2006 was a rough year for French pharmaceutical giant Sanofi-Aventis (NYSE:SNY). Its top line got bashed up for part of the year by the temporary introduction of a generic version of one of its top drugs, and the FDA delayed rendering a decision on its future potential blockbuster, Acomplia.

Sanofi released its fourth-quarter financial results this week, and the effects of some of these issues showed. Sales were up just 5%, to $9.7 billion, and gross margins fell 120 basis points to 76.5%. Earnings were down 4.6% to $1.8 billion.

Fools love to follow the cash flow, and Sanofi did successfully bump up its operating cash flow for the year. But 2007 promises to be a rough year, as Sanofi deals with the possibility of generic competition against several of its top five drug franchises. Altogether, these drugs account for nearly a third of Sanofi's total sales.

Despite a poor fourth quarter due to the temporary launch of a generic version of the anticoagulant drug Plavix, Sanofi did grow earnings 7% for the year and brought in adjusted earnings per share of $6.10 (using an exchange rate of $1.25 per euro).

The guidance for 2007 is of earnings growth "on the same order of magnitude" as last year. Investors should note the big caveat attached to this guidance, which is that Sanofi is discounting the very real possibility that it may be facing generic competition this year on its two top drugs, Plavix and Lovenox, depending on the outcome of several patent infringement lawsuits and regulatory decisions.

Shares of Sanofi are cheap based on last year's earnings numbers and fat 5% forward dividend yield. With all the risks it is facing in the courts over Plavix and Lovenox, though, Sanofi's valuation won't look so cheap going forward if generic competition pops up against any of these drugs.

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Fool contributor Brian Lawler does not own shares of any company mentioned in this article. The Fool has a disclosure policy.

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