Sanofi-Aventis

About the company: Sanofi-Aventis (PSX:SAPL) is the result of Sanofi Synthelabo acquiring Aventis SA in 2004. However, the company's roots go farther back than that; initially incorporated in 1967 as Hoechst Pakistan Limited, the company began manufacturing pharmaceuticals and specialty chemicals in 1972 and listed itself on the Karachi Stock Exchange in 1977. Today, its name is Sanofi-Aventis and its market capitalisation stands at over Rs 6.2 billion.
Sanofi-Aventis is one of the larger players in the pharma industry, particularly in the field of diabetes. Although it reports sales under one segment, the company operates broadly in the medicinal, vaccine, and consumer healthcare businesses. It boasts a diversified portfolio, with successful names like Flagyl, Telfast, Lantus, and Amaryl under its belt, to name just a few.
PRIOR PERFORMANCE Sanofi-Aventis' top line has been on an uptrend, painting a picture of steady growth. Although gross margins fell to 25 percent in 2014, they've maintained a healthy level over the past three years - at par with the industry leader GlaxoSmithKline (gross margins 26 percent as of 2014). However, the company takes a beating when it comes to net margins which, as of 2014, were a meager two percent - far too low for a pharma company, even considering that it is one of the firms that were granted a stay order on price increase on certain products. GSK's net margins over the same period were at six percent.
The year 2014 saw lower profits for the company due to substantial increase in higher input costs and inflation, as per the Director's Report. More importantly, Sanofi-Aventis' distribution and marketing expenses have been higher owing to advertising and promotional activities to support new product launches.
The company has been strengthening its consumer healthcare operations. In 2012, Sanofi-Aventis acquired Selsun Blue shampoo - its first brand to advertise in the mass market - and has been expanding this range. During 2013, the company launched 16 new products; nine in the pharmaceutical range and seven in the consumer healthcare product range. In 2014, it launched new products like Jevtana and Ciprozee, whereas line extensions to existing products such as Clarofan 2G, CoPlavix, and Taxotere injection were rolled out.
One interesting trend to note is that the company has increased its exports quite substantially over the past four years, going from just Rs 130 million in 2011 to Rs 754 million as of 2014. Although as a percentage of net sales the figure is still quite low, the growth and expansion into other markets is worth mentioning. The company's main external market is Afghanistan.
RECENT PERFORMANCE For the nine months ended 2015, Sanofi-Aventis' financial performance appears quite satisfying at first glance - a nine percent jump in top line year-on-year with costs kept in check, yielding double digit growth in gross profits. Even the bottom line shows a 12 percent growth year-on-year. Unfortunately, a look at the net margins shows how the improved sales and gross profits have been all for naught - net margins were a meager one percent, showing no change over last year. As has been the case in the past, Sanofi-Aventis' distribution and administrative expenses ate away at the bottom line, increasing by double digits and amounting to almost 19 percent of net sales. To compare, GSK's distribution, marketing and selling expenses over the same period amounted to 12 percent of its sales.
The increase in Sanofi-Aventis' distribution and marketing expenses has been due to increased staff costs, commission, depreciation and freight and transportation, as per the Director's Report. That being said, business is sound - the pharmaceutical division's revenues for the nine-month period were up by six percent year-on-year, owing to strong sales from brands such as Lantus, Amaryl, Flagyl, and Claforan; the vaccines business recorded an enormous growth of 64 percent due to higher sales of the polio vaccine; finally, the consumer healthcare segment's growth for the period was 33 percent largely realised from sales of the key brand Selsun Blue. Exports to Afghanistan were also stepped up over the period.
OUTLOOK The pharmaceutical industry remains under immense pressure in Pakistan, with companies not being allowed to increase drug prices for over a decade. Many pharma companies have packed up and exited the country. On top of that, counterfeit medicine remains a plague for the domestic market.
The new drug pricing policy, rolled out in the first quarter of 2015, will allow price increases to a certain extent on some drugs. However, most pharma companies are dissatisfied with the policy. Nevertheless, many pharma companies are holding their own and emphasising their consumer healthcare segment in the absence of any price increases on their drugs. All things considered, Sanofi-Aventis has performed well over the years, managing consistent growth in an industry that has been in deep waters for too long.

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Sanofi-Aventis

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Rs (mn)                           9MCY15   9MCY14         YoY

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Sales                              8,328    7,649          9%

Cost of Sales                      6,092    5,742          6%

Gross Profit                       2,236    1,908         17%

GP Margin                            27%      25%  up 190 bps

Distribution & Marketing expense   1,557    1,353         15%

Administrative expenses              233      204         14%

Other operating expenses              34       34          0%

Other operating income                81      118        -31%

Finance cost                         234      210         11%

Taxation                             149      128         16%

Net Profit                           109       97         12%

NP Margin                             1%       1%           -

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