We recently downgraded our recommendation on Sanofi-Aventis (SNY) to Underperform from our earlier Neutral recommendation. Although Sanofi’s fourth-quarter earnings came in a couple of cents above the Zacks Consensus Estimate, we are concerned about the company’s high exposure to generic risk on many of its leading franchises.
We see generic risk to products like Avapro, Allegra, Lovenox, Eloxatin, Delix, Taxotere, Plavix and Ambien all keeping a lid on shares. With Eloxatin facing generics from 2009, the next wave of generic erosion will occur in 2010 when Taxotere loses exclusivity.
The generic risk to Lovenox is the most concerning and, if it were to materialize, would cause significant problems for Sanofi. Although the inability of generic manufacturers in getting a Lovenox substitute approved is somewhat encouraging, there remains a risk that Lovenox sales will be compromised in the future. Lovenox accounted for 10.4% of total sales in 2009 and a generic alternative would be devastating.
Recent revisions in 2010 earnings estimates for Sanofi have been in both directions, with a strong downward (negative) bias. Over the last 30 days, 6 of the 8 analysts following the stock have reduced their estimates for fiscal 2010, with only one analyst moving in the opposite direction.
Over the last 7 days, 3 of the 8 analysts covering the stock have lowered their estimates for fiscal 2010 with just one analyst moving in the opposite direction. On balance, the estimate is down 13 cents per ADS in the last 7 days. If annual results come in line with expectations, 2010 EPADS would be 3.8% below the year-earlier level. The year-over-year decline is due to the impact of genericization of lead franchises.
For the first quarter of 2010, the Zacks Consensus Estimate is $1.17, representing year-over-year growth of 6.4%. Over the last 30 days, 1 of the 3 analysts following the stock has reduced their estimates for fiscal 2010, with no movement in the opposite direction. A similar trend was observed in the last 7 days. On balance, the estimate for the first quarter of fiscal 2010 is down 2 cents per ADS.
In terms of earnings surprises, Sanofi had a modest positive surprise (2.17%) in the fourth quarter of 2009 and a 4% positive surprise in the third quarter of 2009, with the four-quarter average of positive 12.78%. This means that, on an average, Sanofi has come ahead of the Zacks Consensus by 12.78% over the last four quarters.
Our short-term rating on Sanofi is ‘Hold’ (Zacks #3 Rank) – we expect the company to perform in-line with expectations in the first quarter of 2010. We believe the vaccines segment, which drove fourth quarter revenues, will help boost performance in the first quarter as well.
However, longer-term, we have an Underperform recommendation on Sanofi due to our concerns regarding generic competition. While new product launches should make significant revenue contributions in the early part of the decade, they will not be enough to compensate for increased generic erosion.
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