns over generic competition waning, investors can refocus on the French drug maker’s new products and juicy yield, writes Paul Tracy in High-Yield International.
Last year, Paris-based pharmaceutical giant Sanofi-Aventis (SNY) faced a problem many large pharmaceutical firms have encountered in recent years: a raft of major patent expirations.
When a pharmaceutical firm develops and patents a new drug, it's protected from competition for a number of years, allowing the drug company to earn high profits and recoup their development expenditures.
But once patents expire in large markets like the US and EU, profits quickly erode, as generic competitors begin supplying copies of the drug at a fraction of the cost.
The speed of erosion in margins due to generic competition has accelerated over the past few years, as generic-drug companies have become more sophisticated and quicker to deploy their discounted offerings.
Over the past two years, important Sanofi drugs—including Lovenox for blood clots, cardiovascular drug Plavix, and cancer drug Taxotere—have all lost patent protection.
Plavix alone accounted for more than 2.6 billion euros ($3.7 billion) in sales in 2009, the last full year before the drug saw generic competition. The good news: the wave of major patent expirations is slowing rapidly.
In the first quarter of 2009, sales of products subject to generic competition totaled more than 2 billion euros ($2.8 billion), compared with less than 950 million euros in the first quarter of 2011.
And just as the generic headwind abates, Sanofi's pipeline of new drugs is beginning to power growth.
Less than 60% of Sanofi's sales now come from what management calls its “growth platforms,” including its Merial animal-health division, diabetes drugs, consumer health, and vaccines.
Animal health is a big, profitable and fast-growing business. Merial alone has more than 2 billion euros in annual sales, and is the world's third largest player and the market leader in parasiticides, drugs designed to combat animal parasites.
In particular, the company's Frontline topical heartworm medication and livestock parasiticide Eprinex are market leaders in their categories. Sales in emerging markets are growing well into the double digits, powered by booming demand for livestock and growing pet ownership.
Most impressive of all, Merial's operating margins last year were 31.3%, well above Sanofi's overall margins of just over 24%.
In consumer health, Allegra OTC—an over-the-counter version of the company's allergy treatment—successfully launched in the first quarter, aided by a major marketing campaign. Management expects strength to continue in coming quarters.
And Lantus, a treatment for diabetes, saw sales climb 13.2%, as the firm initiated a new marketing drive. Growth for the drug in emerging markets, where shifting diets make diabetes a growing problem, soared more than 31.4%, albeit from a relatively low base.
Other prospects for growth include the launch of new products such as Jevtana and Multaq, treatments for cancer and atrial fibrillation, respectively.
Sales of new products topped 110 million euros in the first quarter alone, more than quadruple the 24 million in quarterly revenues from new products in the same quarter a year ago.
And Sanofi's recent acquisition of biotech giant Genzyme will add to its long-term growth potential. Genzyme was known for its focus on developing treatments for rare diseases.
Such medicines tend to carry high profit margins because there is typically far less competition from other drug makers for sales; in many cases, Genzyme has the only approved treatment for certain disorders.
Based on the annual dividend paid this month, the stock yields 4.7%. And there's upside—over the past five years, the company has increased its payout at an average annualized rate of nearly 17%.
With headwinds from expiring patents abating, Sanofi's growth prospects look bright. It’s a solid, low-risk buy below $40. [Shares closed below $39 Friday—Editor.]
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