Acomplia for obesity

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Sanofi-Aventis: A Mix of News

By D. Simpson, CFA

August 31, 2005

With the company providing so much information, there are a lot of

possible interpretations of whether Sanofi-Aventis (NYSE: SNY) had

a " good " quarter. While I'd suggest the financial performance was

pretty respectable, the clinical trial insights were more mixed.

Sales for the second quarter rose 6.5% on a reported basis and 10.1%

on a " comparable " basis that adjusts for the Aventis merger and

foreign currency effects. Margins were quite solid once again: Gross

margin improved to nearly 79%, and operating margin climbed to

33.7%. Adjusted net income rose by 26%.

The company's top drugs led the way again, with the top 15 compounds

bringing revenue growth of 16.2% in the quarter and making up more

than 60% of the company's total. Market-leading drugs like Lovenox,

Plavix, and Lantus were all quite strong and posted double-digit

growth. The vaccine business also had a good quarter, as a new

meningitis/pneumonia vaccine helped push sales up more than 13%.

Sanofi-Aventis generated more than $3.5 billion in free cash flow

(before dividends) and has managed to repay close to $2 billion in

debt so far this year. Based on the strong results, management

raised earnings growth guidance for this year to at least 20%.

The clinical side of the business was less stellar. Sanofi-Aventis

announced that it was dropping two compounds that were in phase 2-b

testing (pranalcasan for arthritis and osanetant for schizophrenia).

The company also announced mixed data from a phase 3 depression

trial (the European study showed decent efficacy, but the North

American study did not), and it's quite possible that another phase

3 study may be required before approval.

On a more positive note, the company had better success in trials

studying insomnia, smoking cessation, and cancer. Investors should

also remember that Sanofi-Aventis is awaiting Food and Drug

Administration approval for Acomplia for obesity and smoking;

Exubera, which is inhaled insulin, with Pfizer (NYSE: PFE) and

Nektar (Nasdaq: NKTR) as partners; dronedarone for atrial

fibrillation; Alvesco for asthma; and a longer-acting formulation of

Ambien, for insomnia.

These late-stage drugs (as well as the 35 compounds in phases 2b or

3 testing) will be important. Sanofi-Aventis faces the threat of

losing patent protection for Lovenox and Plavix, and should that

happen, it would need these new drugs to maintain growth.

I won't make the case that Sanofi-Aventis is dirt-cheap or

significantly undervalued. Stocks like Merck (NYSE: MRK),

GlaxoKline (NYSE: GSK), and AstraZeneca (NYSE: AZN) are all

cheaper, just to name three. But I do believe that Sanofi-Aventis

has an appealing late-stage pipeline and the wherewithal to produce

much better growth than the average pharmaceutical company over the

next few years. Growth or value? It's an age-old question, but I'm

continuing to stick with growth in this particular case.