Possible threat to strong launch of Merial's anti-flea pill NexGard adds to Sanofi's woes

Sanofi's ($SNY) animal health division, Merial, provided a rare bright spot in the company's third-quarter earnings report--but it wasn't quite bright enough to save CEO Chris Viehbacher's job. On Wednesday, just after announcing so-so earnings that triggered a massive selloff of Sanofi's stock, the company's board said it has "decided unanimously to remove" Viehbacher.

Fact is, even the good news on Merial came with a touch of bad news. First the good news: In the third quarter, sales in Merial's animal health division rose 13.3% to €317 million ($403.8 million), largely on the strength of NexGard, the company's beef-flavored chewable pill to fight fleas and ticks in dogs. Sales of NexGard, which Merial launched in the first quarter, were €85 million ($108.3 million) in the first 9 months of the year.

The bad news is that Merck ($MRK) just launched a competing oral drug, which promises to fight off fleas and ticks for three months, versus NexGard's one month of protection. There's still room for NexGard growth--particularly in Europe, where the product has yet to be introduced--but in a conference call with analysts following the earnings report, Viehbacher didn't exude complete confidence in Merial's ability to sustain its recent performance. "I don't think we're going to see as [strong] growth in Merial next year," Viehbacher said.

Merck's chewable, Bravecto, which was approved by the FDA last year, and NexGard are meant to offer alternatives to topical flea-and-tick fighters like Merial's popular Frontline. Despite the new competition from Merck, Merial is clearly confident its chewable will continue to catch on with dog owners: In September, the company said it will invest $25 million into its Paulínia, Brazil, plant so it can increase production of NexGard.

As for Viehbacher, his dismissal was sudden but not altogether surprising. Even though strong performance from Merial helped push Sanofi's revenues up 4% in the third quarter, and earnings rose 8%, Viehbacher indicated that sales in the company's flagship diabetes franchise were under pressure. That seemed to be enough to prompt the board to shake his hand and say goodbye.

- here's the transcript of Sanofi's earnings call
- access the earnings release here (PDF)

Special Report: Top 10 animal health companies of 2013 - Merial

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