Sanofi's Q3 bombshell: Diabetes sales drop, and will keep dropping through 2018

Sanofi ($SNY) racked up big third-quarter gains in emerging markets, its Genzyme unit sales were up almost one-third, and vaccines and animal health delivered growth, too. Overall sales increased by 3.4% to €9.6 billion, lower than analysts expected, but only slightly. And earnings topped estimates by a couple cents per share.

But what got most of the attention in the French drugmaker's Q3 release? Its falling diabetes sales--and its expectation that they'll continue on that downward trajectory.

Lower sales of Sanofi's longtime best-seller Lantus--in the U.S. because of higher-than-expected rebates, in Europe because of biosimilar competition--dragged the company's diabetes franchise down by 6.6%.

Couple that with downgraded expectations for a couple of new products, the inhaled insulin Afrezza and the GLP-1 drug Lyxumia, and Sanofi sees global diabetes sales declining by an annualized 4% to 8% through 2018. For this year, those sales will see a 6% to 7% slide, rather than remaining flat as previously expected.

During the company's Thursday earnings call, analysts jumped all over those predictions, asking Sanofi executives to slice and dice the assumptions that led to that forecast. And they followed up on a promise Sanofi made in its press release--that it would "mitigate the impact" of that sales decline on operating income--with questions about M&A, business unit sales, R&D spending, cost cuts and more.

Sanofi CEO Olivier Brandicourt

In fact, there's word on the street that Sanofi is looking at unit sales or spinoffs, and unions have been worrying about sweeping job cuts, though the company says those worries are unfounded. Unfortunately for the questioning analysts (and other curious types), most of Thursday's big questions were deferred to Nov. 6, when Sanofi CEO Olivier Brandicourt will lay out his strategy for the company at an investor event.

But Brandicourt and his team did address the nitty-gritty of this year's unexpected decline in diabetes, blaming higher drug discounts, slower basal insulin growth, and a bigger-than-expected share of sales to U.S. government health programs, such as Medicaid and the Veterans Administration, where rebates are higher than in commercial plans. Sanofi commercial EVP Peter Guenter said 33% of Lantus sales came from those programs in the quarter, a big leap from previous periods. And as Bernstein analyst Tim Anderson pointed out in a Thursday investor note, that increase--and the higher rebates that came along with it--appeared to catch Sanofi by surprise.

And Brandicourt did assure analysts that Sanofi hasn't been sitting on the M&A sidelines completely, despite the lack of deal announcements. The company's M&A team has "actively reviewed" deal opportunities, but has been, "and will continue to be" financially disciplined, the CEO said. And though biopharma stocks have indeed declined considerably in recent months--making deals theoretically less expensive--that doesn't mean shareholders and executives' expectations have fallen commensurately.

The company has a strong balance sheet, with strong cash flow, and with borrowing costs still low, Sanofi "could act very swiftly" if it comes across attractive opportunities. But "certainly more in the space of bolt-ons" than in the megamerger area, which Big Pharma rival Pfizer ($PFE) is currently pursuing with Allergan ($AGN).

- see the Sanofi release

Special Report: Top 15 pharma companies by 2014 revenue - Sanofi | Top 10 pharma companies by employees

Read more on