Sanofi announced Thursday alongside its second-quarter results that earnings per share are expected to fall between 7 percent and 10 percent this year compared to 2012 due to generic competition to drugs such as Plavix and Avapro and an inventory setback in Brazil. The company had previously said that earnings would be flat to declining as much as 5 percent. Shares in Sanofi fell as much as 6.7 percent on the news.
CEO Christopher Viehbacher remarked "the second quarter was a difficult quarter... We have hit a few speed bumps." He noted that "as expected, this was the last quarter with a tough comparison to the prior year due to the residual impact of the patent cliff." Sales in the three-month period lost due to generic competition were 481 million euros ($637 million) mainly as a result of falling sales of Eloxatin, Lovenox, Plavix and Aprovel. "Given the underperformance of some businesses in the first-half, we can no longer maintain our guidance," Viehbacher said, adding "we continue to expect to return to growth in the second half."
The company revealed that it recorded charges of 201 million euros ($266 million) in the quarter because "generic inventory levels in trade channels in Brazil were significantly and inappropriately" higher than necessary. The problems occurred at Sanofi’s Medley unit, which was acquired for 1.5 billion reais ($660 million) in 2009. Viehbacher said the company has recalled some stock that is expiring and appointed new local management.
Sanofi posted overall second-quarter sales of 8 billion euros ($10.6 billion), down 9.8 percent on the prior-year period, while revenue from prescription drugs slipped 10.6 percent to 6.7 billion euros ($8.9 billion), reflecting both generic competition and European austerity measures. The company said profit declined to 444 million euros ($588 million) from 1.2 billion euros ($1.6 billion) reported in the corresponding 2012 quarter. "It’s a pretty shocking set of results," commented Barclays analyst Michael Leuchten, adding "the whole idea that you can sleep quietly with this stock because it’s an emerging markets story, it’s a consumer story, you’re not exposed to pipeline risk -- clearly that hasn’t quite worked out this quarter."
The company said that quarterly sales in emerging markets dropped 2.3 percent at constant exchange rates to 2.7 billion euros ($3.6 billion), which included a negative impact of 212 million euros ($281 million) from generics sales in Brazil. Sanofi noted that "despite recent price cuts," sales in China grew 15.3 percent at constant currencies to 372 million euros ($492 million), boosted by Plavix, Aprovel and Lantus. "Emerging markets were meant to be that driver, that platform that allows them to push the top line at least 5 percent, which they’ll now struggle to do," Leuchten remarked.
According to the drugmaker, sales from growth platforms in the quarter reached 5.7 billion euros ($7.5 billion), up 2.5 percent on a constant currency basis versus the year-ago period, representing 71.4 percent of all revenue. Growth platforms include diabetes products, which jumped 12.9 percent in the three-month period to 1.6 billion euros ($2.1 billion), and Genzyme, where sales surged 21 percent to 525 million euros ($695 million).
For specific products, sales of Lantus increased 14.7 percent to 1.4 billion euros ($1.9 billion), driven by the US, with the product's revenue in the country climbing 20.9 percent on a constant currency basis to 903 million euros ($1.2 billion). In addition, sales of Plavix and Lovenox both dropped 10.8 percent versus the year-ago period to 493 million euros ($653 million) and 436 million euros ($577 million), respectively, mainly as a result of generic competition in the US. Further, combined revenue from Aprovel/Avapro slipped 28.7 percent to 238 million euros ($315 million).
Meanwhile, sales from Sanofi's vaccine division fell 2.9 percent to 760 million euros ($1 billion) impacted by the "high level of sales in the second quarter of 2012 which benefited from favourable phasing for seasonal influenza vaccines in the Southern Hemisphere." The company noted that sales of influenza vaccines reached 53 million euros ($70 million), a decrease of 33.8 percent.
Jefferies International analyst Jeffrey Holford noted that while the second-quarter performance is "disappointing," the one-time nature of the inventory mismanagement in Brazil, and the fact that Sanofi is now over most of the patent cliff indicates future quarters will be more favourable.
Viehbacher said Sanofi continues to look for bolt-on acquisitions of about 1 billion euros ($1.3 billion) to 2 billion euros ($2.6 billion), with an emphasis on deals in emerging markets, non-prescription products and branded generics. "There's an awful lot of things out there," the executive noted, adding however that "it's a lot tougher to find value-enhancing deals at the moment."
The executive also said Thursday that local authorities in China visited a regional office in Shenyang, although the company did not know whether it is related to a similar bribery probe into GlaxoSmithKline. Viehbacher said the company's headquarters in Shanghai have not been checked.
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