Growing Pains At Sanofi

The pipeline looks good -- but investors are waiting for cost cuts

Less than a year ago, Jean-François Dehecq was the head of a midsize French drug company few outside the pharmaceutical industry had ever heard of. Even fewer could pronounce its name -- Sanofi-Synthélabo. But then Dehecq, with a boost from French politicians eager to create a national champion, launched a $72.5 billion hostile takeover of Aventis, a Franco-German drugmaker twice Sanofi's size. Overnight, he went from obscurity to notoriety as Aventis management, rival Aventis suitors, and shareholder-rights activists all condemned Paris' ham-handed tactics.

But Dehecq won, and today he runs the world's No. 3 drugmaker after Pfizer Inc. (PFE ) and GlaxoSmithKline (GSK ) PLC, with $33.9 billion in sales. The new Sanofi-Aventis boasts a strong product lineup, with Aventis best-sellers, including breast-cancer drug Taxotere, joining such Sanofi standouts as cancer drug Eloxatine. "They have young blockbusters that are gaining momentum," says analyst Philippe Lanone of Paris-based CDC Ixis Securities, who expects earnings to rise nearly 18% this year, to $6.9 billion, with another 15% rise in 2005.

Sanofi also has one of the richest pipelines of late-stage drugs awaiting regulatory approval. They include what could be one of the biggest blockbusters ever, anti-obesity drug Acomplia. More could be on the way, since the merger tripled the research and development budget, to $5.5 billion. "We're going to push for growth everywhere," says Dehecq.

Investors still have questions for Dehecq, though. He has promised $2.1 billion in cost savings by 2006, while telling unions that he plans no layoffs in France or Germany. At the same time, Sanofi faces legal challenges in the U.S., where generic drugmakers have sued to end patent protection for four of its best-sellers, including blood-thinner Plavix, whose U.S. sales account for nearly 10% of the company's operating profits.


The betting is that Sanofi will prevail in most of these cases. But shares have underperformed the sector by about 15% since the merger, in part, analysts say, because Dehecq has declined to spell out financial targets before February.

He has acted quickly in other areas, filling most key posts in the merged company with trusted Sanofi lieutenants while ousting most of the Aventis top brass. Critics fret that hard feelings from the shakeup could make it difficult for Sanofi to attract and keep top talent. Just as worrisome, Sanofi has no obvious candidate to replace Dehecq, who turns 65 on Jan. 1 and plans to retire in three years. "We have a succession question," a board member concedes.

But Dehecq, a combination of straight-talking charm and pure drive, has overcome plenty of obstacles. Unlike most French CEOs, who reach the executive suite after attending elite schools and serving in high-level government jobs, Dehecq forged his own path to the top. As a junior high school math teacher in the 1960s, he earned a mechanical engineering degree at night. That led to a job at the state-owned oil company then known as Aquitaine. An Aquitaine executive, René Sautier, became Dehecq's mentor. When the company in 1973 spun off a small group of noncore assets and put Sau- tier in charge, Dehecq went with him.

The duo spotted growth potential in a small pharmaceuticals business. Over the next decade they bought and sold dozens of companies, from cheese producers to perfume makers, squeezing out cash flow to pour into drug research. "We had to have very strict management because we didn't have much money," Dehecq recalls."And I can tell you, we sold tons of cheese."

The cheese business is long gone, but that strict management style will come in handy. Dehecq plans to trim the European workforce through early-retirement buyouts, but unions say only 300 jobs have been cut in France, and none in Germany. Heavy layoffs would provoke a political firestorm. They also would run counter to Dehecq's reputation as an intensely loyal boss. But as Aventis learned, Dehecq has a ruthless streak. Now investors want to see more of it.

By Carol Matlack in Paris, with Kerry Capell in London

    Before it's here, it's on the Bloomberg Terminal.