Aventis May Make Investors Queasy

Sale of CropScience Unit Could Help to Bring on a Host of Side Effects
Tougher Regulatory Climate and Limited Product Pipeline Could Thwart Growth

07/20/2001
The Wall Street Journal Europe
Page 10
(Copyright (c) 2001, Dow Jones & Company, Inc.)

PARIS -- Investors watching with hope as Aventis holds exclusive talks with Germany's Bayer AG over the sale of its CropScience unit might want to put the drug group under the microscope one more time.

Selling CropScience, which is 76% owned by Aventis and 24% held by Schering AG, might well make life more difficult for Aventis . On the positive side, the sale could allow Aventis to dump 2 billion euros in CropScience debt and bring in 6 billion euros to 8 billion euros in proceeds. Those funds go toward acquiring promising biotechnology companies or develop drugs in house. Another benefit of a sale would be the Franco-German behemoth's transformation into a pure pharmaceutical company.

But here's the rub. As a pure pharmaceutical company, Aventis 's scant product pipeline would be fully exposed at a time when an increasingly active U.S. Food and Drug Administration is stalling launches of new drugs and generics are posing an increasing threat to branded medicines. Add to this public pressure to slash drug prices, a few threats to key products, evaporating merger synergies and a probable slowdown in Aventis 's sales for the long term, and the stock price looks vulnerable.

At a price-to-earnings ratio of 33, based on 2002 earnings per share of 2.61 euros, according to IBES, Aventis trades at a premium to both its earnings-growth rate of 28% and the global pharmaceutical sector price-to-earnings average of 28. Compare it with global leader Pfizer Inc. Although armed with several blockbusters and a bulging pipeline, Pfizer trades at 24 times its 2002 earnings, in line with its earnings-growth rate.

"Aventis has issues with its pipeline," said Thomas Shrager, who manages Tweedy Browne's Global Value Fund. Mr. Shrager said Aventis shares are "expensive."

Aventis executives declined to comment. But the company has already acknowledged a growth gap. "We need to demonstrate that growth will be there for the long term," Aventis 's Chief Financial Officer Patrick Langlois said after the company released its annual results in March.

But investors are losing patience. In the three months ending in March, two of the three biggest holders of Aventis stock, Vanguard's Wellington Fund and Windsor Fund, unloaded a combined total of 1.55 million shares. Furthermore, some major banks have downgraded the stock.

Aventis has earned a heady valuation by producing a steady stream of best-selling drugs -- including household names such as Allegra and Lovenox -- since its creation through the 1999 merger of Hoechst and Rhone-Poulenc.

It is now the world's fifth-largest pharmaceutical group by sales. Aventis shares have doubled since its debut in 1999 and hovered around 90 euros over the past month. On the Paris Stock Exchange Thursday, Aventis shares gained 1.2%, or 1 euros, to 86 euros, after losing 2% Wednesday as a result of news about a delay in U.S. agency approval for its diabetes drug Exubera.

But some analysts think the stock may be peaking. Aventis makes more than half its 13.9 billion euros in prescription sales from four franchises: cardiovascular, led by Lovenox that chalks up about 23% of sales; respiratory, with Allegra; oncology with Taxotere; and anti-infectives. These drugs, plus synergies from its 1999 merger, have driven Aventis 's 30% plus earnings growth rate.

But that is a tough act to follow. Aventis is planning to launch three key drugs by 2003: Ketek, an antibiotic for respiratory illnesses, Dynepo for anemia, and Exubera. All are expected to reap annual sales of 500 million euros or more.

The trouble is that public pressure for improved safety following several drug-related deaths is pushing the U.S. agency to recall drugs and more closely scrutinize its applications. The agency "is much more cautious over any hint of a side effect," said Jonathan de Pass, managing director of London-based research group Evaluate Pharma.

That has resulted in nine drug approvals in the first six months of this year, vs. 21 in the same period last year, according to Pharma Approvals Monthly, as the agency sends medicines back to the drawing board. But investors don't appear to have lowered Aventis 's valuation to account for the greater uncertainty. What is more, a few doubts surround Aventis 's drugs that are up for approval.

Aventis and Amgen Inc. are embroiled in a patent infringement dispute over Dynepo; Ketec faces a one-year delay for the larger angina market; and, just this week, safety concerns delayed Exubera approval.

Moreover, Pfizer, with 17 drugs up for approval before 2003 -- and Novartis AG with eight -- dwarf Aventis 's three products and enjoy better odds for a green light from the U.S agency.

In addition, pricing pressures and generic competition pose a not-so-distant threat to two of Aventis 's current best-selling medicines. The spotlight on the U.S. Hatch Waxman Act is paving the way for generic heavyweights to dent the market for large pharmaceuticals. The bill has been in effect since 1984 but has attracted more attention as drug prices rise, created a fast-track process for generic-drug approval.

Bank of America Securities, for example, expects U.S. generic sales to more than double by 2005, to $20.1 billion (23.04 billion euros) from $10 billion in 2000, accounting for about half of the U.S. drugs market.

With a key Allegra patent expired, Aventis 's nemesis Barr Laboratories filed an application for a generic version of the drug last month. If successful, it could hurt Allegra's market share and margins.