Headquartered in Paris, France, Sanofi Aventis (SAN.P)(NYSE:SNY) is the world’s fourth-largest pharmaceutical company by prescription sales. Sanovi Aventis was formed through a merger of Aventis, a pharmaceutical and lab assay testing company formed in 1999 through a merger of Rhone-Poulenc and Hoechst, and Sanofi-Synthelabo, formed in 1999 when Sanofi merged with Synthelabo, in 2004. The company employs around 100,000 people in 100 countries.
Sanofi has six growth platforms: emerging markets, vaccines, consumer health care, diabetes treatments, innovative products and animal health.
Around a third of Sanofi’s sales are under threat from generics from 2013 however Buffett has always maintained that pharmaceutical companies should be bought in a basket of stocks. The reason for this is that the sage sees drug pipelines changing over a period of 5 years. Which company will develop the next blockbuster drug? No one knows therefore, says Buffett, it makes sense to hold pharma stocks within a diversified portfolio.
Several analysts expect Sanofi to meet its 2013 sales targets due to the effectiveness of the six growth platforms. Cost cutting may not be able to offset patent expiry therefore margins could suffer in 2013. Importantly Sanofi holds the No. 1 position amongst pharmaceuticals in emerging markets and it is this sector that is thought to provide the majority of growth for pharmaceuticals from 2013 onwards.
Enter Warren Buffett
Buffett initiated his holdings in Sanofi during the start of 2006 by purchasing 488,500 shares between $44.52 and $45.03.
According to Berkshire Hathaway’s 2010 Annual Report the group held 25,848,838 shares in Sanofi Aventis which equals a 2% stake in the company. The total acquisition cost was $2,060,000. It is important to note that the stock has been bought on both European and American stock exchanges therefore reports of a lesser holding is in all probability based on the ADR holdings.
Currently along with Sanofi Aventis Buffett’s portfolio contains pharmaceutical holdings in Johnson & Johnson (NYSE:JNJ) and GlaxoSmithKline (NYSE:GSK).
Ten-year average return on equity, a key measurement for Buffett, for each company is as follows:
10 Yr Av ROE
The Securities and Exchange Commission
At the end of 2010 Berkshire Hathaway reported a $938 million impairment charge due to several equity positions continually trading below acquisition costs. The companies involved were Wells Fargo (NYSE:WFC), US Bancorp (NYSE:USB), Kraft Foods (KFT), Swiss Re (RUKN.VX) and Sanofi Aventis. After deliberation, Berkshire was spared write downs on Wells Fargo and Kraft Foods. It appeared, from correspondence between the SEC and Berkshire, that the maximum price Buffett paid for SNY shares was $45.03.
A letter, written on the 11th of January, 2011, from Berkshire to the SEC can be found here:
Buffett believes that each of the companies offers good long-term prospects. An excerpt from the letter confirms this:
"...Continue[s] to believe that our ability and current intent to hold these investments for an extended period of time which would be sufficient to allow for an anticipated recovery in market value along with our opinion that the current financial condition and business prospects of each issuer are favorable suggests that it is likely that the market prices of each of these securities will recover to a level equal to or greater than our cost basis in each investment.'
On page four of the letter we find Buffett’s thoughts on Sanofi:
"Sanofi-Aventis, a large global pharmaceutical company, reported strong earnings in recent periods. Its earnings per share in 2009 increased about 18% versus 2008 and for the first nine months of 2010, earnings per share increased about 9% over the same period in 2009. Berkshire believes that Sanofi-Aventis possesses a significant economic franchise and potential for continued growth in earnings and earnings per share. Berkshire does not believe there are significant negative considerations that are unique to Sanofi-Aventis."
So from Buffett’s own pen, or rather keyboard, we can see that the Oracle thinks that Sanofi has a favorable financial position as well as business prospects. In addition, Buffett finds the earnings growth attractive, and believes that Sanofi possesses a significant economic franchise without any significant negative considerations.
European forecasts for Sanofi Aventis are as follows:
It looks like that the previously mentioned margin erosion is factored in by analysts already. We know that Buffett disregards analysts (the recent move of inviting three analysts to the next Berkshire meeting surprised the investment community) as the sage looks over longer-term earnings.
Last year I read an article which mentioned that Sanofi fit the Benjamin Graham defensive stock requirements. No detailed figures were given in the article and when I looked at the criteria myself, I found that Sanofi fell short.
So in summary it looks like Buffett likes Sanofi for future earnings growth, its business franchise and prospects, as well as sound financial characteristics.