Sanofi (SNY - Analyst Report) reported third-quarter 2016 business earnings of $1.00 per American Depository Share, which beat the Zacks Consensus Estimate of 86 cents by 16.28%. Earnings increased 11.2% on a reported basis and 12.4% at constant currency rates (CER) driven by higher sales and tight cost control.

Third-quarter 2016 aggregate (including Animal Health) sales rose 2.1% on a reported basis and 3.0% at CER to almost €9.7 billion. Sales were hurt by exchange rate movements of roughly 1%. 

Sales rose 7% at CER in the U.S. and 5.6% in Emerging Markets and declined 0.5% in Europe and 12% in the Rest of the World (Japan, South Korea, Canada, Australia, New Zealand, Puerto Rico).

All growth rates mentioned below are on a year-on-year basis and at CER.

Segmental Performance

Sanofi’s new operating model based on five Global Business Units (GBUs) – Sanofi Genzyme (Specialty Care), Diabetes & Cardiovascular, General Medicines & Emerging Markets, Sanofi Pasteur (Vaccines) and Merial (Animal Health) – came into effect on Jan 1, 2016. Under this organizational structure, all Pharmaceutical sales in Emerging Markets are now included under the General Medicines & Emerging Markets GBU.

Sanofi Genzyme/Specialty Care GBU sales increased 16.9% to €1.27 billion, driven mainly by strong uptake of multiple sclerosis drugs Aubagio (up 49.8% to €334 million) and Lemtrada (up 69.1% sequentially to €112 million).

Meanwhile, sales of rare disease drugs like Cerezyme increased 1.6% to €183 million while Myozyme/Lumizyme improved 16.0% to €185 million. Fabrazyme sales were €176 million, up 20.4%. Cerdelga sales came in at €28 million in the third quarter of 2016, up 55.6%.

Oncology sales decreased 2.4% to €363 million due to lower sales of Taxotere and Eloxatin.

Diabetes and Cardiovascular GBU sales declined 2.5% to €1.56 billion. The Diabetes franchise was down 1.5% to €1.81 billion, reflecting lower sales of its best-selling drug, Lantus, in the U.S., due to lower average net price. Lantus sales declined 9.8% to €1.39 billion in the quarter.

Sales of diabetes drugs in the U.S. declined 5.4% to €1.0 billion.

Sales of diabetes drugs outside the U.S., however, increased 3.9% to €792 million driven by strong performance in Emerging Markets (up 13.6% to €341 million). Newly launched Toujeo generated sales of €167 million (up 18.4% sequentially) in the reported quarter.

In the cardiovascular franchise, newly launched Praluent garnered worldwide sales of €35 million in the reported quarter, up 67% sequentially with U.S. sales coming in at €28 million and EU sales amounting to €6 million. Praluent total prescriptions increased 60% sequentially in the third quarter.

General Medicines & Emerging Markets GBU sales came in at €4.37 billion, down 2.4%. Sales of Established products were €2.54 billion, down 7.4%, reflecting termination of Auvi-Q commercialization in the U.S., lower sales in Venezuela and generic competition for Plavix in Japan (Plavix lost exclusivity in Japan in 2015).

Third-quarter Consumer Healthcare sales were €791 million, down 1.2%, due to currency headwinds in Venezuela and lower sales in Russia due to a challenging economic environment.

Sales of Generics increased 1.3% to €453 million as higher sales in U.S. and Europe offset lower sales in Emerging markets.

Pharmaceuticals sales increased 0.5% to €7.2 billion, as growth in multiple sclerosis, rare disease and cardiovascular franchise offset the decrease in Diabetes, CHC and Established Rx Products sales.

Third-quarter consolidated Sanofi Pasteur (Vaccines) sales increased 14.4% (comparability based on reclassification of VaxServe sales – Sanofi's vaccine distribution and service provider in the U.S.) to €1.80 billion, driven by strong sales of influenza vaccines in the U.S.

At the call, management said that the Dengvaxia (the world's first dengue vaccine) launch is progressing with multiple new approvals since the second quarter. However, the uptake of Dengvaxia has been below management’s expectations due to recent political changes and economic volatility in Latin America. The uptake is expected to be lower in the fourth quarter. Moreover, sales of Polio/Pertussis/Hib Vaccines were down slightly in the quarter.

Third-quarter Animal Health (Merial) sales were up 4.0% to €624 million, driven by the success of NexGard, Merial’s next-generation flea and tick product for dogs, in the U.S., the EU and Japan. The Ruminant business also did well in the U.S.

Sanofi is planning to swap its Merial business with Boehringer Ingelheim Consumer Healthcare business. The deal is expected to close by the end of 2016.

Cost Discussion

While marketing expenses rose 3.3% due to higher launch costs, cost savings led to a reduction in general & administrative expenses. R&D spending declined 6.4% due to lower spend on Praluent and dupilumab as key programs have been completed.

2016 Outlook

Sanofi raised its 2016 earnings guidance. Sanofi expects 2016 business earnings to grow between 3% and 5% at CER. Previously, the company expected business earnings to remain broadly stable. It still anticipates negative currency impact of around 4% on business earnings in 2016.

Gross margin is expected to be around 70% for 2016, up from management's previous guidance range of above 69% to below 70%. Operating expenses are now expected to grow in the low single digits instead of mid single digits expected earlier.

At the quarterly earnings call, management announced a €3.5 billion share repurchase program (including equity from Merial swap) to be completed by the end of 2017.

SANOFI-AVENTIS Price, Consensus and EPS Surprise

SANOFI-AVENTIS Price, Consensus and EPS Surprise | SANOFI-AVENTIS Quote

Separately, Sanofi and partner Regeneron Pharmaceuticals, Inc. (REGN - Analyst Report) announced that they have received a Complete Response Letter from FDA for their pipeline candidate, sarilumab, being developed for the treatment of rheumatoid arthritis. The CRL relates to certain deficiencies identified at the Sanofi Le Trait facility where sarilumab is filled and finished. A satisfactory resolution of the facility is required for approval.

Our Take

Sanofi’s third-quarter 2016 results and the increase in guidance were encouraging. Also, both earnings and revenues increased year over year. Shares rose more than 4%.

We expect investor focus to remain on the sales ramp-up of newly launched drugs Praluent, Toujeo and Dengvaxia. The company expects a lot of activity on the pipeline front in the upcoming quarter.

Sanofi currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the large-cap pharma sector are Merck & Co., Inc. (MRK - Analyst Report) and Bayer AG (BAYRY - Analyst Report) . Both the stocks have a Zacks Rank #2 (Buy).You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Merck’s performance has been pretty impressive, with the company beating earnings expectations consistently. The average earnings beat over the last four quarters is +4.30%. Its share price has risen more than 11% year to date.

Bayer’s four-quarter average earnings surprise is 2.33% and it has a long-term earnings growth rate of 8.19%.