Sanofi profit knock highlights need for Genzyme

PARIS Thu Apr 28, 2011 7:22am EDT

Employees enter Sanofi-Aventis headquarters in Paris August 4, 2010. REUTERS/John Schults

Employees enter Sanofi-Aventis headquarters in Paris August 4, 2010.

Credit: Reuters/John Schults

PARIS (Reuters) - Growing generic competition knocked first quarter earnings at Sanofi-Aventis, underscoring the French drugmaker's need to integrate its recent purchase of U.S. biotech Genzyme to counter the threat.

Like British rival AstraZeneca, Sanofi's earnings were hit by competition to several of its top drugs, as well as a hole in sales from swine flu vaccines.

However, Sanofi expects its $20.1 billion cash takeover of Genzyme, which it completed earlier this month, to help it lessen its growing exposure to cheaper generic drugs as it adds treatment of rare diseases as a new growth area.

Sanofi's shares were up 0.2 percent at 53.38 euros at 0902 GMT on Thursday.

Sanofi said the integration had begun well and that it would scrutinize Genzyme's entire pipeline over the coming months to assess which drugs would get priority.

Genzyme has 10 drugs in clinical trials, three of which are in promising late stage trials. Genzyme's drugs would add to Sanofi's pipeline of 64 products, including vaccines.

Unlike AstraZeneca, Sanofi did not give an earnings outlook, saying it would update its forecast at its first-half earnings in July.

Throughout the year, however, Genzyme should add to Sanofi's performance and finance director Jerome Contamine estimated it to contribute 3 to 4 percent to Sanofi's business earnings per share, which excludes items like amortization and legal costs.

Chief Executive Chris Viebhacher said on a conference call that manufacturing issues involving two of Genzyme's main drugs Cerezyme and Fabrazyme were improving daily as Genzyme solved drug shortages following contamination at one of its plants.

"I have a lot of confidence that we will be able to get manufacturing issues back on track pretty quick," he said.

NEW GROWTH AREAS

Sanofi's earnings just beat the average of a Reuters poll of analysts' forecasts and showed that the company's new areas for growth, which represented 60 percent of its business in the quarter, were able to partly offset the dent from generics and a sharp drop in sales of H1N1 flu vaccines.

Business EPS, fell 10.8 percent to 1.66 euros in the first quarter against the Reuters poll's average of 1.63 euros.

Sales fell 1.5 percent to 7.779 billion euros ($11.4 billion) compared with consensus for 7.659 billion, as a stronger-than-expected currency effect helped cushion the fall, on business net income down 10.6 percent at 2.170 billion euros.

"From first glance, first-quarter numbers are very fractionally ahead of expectations and the CEO's comments on Genzyme are reassuring," Deutsche Bank analysts said in a research note, rating Sanofi shares a "buy."

Analysts are looking forward to Sanofi's seminar in September, when the group will outline its strategy and expectations for 2013 and beyond.

"We can (then) start to evaluate the impact of the deals they have done. It will be interesting to see what Viehbacher's revised vision is," said Michael Leacock, analyst at Royal Bank of Scotland.

Sanofi has struck a number of partnerships to replenish its pipeline with biotechnology based drugs, that are much harder to copy, and Genzyme has been only one of many, albeit much smaller, acquisitions.

Generics weighed on Sanofi's high-margin branded drugs such as anti blood clotter Lovenox and cancer drug Taxotere. And as with vaccine makers GlaxoSmithKline and Novartis, H1N1 flu vaccines no longer featured, pulling Sanofi's total vaccine sales down 38.3 percent.

Sanofi's so-called growth platforms, meant to diversify the group's business and limit its exposure to generics, increased sales at constant exchange rates by 4.3 percent with consumer health products up 40 percent and animal health up 11.5 percent.

Sanofi for the first time consolidated its Merial animal health unit after its joint venture with Merck failed.

Viehbacher said Merial's expansion would mainly be in livestock and in emerging markets where growing middle classes are buying pets. In addition, he saw possibilities for synergies between animal health and Sanofi's pharmaceutical business, with some diseases such as cancer and diabetes overlapping.

As part of its business review, Sanofi wants to sell its small dermatology line and Viehbacher said interest was strong.

Separately, Genzyme reported a 7 percent rise in its first-quarter sales to $1.009 billion. These sales are not consolidated in Sanofi's accounts.

($1=.6817 Euro)

(Reporting by Caroline Jacobs, Editing by Lincoln Feast and Alexander Smith)

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