SNY

Business Context and Reporting Period

Company: Sanofi-Synthélabo (Sanofi)
Reporting Period: Fiscal Year ended December 31, 2003
Accounting Basis: French GAAP (with U.S. GAAP reconciliations provided)
Industry: Pharmaceutical (Prescription focus in Cardiovascular/Thrombosis, CNS, Internal Medicine, and Oncology)

Sanofi is a French pharmaceutical group formed by the 1999 merger of Sanofi and Synthélabo. As of December 31, 2003, the company held 732,848,072 ordinary shares. The company is currently pursuing a major strategic acquisition of Aventis, announced in January 2004, which involves a mixed cash and stock offer.

Key Financial Metrics (French GAAP)

Note: U.S. GAAP Net Income for 2003 was €1,865 million.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 8.1% to €8,048 million. On a comparable basis (excluding currency and scope changes), sales grew 15.6%. Growth was driven by strong performance of strategic products: Plavix, Aprovel, Stilnox, and Eloxatin.
• Profitability: Operating profit rose 17.6% to €3,075 million. Operating margins improved to 38.2% due to product mix shifts toward higher-margin strategic products and improved sales force productivity.
• Currency Impact: The weak U.S. dollar against the euro negatively impacted reported results. Operating profit would have grown 34.4% if exchange rates had remained constant.
• Product Performance:
  • Eloxatin: Sales more than doubled (111.8% increase) driven by U.S. launch.
  • Plavix: Sales increased 34.2%.
  • Stilnox: Sales decreased 5.5% on a reported basis due to currency, but grew 10.4% on a comparable basis.
• Divestitures: No significant divestitures in 2003. In 2001, the company divested non-core businesses (custom chemicals, medical equipment).

Guidance, Outlook, and Risks

Proposed Acquisition of Aventis

On January 26, 2004, Sanofi announced a mixed cash/exchange offer to acquire Aventis. The offer is subject to regulatory approvals (including U.S. HSR Act and European Commission) and shareholder approval. If successful, the company expects to incur substantial debt (up to €12 billion credit facility) to finance the cash portion. Management estimates annual synergies of €1.6 billion before tax.

Strategic Outlook

The company plans to continue expanding its U.S. presence and investing in R&D (€1,316 million in 2003, or 16.4% of sales). Key growth drivers include the pipeline of 56 compounds (25 in Phase II/III) and the expansion of indications for existing products like Plavix and Arixtra.

Key Risks

• Acquisition Risks: Failure to complete the Aventis offer, integration challenges, and potential unknown liabilities of Aventis.
• Patent Expirations: Generic competition for products like Corotrope and potential challenges to Plavix patents (litigation pending with Apotex and Dr. Reddy's).
• Regulatory and Pricing: Price controls and reimbursement policies in Europe and the U.S. (e.g., Medicare reform).
• Currency Fluctuations: Significant exposure to the U.S. dollar, which accounts for 23.8% of sales and 45.4% of operating profit.

Investor Verification Checklist

• Aventis Offer Status: Verify the outcome of the regulatory approvals and shareholder vote for the Aventis acquisition.
• Plavix Litigation: Monitor the status of patent infringement lawsuits filed by generic manufacturers (Apotex, Dr. Reddy's, Teva) regarding Plavix.
• U.S. GAAP Reconciliation: Review the reconciliation of Net Income and Shareholders' Equity to U.S. GAAP, noting the impact of purchase accounting adjustments and stock-based compensation.
• Dividend Policy: Confirm the approval of the proposed 2003 dividend (€1.02 per share) at the upcoming shareholder meeting.
• Debt Covenants: Assess the financial covenants associated with the new €12 billion credit facility if the Aventis deal closes.