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Case Study: Sanofi-Aventis (Lantus) vs Merck (Vioxx) Comparison

Post a Comment June 28, 2009 – 1:07 am |   | Permalink |  Print This Post |

Sanofi Aventis (which we hold a small position via the Warren Buffett Index) is down 12% at $41 Euro after its third best selling drug Lantus was implicated in a link to cancer amongst users. A German study in 2008 (yes it was published a year ago but only caught everyones attention after UBS reported it to investors) involving 127000 patients reported a higher incidence of cancer amongst patients on Lantus. A Swedish study involving 114841 patients found a two-fold increase in breast cancer amongst patients on Lantus. While a Scottish study reported a higher incidence of cancer, the results were not statistically significant. Whilst entirely speculative and inconclusive at this stage, if found to be true, this would be cataclysmic for Sanofi. We compare this to Merck’s withdrawal of Vioxx back in September 2004.

Lantus Vs Vioxx Case Study

Drug         Company     Drug Revenue pa   % revenue      Share price Impact       Value wiped out

• Vioxx       Merck           2.4 billion                10%                 $45 to $26                     $ 42 bil (2221 mil shares oustanding)
• Lantus     Sanofi         2.45 billion               9.9%                  $46 to 41                                    ?

Merck’s market capitalization dropped by 41% after withdrawing Vioxx. It took 2 months for the free fall to hit bottom. After hitting $26 in November 2004, Merck recovered to a high of $35 before lawsuits started hitting headlines. The shareprice started heading lower back to its $26 levels. Refer to attached chart. The long term financial impact of Vioxx on Merck have been fairly contained - most lawsuits settled for $25 million each with half the cases overturned due to insufficient evidence of a direct causal effect.

Those with an appetite for risk may take a position in Sanofi - we have always believed in the buy on rumour sell on fact strategy (in the setting of unexplained fall in share price; whilst selling on rumour and buying on fact if there is an unexplained rise in share price). We may take a position if the share price falls further this coming week in the absence of conclusive damning evidence.

Merck Historical Share Price and Impact of Withdrawal of Vioxx in September 2004

www.theinflationist.com

www.theinflationist.com

Sanofi Aventis Share Price Chart and Impact of Lantus-Cancer Link

by www.theinflationist.com

by www.theinflationist.com

Conclusion

• We will take a very small position (1/8 intended position) in Sanofi  this coming week if its share price remains depressed (especially if it falls sub $40) in the absence of definitive proof. Subsequent targets at $35 (1/8); $30 (2/8); $25 (4/8). This will give us an entry price of $29.38. (assumption is for $25 target to be hit - failing which our average entry price will be $33.75)
• Assuming the worst case scenario (ie withdrawal of Lantus) and applying the same impact on Sanofi as with Merck (ie 41% drop in market capitalization), we should see prices go above $30 in the long term.
• Disclaimer: invest at your own risk and consult your financial advisor before making investment decisions. This is a high risk play.