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Sanofi-aventis is one of the worlds leading Pharmaceutical companies. Present in more than 100 countries, with around 11,000 scientists, they have around 100,000 employees working to improve health and wellbeing. Global headquarters are in Paris, France. Sanofi-Aventis Pakistan Limited engages in the manufacture and sale of pharmaceutical products. The company develops products in the areas of thrombosis, cardiovascular diseases, diabetes, vaccines, oncology, central nervous system disorders, and internal medicine, as well as neurodegenerative diseases, metabolic disorders, and allergies and infectious diseases. The company was incorporated in 1967 and is headquartered in Karachi, Pakistan. Sanofi-Aventis Pakistan Limited is a subsidiary of SECIPE. KEY STATISTICS:
Company Profile: Ticker: Exchanges: Sanofi Aventis Pakistan Ltd SAPL KAR

Major Industry: Sub Industry: Country: Employees:

Drugs, Cosmetics & Health Care Ethical Drug Manufacturers PAKISTAN 789

Net income/ profit Net sales Sales growth (%) Gross profit Operating income Total equity

2007 0.08 5 3.8 2 1.08 0.23 5 1.14

2008 0.03 8 4.3 11.6 1.05 0.17 1 1.1

2009 0.167 6.7 54.7 1.62 0.384 1.2

The managements goal for the company is to become a DIVERSIFIED HEALTH CARE COMPANY. The product market in which the management plans to compete in future years are Diabetes, Cardiovascular, Oncology and Antibiotics. Strategies of each product market include increase coverage and SOV (percentage of niche market). Product Flagyl makes the majority portion of companys sale in 2009 sales; i.e. the highest profitable product of the FY09.The increase in sales reported was also due introduction of Swine Flu vaccine which increased the

sales to 10 % during Q4 2009. The company has also undergone various investment projects and product line extension during years 08 and majority in year 09 which in turn had a positive impact on companys net income, sales, gross profit and operating income. Sanofi Aventis Pakistan Ltd has posted a record profit after tax of Rs 167.371 million for the year ending December 31, 2009. According to financial results of the company dispatched to Karachi Stock Exchange, the pre-tax profit surged to Rs 253.059 million. Due to the year 2009 position the out look of profitability for the year 2010 is expected more than 45%.The peers identified for financial comparison of company are Glaxo Smithkline, Abbott and Wyeth. These are taken into consideration as all are MNCs other than that they share similar product line (majority) as that of Sanofi Aventis. And among them GSK is highly aggressive competitor locally as well as globally. Right now following are the market competitive and operating risks of the company; PKR devaluation, Political instability, increase price of raw material, patent expiry of major brands, generic erosion (decrease in demand of certain products).The growth of primary demand in each product market varies from 10 % to 20%. The companys sales are both seasonal and cyclical and in time of seasonal financing need company plans ahead according to the requirements. The company is soundly financed as evident from the capital structure (debt to equity ratio during 3 years are0.5, 0.8 and 1.1 times), given its level of profitability, level of business risk and future need for additional finance. These in time and realistic planning during FY09 results in increase of sales to 54.7% in comparison to FY08. To overcome the adverse conditions the companys strategy is to increase the unit sale (those in demand) and to invest on those brands where margins are very high.

Industry Overview:
Pharmacy industry of Pakistan is around US$ 2 billion with an annual growth rate of 12.9% per annum. At present 29 multinational Pharmacy organizations ( meets around 70% of the country's demand of Finished Medicine) are producing their products in Pakistan. Over 300 units are involved in local Pharmacy manufacturing. Out of total market of US$ 2 billion, 53.3% is captured by Multinationals and 46.7% is taken up by National companies. The total outlay on the health sector is budgeted at Rs.38.0 billion, which has increased by 15.8 percent over last year. The Pakistan pharma industry is relatively young in the international markets with an export turnover of over US$ 100 Million as of 2007. Pakistan Pharma Industry boasts of quality producers and many units are approved by regulatory authorities all over the world. Like domestic market the sales in international market have gone almost double during last five years. The pharma industry is focusing to an Export Vision of USD 500 Million by 2013. In the meantime, exports are also likely to be boosted by new regional and global opportunities. In addition to the challenging economic environment, the countrys pharmaceutical expenditure will also be shaped by the volatile political and security situation. Overall, we expect the pharmaceutical market value to increase at a compound annual growth rate (CAGR) of 9.39% in

local currency terms, reaching PKR206.9bn (US$2.3bn) in 2014. Growth over our longer, 10year, forecast is likely to be somewhat more subdued, at a CAGR of 8.75% in local currency, as the operating environment stabilises. Twenty-nine international pharmaceutical manufacturers now have facilities operating in the country and its pharma market is now worth $1.5bn (1.2bn). TERND AND PEER GROUP ANALYSIS: PROFITABILITY (EXHIBIT) Profit margin: A class of financial metrics that are used to assess a business's ability to generate earnings as compared to its expenses and other relevant costs incurred during a specific period of time. A high ratio from the competitors indicates that the company is performing well. A higher profit margin indicates a more profitable company that has better control over its costs compared to its competitors. The profit margin in FY09 is increased due to increase in net income. Although the CGS, administration and selling expenses, financial cost and taxation has also increased in comparison from FY08 and 07 but there is a propionate increase in the sales for FY09 as well. There is an increase of 54.7% sales (for FY09) as compared to previous year i.e. 11.6%. This increase in sales is due to swine flu vaccine introduced during Q4 of 09 which increased the sales to 10%. The ratio however remains below to that of its peers average. Due to the economic recession and high costs the average of peers has declined from 14.36 to 13.38 and finally to 8.74%.Sanofi among its competing peers is the only one experiencing an increase in net profit margins. ROE: It is important to the owners of the enterprise because it indicates the rates of returns that management has earned on the capital provided by the stockholders after accounting for payments to all other capital suppliers. The two apparent components of this ratio are profits after taxes and owners equity. In case of sanofi the net income for FY09 has increased by 1.6% i.e from 0.9 % in FY08 to 2.5%. The increase in net income is due to the same factors as discussed above. This ratio has increased due to increase in net income as the second factor which is owners equity has decreased during the previous years as evident from the capital structure. This is because the companys equity financing for the year 09 is only 37.5% which is less than 45.8%( 07 fig). The company is undertaking new projects and requires debt financing for the purpose.The ROE of company is for FY09 is higher than the peers average (12.5) indicating a profitable year for the company. But GSK leads the group having ROE more than the competing companies. The fig remained very low as compared to peers average during FY 08( 21.4%) and FY07 ( 20.52%). This is because of very sharp decline in net income during these years.esp during 2008 due to increased expenses (20.2) and less operating profit (4%) in comparison to FY09.

Duo Pont Analysis :( EXHIBIT) ROE is a strong measure of how well the management of a company creates value for its shareholders. The number can be misleading as increase in its value can also make the stock more risky. Without a way of breaking down the components of ROE investors could be duped into believing a company is a good investment when it's not. If ROE goes up, it is generally a great sign for the company as it is showing that the rate of return on the shareholders equity is going up. The problem is that this number can also rise simply when the company takes on more debt, thereby decreasing shareholder equity. This would increase the leverage of the company, which could be a good thing, but it will also make the stock more risky. So importance of ROE as performance indicator makes it desirable to divide the ratio into 3 major components i.e. Profit margin- measures operating efficiency

Total asset turnover- measures asset use efficiency Equity multiplier-measures financial leverage Dupont analysis of aventis shows that in FY 07 to 08 both net profit margin and asset turnover decreased, two negative signs for the company, and the only reason that ROE did not tremble largely was a large increase in leverage 2.4% to 4.5%. No matter what the initial situation of the company is, this is obviously the bad sign. It means the company is relying more on debt to finance its assets. That is why in FY 07 and 08 Aventis ROE 7.2 and 6.1 is much smaller than the average, 22.6 and 15.5 respectively, of its peer group. In FY 09 our company's ROE goes up due to an increase in the net profit margin and asset turnover, this is a very positive sign for the company the company is managing itself better. A higher profit margin indicates that aventis is a profitable company, that has better control over its costs compared to its competitors. However, if the equity multiplier was the source of the rise, and as the company is already appropriately leveraged, this would simply be making things more risky. If the company had got over leveraged, the stock might deserve more of a discount, despite the rise in ROE. Aventis has raised its sales and net income considerably in 2009 making its return over total assets conspicuously higher from 1.35 to 4.75.due to this, its ROE is highly differentiated from average 7.9% to 11.9%

Operating Profit Margin: Operating profit margin indicates how effective a company is at controlling the costs and expenses associated with their normal business operations. The operating profit margin for Sanofi Aventis during 09 was 5.7% which was higher than 3.9%(during 08) and 4.6% ( during 07). The selling, distribution and administrative during 08 expenses accounted 20.2% which was higher than the 09 amount 17.9% .these increased expenses and CGS(75.7%) decreased EBIT for

2008. During 2009 the company got control over its costs and expenses to some extent which increased the ratio.

LIQUIDITY ANALYSIS :( EXHIBIT) Current ratio is mainly used to give an idea of the company's ability to pay back its short-term liabilities (debt and payables) with its short-term assets (cash, inventory, receivables). The higher the current ratio, the more capable the company is of paying its obligations. A ratio under 1 suggests that the company would be unable to pay off its obligations if they came due at that point. But this does not necessarily leads to assumption that company is not financially sound, as a company with good will can get the opportunity to extend the loan and can increase both internal and external financing as well. As the trend of current ratio for Sanofi shows a decreasing trend from 1.3 in FY 2007 and has reached to FY08 with 0.98. This apparently does not show a healthy sign, as its current liabilities have increased substantially by 44% while current assets only increase by 8%. Main contribution to this increase in current liability is, increase in accrued interest on short term borrowing with an increase of 204% and short term borrowings with 60% growth. This show Sonafi is using more and more external financing for operating and expansion plan, while dividends has not been declare and earning also has been retained. While on the other side companys Trade deposits and short-term prepayments and other receivables have made contribution in upward pattern, which shows inappropriate collection policy. Sanofi has been able to stabilize current ratio in FY09 to 0.98 as of last year, though there is a 15% rise in both current assets and current liabilities, company has reduced its current liabilities, but the down side is, that its short term borrowing has increased by 56% and its trade debts has been increased by 127%, in which doubtful trade debts rises to Rs 348,007. Current ratio of Sanofi is less than the companies selected to be included in the peer group, which include Wythe, Abbot, and GSK. The current ratio of peer group on average is 3.91, 3.34, and 2.7 which is much higher than that of Sanofi. This shows that the company is individually troubled in this regard, as this is not the situation in the industry.

Quick ratio indicates whether a firm has enough short-term assets to cover its immediate liabilities without selling inventory. Companies with ratios of less than 1 cannot pay their current liabilities and should be looked at with extreme caution. Sanofi have the same trend with quick ratio as that of current, by showing a slight decline and then stabilizing again to 0.41. This still is not a healthier sign as, peer group have an average 2.47(07), 1.62(08) and 1.24(09).also this shows that the company has only 0.41 of most liquid assets for only Rs 1 of short term liability.

ASSET MANAGEMENT ANALYSIS: (EXHIBIT) The asset management of the company seems to be quite effective during FY09 as the operating cycle of Aventis decreased to 88 days from 138 days in FY08. The operating cycle however has reduced due to faster sales turnover. During FY09, the days to collect accounts receivables have reduced to 7days from 12days in FY08. The days to sell the average inventory were 126days in FY08 whereas in FY09 it took the company only 80days to sell its inventory. The company has increased its inventory by 2.8% in FY09; while the inventory turnover rate was increased from 2.9times to 4.5times. This year the sales of the company were increased by 54.7% as compared to FY08, which also played its part in increase of the inventory turnover. The company seems to be leading the market as far as the asset management is concerned, as its operating cycle of 88days is very less than the peer group average of almost 134days in FY09. This incredible performance is really plausible. The companys total assets turnover was also stable at 1.9times and it was almost the same as previous financial year.Though the sales increased by 54.7% and the total assets increased by 16%; the companys turnover in FY09 is more than the peer group average of 3.6times and this is because in FY09, Aventis has started the commercial production of many new products such as Lactacyd classic, Lignocaine injections and Aventriax- indicated for the treatment of lower respiratory tract infections, skin infections and joint infections etc; and because of these new products they have seen a tremendous increase in sales which in turn increased the inventory turnover. During FY09, the cash conversion cycle/cash cycle of Aventis has reduced to 31days

from 50days in FY08; which means that the company is taking fewer days to pay its bills. The companys cash conversion cycle in FY09 is also less than its peer group average of 58days and this appears to be quite good as it is showing that the company has maintained a better position in the industry.

LEVERAGE RATIO: The debt/asset ratio shows the proportion of a companys assets which are financed through debt. If the ratio is less than one, most of the companys assets are financed through equity. If the ratio is greater than one, most of the companys assets are financed through debt. In case of sanofi during the recent year it has undergone various investment projects in Pakistan like in 2009 there is a completion of new plant in Karachi, renovation and upgradation of quality control lab, cold room facilities , enhancement of infrastructure for improved productivity and quality. The commercial production of new products has also starts during 2009 like aventriax IV and IM injections, new packs of Tritace, lignocaine injections and lactacyd classic. The debt to total assest ratio is almost same during the FY 08 and 09 because of the undergone research and investment projects. The ratio has increased from 54.1% to 62.5% and finally to 62.4% and the respective ratio is increased due to proportionate increase in total liabilities as well as total assets(mostly fixed assets with relatively no prominent change in current assets). This shows that most of the companys assets are financed through debt. The peers identified are Glaxo Smithkline, Abbot and Wyeth not only on the basis of similarities that they are multi national corporations but also that they are sharing a common range of products. The strongest competitor in this range is GSK, then Abbot and then Wyeth (previously known by the name of Pfizer). The debt/asset ratio of Aventis in 2007 shows that it was greater than the peer group (showing greater proportion of debt financing in company during FY07) and remains subsequently high during FY 08(62.5%) and 09(62.4%) than the respective peer groups averages i.e.25.07% and 34.50%. this depicts that the proportion of debt financing of total assets of this company is greater than their peers.

In FY09 the debt to equity ratio has increased and reached to 1.1. During 2008 it was 0.8 and in 2007 it was 0.5. Increase in this ratio has shown that as the company has undergone expansion through different investment projects in research as well as in the product line areas. Due the increased interest rates in the economy the indulgement into debt financing has increased the riskiness of the company. But as it is investing in other projects ( by utilizing the debts) this in turn has ultimately increased the earnings of the company adding value to the share holders wealth. This is also evident through sales growth, net profit ad gross profit margin which has increased tremendously in comparison to previous years. The times interest earned ratio is an Indicator of a companys ability to meet the interest payments on its debt. During the FY09 this ratio is 2.93 times which is higher than the last years which was 1.96 times(2008) and 2.15times( 2007). This shows as the companys debt financing is increasing but with this increase the companys ability to pay financial charge on loan has also increased (i.e from 87113 to 131012). In short this increase in TIE ratio shows that it is investing in new projects and these are debt financed but as it is meeting its interest payment obligations this prevents the companys risk of bankruptcy. In case of time interest earned the ratio remains unexpectedly below the peer group averages that is 206.4 times which is quite high. The capital structure of Sanofi depicts that the debt financing during FY07 was 51.1% which increased to 60.2% in FY08 and finally to 60.3 % during FY09. Whereas the capital structure of peers is equity financed as evident from the table. Thus as others are less debt financed therefore their financial charge are very low as compared to the Sanofi. Thus their lower financial charge has increased their TIE ratio and so the peers average. And with Aventis the market is offering debt at a higher cost this may be due to their low credit worthiness and the possibility is also that the company is moving towards debt and increasing its proportion since the last two years thus the market is charging them high in comparison to peers which in turn causes a sharp decrease in TIE ratio for this company. The days payable outstanding (DPO) calculates the total time it takes a business to pay back its creditors. It shows how promptly the company is making payments to its suppliers. During the FY 09 the ratio has decreased to 47 days from 99 days ( during FY08) and 88 days( during FY07). This also shows that the company is trying to gain good image in the market through making the payments earlier. The days payable ratio average for the Aventis peers during FY09 was 111 days where as that of Sanofi was 47 days which is very less than the average ratio, depicting a positive sign that is they are relatively faster in making payments to their suppliers in comparison to their peers. The ratio was good during FY 07 but had slightly declined during 08. To mitigate the credit risk, the Company has a system of assigning credit limits to its customers based on an extensive credit rating and ensures that sales of products and services are made to customers with appropriate credit history and credit worthiness. The utilization of credit limit is regularly monitored.

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Accordingly, the credit risk is minimal and the Company also believes that it is not exposed to major concentration of credit risk. The share market price of Sanofi declined during the respective years i.e. from Rs 275 to Rs. 145. This decrease was due to overall stock market decline especially during December 2009 when the companys shares were at the loose end. Globally as the company is actually in Paris it derives more than one third of its profit from US thus the relative weakness of dollar against strengthening euro had an impact on the share market price of Sanofi. However the EPS has increased from RS3.97 to RS17.4. this is due to 2.5 % increase in net income during 09 from 0.9% of FY08.the net income in turn has increased due to sales growth.

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GROWTH ANALYSIS OF SANOFI AVENTIS

YEARS ROE DIVIDEND PER SHARE EARNING/ SHARE AFTER TAXES -22.20 16.04 25.39 28.64 23.54 7.81 3.97 17.4 RETENTION RATE (1-div/earning) 1 0.62 0.704 0.69 0.698 0.43 0.64 0.59 SUSTAINABLE GROWTH RATE(ROE*retention rate) -61.8 21.63 25.62 21.4 14.007 2.924 2.176 7.61

2002 2003 2004 2005 2006 2007 2008 2009

-61.8 34.9 36.6 31.1 20.3 6.8 3.4 12.9

0.0 6 7.50 8.70 7.10 4.40 1.40 7

The analysis of a sustainable growth potential indicates how fast a firm should grow. It is important for both lenders and owners. As owners know that the value of firm depends on its future growth in earnings, cash flows and dividends. Creditors are concerned about whether firm can pay back obligations or not and this is impacted by its growth potential. The more a firm reinvests, the greater its potential for growth. Alternatively for a given level of reinvestment a firm will grow faster if it earns a higher rate of return on funds reinvested. In Sanofi Aventis the trend of growth till FY05 was increasing but after that it started decreasing. The major contributing factor in this analysis is ROE which in turn is affected by net profit margin, total asset turnover and financial leverage( discussed in detail in Duo Pont analysis).the decreasing trend is due to sharp decrease in ROE 31.1%(FY 05) to 12.9%(FY09). The EPS also deceased from 2006 to 2008 which decreases the retention rate. Due to decrease in both ROE and the retention rate (decrease in EPS and dividend per share) the sustainable growth rate decreased. The increased costs and lesser investment in pharmaceutical industry during economic crises could also be the reason. But during the past two years the percentage has improved from 2. 17% to 7.61% indicating the company is trying to maintain its growth rate.

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APPENDIX:
RATIOS PROFITABILI TY: Net profitability margin Return on invested capital ROE ASSET TURNOVER Sales/T.A NET PROFIT MARGIN N.I/Sales % ROTA FINANCIAL LEVERAGE ROE % Duo Pont LIQUIDITY: Current Quick ASSET MANAGEMEN T: Total asset turnover (Times) Inventory turnover (Times) Avg. no. of days inventory in stock (Days) Avg. collection period (Days) Operating cycle (Days) Cash conversion cycle (Days) SANOFI AVENTIS 2007 2008 1.9 10.7 6.8 1.6 1.9 3.04 2.4 7.296 0.9 8.4 3.4 1.5 0.9 1.35 4.5 6.075 2009 2.5 14.2 12.9 1.9 2.5 4.75 2.5 11.88 22.6855 1.3 0.4 0.98 0.34 0.98 0.41 3.91 2.477 15.5396 3.343 1.627 7.93095 2.7033 1.24 PEER GROUP AVERAGE 2007 2008 14.36 20.52 20.52 13.38 21.4 21.4 2009 8.74 12.5 12.5

1.6 2.9 126

1.5 2.9 126

1.9 4.5 80

1.1 3.4 116

1.4 4 104

1.5 3.6 117

13 139 60

12 138 50

7 88 31

13 129 35

15 118 40

17 134 56

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LEVERAGE : Total liabilities/total assets (%) TIE (times) No. of days payable ratio(days) CAPITAL STRUCTURE Debt(%) Equity (%) Market value per share EPS

54.11

62.5

62.4

21.29

25.07%

34.50

2.153 24%= 88 days

1.968 27.1%=99 days

2.93 13.49%=47 days

231.6 25.93%=94 days

150.18 22.81%=80 days

206.4 27.1%=111. 4 days

51.1% 45.8% 276 7.81

60.2% 37.4% 211 3.97

60.3% 37.5% 145 17.4

21.3 78.3

25.06 74.8

31.03 68.8

Z-Score Financial Analysis Tool The Z-score formula for predicting bankruptcy was published in 1968 by Edward I. Altman. The formula may be used to predict the probability that a firm will go into bankruptcy within two years. Z-scores are used to predict corporate defaults and an easy-to-calculate control measure for the financial distress status of companies in academic studies. Z' Score Bankruptcy Model: Z' = 0.717T1 + 0.847T2 + 3.107T3 + 0.420T4 + 0.998T5 T1 = (Current Assets-Current Liabilities) / Total Assets T2 = Retained Earnings / Total Assets T3 = Earnings before Interest and Taxes / Total Assets T4 = Book Value of Equity / Total Liabilities T5 = Sales/ Total Assets Zones of Discrimination: Z' > 2.9 -Safe Zone 1.23 < Z' < 2. 9 -Grey Zone Z' < 1.23 -Distress Zone For Aventis:

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Z' = 0.717T1 + 0.847T2 + 3.107T3 + 0.420T4 + 0.998T5 = 0.717(-0.011) + 0.847(0.346) +3.107(0.111) +0.420(1.28) +0.998(1.95) = -0.0078+0.293+0.344+0.537+1.946 = 3.1 This shows that the value of Z is greater than 2.9 so we can say that Aventis is in Safe Zone and there is no probability that Aventis will go into bankruptcy within two years.