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Sanofi Cuts Forecast as Earnings Miss on Brazilian Woes

Sanofi (SAN) cut its full-year forecast as second-quarter profit missed analysts’ estimates, hurt by inventory mismanagement in Brazil and generic competition.

Earnings per share excluding some costs and currency swings may fall between 7 percent and 10 percent, France’s largest drugmaker said in a statement. Sanofi previously expected profit to show no change or drop 5 percent at worst. The stock slumped the most in six weeks.

Chief Executive Officer Chris Viehbacher said today he continues to expect a return to growth in the second half. Last quarter’s 23 percent earnings decline reflected generic competition for some of the Paris-based company’s best-selling medicines and poor performance at several units, including the one that sells generic drugs in Brazil.

“There’s no point in sugar-coating this, this is a quarter where we have disappointed,” Viehbacher said on a call with analysts today. “I personally don’t like disappointing, my team doesn’t like disappointing. There’s clearly some work to be done.”

Sanofi fell 4.1 percent to 76.85 euros in Paris. The shares have returned 11 percent this year including reinvested dividends, trailing a 19 percent return in the Bloomberg Europe Pharmaceutical Index.

‘Shocking Results’

Profit excluding some costs fell to 1.48 billion euros ($1.96 billion), or 1.11 euros a share, last quarter. That missed the 1.74 billion-euro average of 12 estimates compiled by Bloomberg. Revenue slipped 9.8 percent to 8 billion euros last quarter, also falling short of estimates.

“It’s a pretty shocking set of results,” Michael Leuchten, an analyst at Barclays Plc in London, said in a telephone interview. “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 took two charges totaling 201 million euros because inventory at customers in Brazil was “significantly and inappropriately” higher than necessary. Sanofi has recalled some stock that is expiring and appointed new local management, Viehbacher said. The problems may take 12 to 18 months to reverse, he said.

Brazil Setbacks

The setbacks took place at Sanofi’s Medley unit, which Viehbacher bought for 1.5 billion reais ($660 million) in 2009, his second acquisition after joining as CEO. The first was the Mexican generic-drug maker Kendrick as Viehbacher pursued a strategy of seeking growth in developing markets. Sanofi in February bought Genfar, a Colombian maker of generics.

Emerging markets were meant to be that driver, that platform that allows them to push the topline at least 5 percent, which they’ll now struggle to do,” Leuchten said.

Sanofi’s branded drugs also suffered last quarter as revenue from new medicines failed to offset generic competition for treatments including the blood thinner Lovenox and the cancer drug Eloxatin, which lost patent protection a year ago.

Generic competition wiped out 1.04 billion euros of sales in the first half, Sanofi said. The company forecast in May that cheaper copies of its medicines would probably lead to a total of 800 million euros in lost profit in the first half.

Sales of vaccines also fell, as did revenue from animal-health products as the Frontline flea-killer faced generic competition. The company plans to introduce a new product with “significant benefits” over Frontline in time for next year’s flea and tick season, according to Viehbacher.

‘Buying Opportunity’

While the second-quarter performance is “disappointing,” the one-time nature of the Brazil problem and the fact that Sanofi is now over most of the patent cliff means future quarters will be more favorable, said Jeffrey Holford, an analyst at Jefferies International Ltd. in New York.

“This may be the last great buying opportunity on Sanofi before the rebound,” Holford wrote in a note today.

The report wasn’t all bad news. Sales of the diabetes drug Lantus climbed 18 percent in constant currencies to 1.41 billion euros, while revenue from the Genzyme unit, which sells treatments for rare genetic diseases, jumped 26 percent in constant currencies to 525 million euros.

More Acquisitions

Sanofi continues to seek bolt-on acquisitions of about 1 to 2 billion euros per year, Viehbacher said today, declining to comment on specific targets. The company is looking primarily for deals in emerging markets, non-prescription products and branded generics, but isn’t interested in buying companies with a single product, Viehbacher said.

“There’s an awful lot of things out there in the market where given the high price of them it’s pretty easy to make someone else’s shareholders wealthy, but it’s not so obvious how you make a beneficial difference to Sanofi shareholders,” he said. “It’s a lot tougher to find value-enhancing deals at the moment.”

Viehbacher said local authorities in China visited a regional office in Shenyang on July 29, though the company didn’t know what the purpose of the inspection was. Sanofi’s China headquarters in Shanghai haven’t been checked, he said.

Chinese authorities have accused Sanofi’s rival GlaxoSmithKline Plc of economic crimes amounting to 3 billion yuan ($489 million) in spurious travel and meeting expenses as well as trade in sexual favors that were conducted through a travel agency it used. Sanofi said last week it had used the same travel agency but stopped when the allegations of wrongdoing surfaced.

To contact the reporter on this story: Simeon Bennett in Geneva at sbennett9@bloomberg.net

To contact the editor responsible for this story: Phil Serafino at pserafino@bloomberg.net

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