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Sanofi's Looking for a Safe Haven

NEW YORK (TheStreet) -- Following the health care sector as closely as I have, one thing that I've come to realize is that, investing in this industry can sometimes be bad for your health. Sanofi (SNY) investors are waking up to this lesson Monday morning, as the French drug company is under investigation by Chinese authorities over bribery allegations of Chinese doctors in 2007.

According to a The New York Times report, which cites Chinese paper company 21st Century Business Herald, Sanofi is alleged to have paid roughly $274,000 to more than 500 doctors in China. These payments were said to have been disguised as grants. But according to authorities, they were compensation for the doctors having prescribed Sanofi-branded drugs to their patients.

Sanofi, which said it is taking these claims "very seriously," has also begun an internal investigation. Truth be told, as embarrassing as these charges may be for Sanofi, they aren't exactly new. Given how "tainted" the Chinese health care system has always been perceived to be, particularly due to low doctor salaries, corruption (in many forms) has often supplemented shrinking budgets. It's always been an "assumed" practice.

In fact, just last month four GlaxoSmithKline (GSK) employees were apprehended by Chinese police on bribery suspicions. In the case of Sanofi, I'm not downplaying the severity of these charges, but to the extent that these new concerns will derail the stock and the company's long-term performance, I don't believe that will be the case.

As with St. Jude Medical (STJ), which has had to battle constant streams of negative news, I believe the Street has already made up its mind about Sanofi, whose stock has been up as much as 15% on the year. This is even though the company has struggled to execute.

There is an obvious love-affair with the company's prospects. I expect that the stock will take a slight dip following this recent scandal. But after the dust settles, it will be business as usual. Before you disagree, consider that, unlike Johnson & Johnson (JNJ), which has had its own issues with negative press related to product recalls, Sanofi hasn't been able to make up for its bad press with better execution, including a pretty sizable miss in the company's second-quarter earnings report last week.

What's even more troubling here, though, is that while there seems to be "big trouble in little China," Sanofi is also having execution problems in Brazil, which has become a very important market for the company. Sanofi has a Brazil generics business, which accounts for 72% of the company's total revenue. And to use management's own words, the company "had a mess in Brazil," which led to a 15% miss on earnings-per-share and a 5% miss on revenue.

With Brazil accounting for over two-thirds of the company's business, a miss there will throws everything out of order, as you can imagine. So it's pointless to sort through the segmental performance to try and find a silver lining. There isn't one. If that weren't bad enough, it also didn't help that the company posted higher-than-expected capital expenses in the quarter.

Here again, though, despite this recent brutal performance, the stock actually traded up following the earnings report, which suggests to me that investors believe that the Brazilian shortfall was an aberration.

While there is plenty of evidence to suggest that Sanofi should overcome its struggles in Brazil, this is not a wager that I'm comfortable making, especially for a stock that is already expensive by every measure. In the meantime, I expect that the Chinese situation will be resolved in short order, and I don't expect that investors will abandon the stock. But this is not one that I'm willing to touch today with my own money.

At the time of publication, the author held no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Richard Saintvilus is a co-founder of StockSaints.com where he serves as CEO and editor-in-chief. After 20 years in the IT industry, including 5 years as a high school computer teacher, Saintvilus decided his second act would be as a stock analyst - bringing logic from an investor's point of view. His goal is to remove the complicated aspect of investing and present it to readers in a way that makes sense.

His background in engineering has provided him with strong analytical skills. That, along with 15 years of trading and investing, has given him the tools needed to assess equities and appraise value. Richard is a Warren Buffett disciple who bases investment decisions on the quality of a company's management, growth aspects, return on equity, and price-to-earnings ratio.

His work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets.

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