Aventis: Investors Await Their Reward

Debt is down, margins are up. So why is the drugmaker's stock lagging its peers?

It's a dreary winter day in Paris, and Aventis (AVE ) Chairman Igor Landau is fighting the flu. But the 59-year-old Frenchman at the helm of the world's No. 6 drugmaker is exceptionally upbeat. The four-year-old company, the product of the union of France's Rhône-Poulenc and Germany's Hoechst, is finally coming into its own. Earnings in 2003 grew by more than 15%, analysts estimate, powered by Lovenox, a blood-thinning drug, and Taxotere, a chemotherapy treatment. "The first two years, it was about creating a global competitor," says Landau. "Now the goal is to create a global leader."

No question, 2003 was a banner year for the Strasbourg-based drugmaker. Aventis divested its last major noncore assets, completing its metamorphosis from a muddled life-sciences conglomerate into a focused drug company. Profit margins, which were 17% in 2000, are now 27%, according to analysts. And with debt levels down to $5.6 billion from $16 billion three years ago, the company has more cash to invest in its pipeline. Aventis submitted four new drugs for approval last year and is expected to submit at least two more in 2004. All this during one of the most turbulent years ever for European drugmakers, when the euro appreciated 20% against the dollar and reform of national health-care systems put renewed pressure on drug prices.

It has been a hard slog. One of Landau's savviest moves was to focus drug discovery on just a few key areas: oncology; diabetes; respiratory, central nervous system, and cardiovascular diseases; and vaccines. Landau, who joined Rhône-Poulenc in 1975, also has juiced sales and profits by channeling more investment into faster-growing new drugs, such as Lantus, a long-acting insulin with estimated sales of $600 million in 2003.

THREATS FROM GENERICS. So why aren't investors cracking open the champagne? Aventis' shares have underperformed the Dow Jones Stoxx pharmaceuticals index by 11% over the past 12 months. And with an estimated 2004 price-earnings ratio of 12.6, the stock is trading at a hefty discount to the 17.8 European industry average. Aventis' stock rose briefly in mid-January on rumors it would soon merge with French rival Sanofi-Synthélabo (SNY ), despite denials from both companies. Analysts, however, say the appeal of an all-French pharmaceutical giant may still lead to a merger by yearend.

But looming generic threats to two of Aventis' best-sellers -- allergy medicine Allegra and Lovenox -- worry investors. "Until now, the story has been one of tidying up a long list of underperforming products and businesses," says Jonathan de Pass, chief executive of consulting firm Evaluate Pharma in London. "But investors want more than a cleanup job; they want sustained innovation." Landau concedes that as a new company, Aventis doesn't have a track record on drug discovery and has been cautious in trumpeting its recent successes. "We haven't totally convinced the market of the full potential of our products," he says. "If we continue to deliver, I am absolutely convinced that investor perception will match reality."

Could be. In mid-January, Aventis was trading at $67, very near its 52-week high. BNP Paribas analyst Katherine Genis believes it has strong products in the pipeline to maintain earnings growth. Those with blockbuster potential include cancer drug Genasense, asthma medicine Alvesco, and meningitis vaccine Menactra.

Landau is studying a slew of measures to fund future growth, from boosting manufacturing productivity to acquiring new products from biotechs. Will the stock rally as a result? "It's not in our culture to overpromise. I'd rather overdeliver," Landau says. Investors surely agree.

By Kerry Capell in Paris

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