Overview
Aventis has agreed to a merger with French large-cap pharmaceutical rival Sanofi-Synthelabo (SNY). The $63B hostile bid creates the third largest pharmaceutical company in the world by revenues. The combined Sanofi-Aventis will command the largest market share of pharmaceutical products throughout Europe, as well as top ten share in the US. Both companies face significant challenges over the near-term with regard to defending their core franchises from generic alternatives. Aventis faces an uphill battle to maintain growth in its lead Allegra franchise. OTC Claritin and Pfizer’s Zyrtec have taken sizable market share over the past few quarters. Sales of anti-coagulant Lovenox, another major product for AVE, could come under pressure in 2005 due to generic competition. AVE will trade in tandem with SNY until the deal closes, most likely late 2004.
Strengths/Opportunities / Weaknesses/ThreatsSales of the Flu Vaccine were solid in 2003 thanks to one of the most severe seasons in recent history. / Generic risk to Allegra starting in 2006 has a number of analysts concerned.
Cancer drug Taxotere was recently approved for first-line treatment of NSCLC, and sales should increase 20-25% to €2.0 this year. / Anti-coagulant Lovenox growth is in question after 2004 given a patent challenge and increasing competition from new competitors.
Diabetes drug Lantus has many analysts predicting €1.2 in sales by 2005. Lantus has become the number one branded insulin product in the world. / AVE stock soared on the SNY hostile bid, but few analysts believe the combined company is going to be in a superior position. SNY has many troubles of its own.
Margin should increase a couple hundred basis points the next few years thanks to increased financial management, restructurings, key product growth, and merger synergies with French rival Sanofi. / AVE will divest some non-core no-growth businesses of crop-science, animal nutrition, and therapeutics totaling €1.5B in sales. That will accelerate top-line growth, but reduce cashflow.
The combined Sanofi-Aventis will become the third largest pharmaceutical company in the world. / Thin pipeline with few potential blockbusters. Risk to products Ketek, Genasense, and Exubera remains.
Allegra is in trouble. The product is losing market share in the prescription market to Pfizer’s Zyrtec and Merck Singulair. And, in the overall antihistamine market OTC loratidine (Claritin) continues to eat into prescription trends. Unfortunately, there is more. Generic drug manufacturers are lining up to bring a generic Allegra to the market in 2006 (under litigation), and there is also concern that the FDA may force Allegra to move OTC. That could be devastating to AVE’s bottom-line.
Still, AVE is a cheap stock, with some products posting solid growth. Margins are heading in the right direction thanks to excellent product management and solid US and EU based manufacturing improvements. Additionally, AVE has made it clear it will attempt to do a better job in reporting going forward, in fact a “carve-out” strategy discussed on the Q4-2003 conference call looks to eliminate the complex conglomerate-like financials. Evidence was seen of the new format on the Q1-2004 report. Business at AVE is not gangbusters, but most analysts believe it is headed in the right direction assuming they can protect Allegra from generic alternatives.
That being said, the near-term focus of the sell-side remains on the planned merger with smaller French pharmaceutical company Sanofi-Synthelabo (SNY). The deal should close late 2004.
Sales
Allegra sales seem to heading in the wrong direction. Not only is the product losing market share to Zyrtec (PFE) and newly promoted for allergy Singulair (MRK), it is losing prescriptions to OTC loratidine (Claritin). Generic pharmaceuticals are lining up to bring an alternative Allegra to the market by 2006. A trial against BRL/IPXL and MYL will commence no later than April 2005. Dr. Reddy seems intent on bringing either a generic or OTC Allegra to the market in 2005 as well. The risk of generics in 2005 seems to be reduced after the Q1 report. AVE reported that the trial previously planned for September 2004 would be delayed. MYL received tentative approval for generic Allegra in April 2004, but with no trial planned at least until April 2005, most analysts increased Allegra 2005 sales (now at €875M).
The issue of OTC Allegra seems to have disappeared as well. Now the sell-side is focusing on the changes to Medicare formulary status that push Allegra to lower-tier levels. This could drive more users to the OTC or generic loratidine. Allegra sales are expected to be down 7% in 2004. In 2003 the drug posted sales of €1737, down from €2029 in 2002. Our estimate for 2004 is to €1625M. Claritin is already off patent, and 5 companies have lined up to challenge Allegra’s patent starting mid-2005. AVE will seek a new pediatric tablet and asthma (Phase III) indication in 2004 to reinvigorate growth (Prudential). Will it be enough?
2002A / 2003A / 2004E / 2005E / Est. GrowthAllegra Sales / €2029M / €1737 / €1500-€1700 / €700-€1000 / (40%)
Lovenox is a high-molecular weight heparin analog. The product is the anti-coagulant / blood thinner of choice for many cardiologists. Yet, AVE’s No. 1 drug faces increasing competition from a number of new therapies. Exanta (AZN/MRK), Arixtra (SNYà?), and Innohep (PHRM) all look to ease Lovenox market share. Yet, AVE presented data at the ACC (American College of Cardiology) meeting in March 2004 on a clinical trial called SYNERGY, demonstrating Lovenox’s non-inferiority to unfractionated heparin in treatment for unstable angina and myocardial infarction. There are some (Morgan Stanley, Prudential, UBS, Lehman) that think this will benefit sales in the future. AVE is currently conducting a DTC (direct to consumer) advertising campaign on DVT (deep-vein thrombosis) in the US. Sales in the Q1 were €439M, up 13% YOY driven by strong sales in the US market. Our digest group sees 2004 sales near €2B, growing to €2.2B in 2005. SNY will divest Arixtra as part of the planned merger with AVE.
One final issue surrounding Lovenox is based on the FDA signal that a generic filing for Lovenox has been made. Analysts (CSFB, Smith Barney, UBS, Merrill, Morgan Stanley) do not assume generic competition until the patent expires in 2012. Yet, the US-PTO rejected AVE’s initial application to reissue the Lovenox patent during the Q1. Most analysts expected this outcome, as the US-PTO has a rejection rate of approximately 85% of initial reissue filings (Natexis), but it does create some uncertainty about the ability of AVE to defend Lovenox. Analysts Estimate that if the FDA does allow a substitute (AVE loses the trail) it could have a €0.50 negative impact to EPS in 2005. AVE believes that peak Lovenox sales are €2500M. Obviously it will fall way short if a generic alternative comes to the market before expected.
Another cardiology drug, Delix/Tritace (ACE inhibitor for hypertension and heart failure), saw patent expirations in both Germany and the UK in the Q1-2004. Generics could begin to impact the franchise going forward. An increase in sales tax rates in Germany also hurt sales in the Q1. However, one analyst (Prudential) points out the benefits of the HOPE clinical trial findings that give Delix/Tritace the best marketing message of any ACE inhibitor. That might easy the decline once generics hit.
2002A / 2003A / 2004E / 2005E / Est. GrowthLovenox Sales / €1562 / €1660 / €1950-€2100 / €2100-€2400 / 6%-8%
Delix/Tritace Sales / €924 / €1065 / €1000-€1200 / €1100-€1400 / 5%-7%
Taxotere sales benefited from a launch in first-line treatment for non-small cell lung cancer (NSCLC), after previously being only approved for second-line treatment. There is also potential for the drug in adjuvant breast cancer, 2nd-line breast cancer, and gastric cancer. Taxotere received approval for combination therapy with prednisone for hormone refractory prostate cancer in late May 2004. Analysts (Delta Lloyd, Morgan Stanley, Prudential) believe these indications are an incremental €1B market opportunity. Sales in the Q1 were €334M, up 3% YOY.
AVE believes that Taxotere has peak sales potential of €3B, but analysts note that two impediments have hurt growth so far. Firstly, generic Taxol (BMY) is taking market share. Generic Taxol has a more favorably reimbursement rate under US Medicare, so AVE might need to reduce Taxotere growth to drive sales. Secondly, the changes to the Medicare reimbursement rates that took effect on January 1, 2004 have hurt injectable oncology drug sales throughout our digest coverage.
Genasense (partnered with Genta Inc.) has been described as a high-risk, but potentially high-reward opportunity. One analyst (Bear Sterns) believes investors do not fully appreciate the potential of the drug given the near-term concerns. Genasense has US $500 potential with a “proof of concept” melanoma indication, but has multi-billion dollar potential with an expanded “solid tumor” listing. Concerns are as follows: 1) as an antisense compound Genasense is based on unproven technology, 2) targeted therapy seems to be harder to accomplish given setbacks with other compounds, and Genasense’s target (BCL-2) has never been attempted before, and 3) combination therapy (with chemotherapy) generally brings higher regulatory hurdles than monotherapy. The FDA seems to agree with all the above concerns because the US Advisory panel rejected the drug 13-3 on May 3, 2004. AVE/GNTA will present additional data to the FDA for a re-file later in 2004. AVE believes the product still has €2B peak sales potential but they will have to design trials to get past the rigorous FDA approval status first.
Analysts expect additional data on Taxotere and possibly Genasense at ASCO in early June 2004.
2002A / 2003A / 2004E / 2005E / Est. GrowthTaxotere Sales / €1262 / €1363 / €1700-€1800 / €1850-€2200 / 15%-20%
Genasense Sales / €0 / €0 / €0-€50 / €0-€150 / ?
Copaxone, co-marketed with Teva Pharmaceuticals for the treatment of multiple sclerosis, showed steady growth last quarter thanks to a better tolerability profile (at the expense of slightly less efficacy) than other MS drugs. Category leader Avonex (BIIB) has seen share slip over the past year due to the introduction of Rebif (PFE/SRA), but Copaxone remains steady at roughly 10% share (CSFB). The product should post close to €1B in sales in 2005, but profits are split with Teva. Sales seem to be benefiting from a new room-temperature version.
Unfortunately some analysts are concerned with Copaxone growth beyond 2005 due to a potentially superior product called Antegren (BIIB/ELN) coming to market mid-2005 (NDA planed mid-2004). Antegren is a humanized monoclonal antibody, not an interferon product like the rest of the MS class. It could take dramatic market share from Avonex, Copaxone, and Betaseron in 2006. We encourage investors to view our TEVA.doc file for more detail.
2002A / 2003A / 2004E / 2005E / Est. GrowthCopaxone Split / €554 / €617 / €675-€725 / €750-€850 / 20%
Lantus (long-lasting insulin) has blockbuster potential for Type-I and Type-II diabetes. The product has exceeded management’s expectation so far. There seems to be potential to further increase sales, as doctors become more comfortable with the franchise. The product has been ramping around Europe throughout 2003. Additionally, AVE added a pediatric indication that should help drive sales. Lantus has been steadily taken market share from Humalin (LLY), and became the number one prescribed branded insulin product in the world last year. AVE believes that Lantus can achieve sales of €2000M in time.
AVE also has Amaryl, a sulfonylurea for patients with Type-II diabetes, to round out its metabolic franchise. Sales of Amaryl were €146M in the Q1-2004.
2002A / 2003A / 2004E / 2005E / Est. GrowthLantus Sales / €299 / €487 / €700-€900 / €900-€1200 / 25%
Amaryl Sales / - / €596 / €650-€700 / €600-€700 / 5%
Actonel (co-promoted with Proctor & Gamble) has been solidly picking up market share in the osteoporosis market. We have seen market share charts (CSFB) showing Actonel taking sizable share from Fosamax (MRK) and Evista (LLY). Yet, the osteoporosis market is growing so rapidly, all products are benefiting. AVE believes that Actonel has peak sales potential of €2000M.
2002A / 2003A / 2004E / 2005E / Est. GrowthActonel Split / €117 / €194 / €350-€375 / €450-€475 / 25%
Ketek (telithromycin), the first of a class of antibiotics known as the ketolides, was designed to deliver an optimal spectrum of activity for the first-line treatment of upper and lower respiratory tract infections. The product received US approval in April 2004. The product currently posts non-US sales of around €100M. However, with US approval the drug has €100-200M potential by 2005, and €500 by 2007 (Morgan Stanley, Prudential, Lehman). Overseas Ketek has been taking market share from generic Augmentin, and battling Zithromax (PFE). AVE will launch Ketek in August 2004, just before the start of the respiratory track infection season here in the US.
Alvesco is AVE’s entrant into the asthma market. AVE should file for Alvesco over the next quarter but analysts (Merrill, Delta Lloyd) are skeptical on the potential of the drug given the highly competitive asthma market. Drugs such as Advair (GSK), Singulair (MRK), Symbicort (AZN), Xolair (DNA) and Spiriva (PFE) will all battle Alvesco for market share in asthma/COPD.
Sales of AVE’s vaccine business were strong in the Q4-2003 thanks to sales of the worldwide Flu Vaccine. Management indicated it sold-out of the vaccine in the Q4-2003 thanks to the rather severe Flu season reported around the world. In fact, chief competitor Chiron also reported selling all of its Flu vaccine shots in the Q4. AVE and CHIR intend to product more shots for the 2004 season. Wyeth’s exit from the Flu vaccine market seems to have helped AVE pick up market share. Total vaccine sales eclipse €1B in sales at AVE, with the Flu shot accounting for slightly less than half.
AVE will team up with PFE and NKTR to bring an inhaled insulin product to the market in 2005. The timing for the filing is under question, perhaps pushed back into the Q3-2004. We encourage investors interested in Exubera to view our NKTR.doc file. The product has €2B peak sales worldwide. AVE management called the product, “A significant growth drive from 2005-2007,” on the Q4 conference call.