* Raises 2011 business EPS, sees drop of 2-5 pct vs 2010
* Sees cost savings from Genzyme takeover at $700 mln
* Says Genzyme likely to miss milestone on drug production
* Q2 net down 13 pct at 2.15 bln euros, sales 8.35 bln
PARIS, July 28 (Reuters) - French drugmaker Sanofi raised its earnings forecast for 2011 now that Genzyme is part of its business, but said the U.S. biotech would likely miss its first milestone fee due to supply constraints of one of its key drugs.
The French drugmaker for the first time included Genzyme, a specialist in rare diseases, fully in its accounts after it bought it for $20.1 billion in cash and milestone payments that are tied to future performance of its products.
Sanofi said Genzyme's integration should yield $700 million in cost savings by the end of 2013. Genzyme should help Sanofi overcome lower sales of drugs that are losing patent protection and hitting net profit which fell 13 percent in the second quarter.
Sanofi deemed it unlikely Genzyme would meet a milestone tied the production of Cerezyme and Fabrazyme. The two key rare disease drugs were in short supply due to contamination problems that led to the temporary closure of Genzyme's Allston plant near Boston in 2009.
While patients on Cerezyme were able to return to normal dosing levels since the beginning of this year, patients on Fabrazyme so far has failed to meet normal dosing level needs. Expectations were for its full recovery in the fourth quarter.
"To return to normal supply levels of Fabrazyme for existing and new patients, the use of extra capacity at Genzyme's new manufacturing plant in Framingham, Massachusetts, is required," Sanofi said, adding this would likely happen in the first quarter of 2012.
Sanofi clinched its long-sought deal for Genzyme in February with a higher offer that comprises cash and the possible payment under contingent value rights (CVRs) , depending on whether Genzyme would meet several goals. The production CVR is worth $1 and CVRs total potential value is $14.
Including Genzyme, Sanofi now expects 2011 business EPS to be 2 to 5 percent lower against last year instead of its forecast issued before it bought Genzyme for a 5 to 10 percent lower business EPS. Sanofi's outlook excludes a return of generics to its cancer drug Eloxatin in the United States.
Business net income, which excludes items like amortisation and legal costs, fell to 13.2 percent to 2.15 billion euros ($3.12 billion) in the second quarter while business earnings per share (EPS) fell 13.7 percent to 1.64.
Sales were little changed at 8.35 billion euros. Genzyme sales rose Genzyme sales rose 16 percent at constant exchange rates and scope to 796 million euros. Excluding Genzyme, part of Sanofi's growth areas such as diabetes, vaccines and consumer health, sales fell 4 percent.
Analysts, on average, had expected net income of 2.178 billion, sales of 8.463 billion and business EPS of 1.65 euros according to Thomson Reuters I/B/E/S.
"As expected, the second quarter is the most challenging this year, given the level of generic competition," Sanofi's chief executive, Chris Viehbacher, said in a statement.
Sanofi completed the Genzyme acquisition in April, adding rare or orphan diseases to its drug portfolio. Rare disease drugs are harder to copy than chemical drugs, have a greater chance of getting reimbursed and sell at hefty prices.
Sanofi is dealing with a so-called patent cliff that runs until 2013 and could take roughly a third out of its 2008 sales base. More and more of its drugs with sales exceeding 1 billion euros a year are no longer exclusive, either because the patents expired or because generic drugmakers legally challenged them.
Sanofi's growth areas in vaccines, diabetes, emerging markets, consumer health and animal health partly made up for a loss in sales to generic competition to anti-blood clotting drug Lovenox, sleeping pill Ambien and cancer drug Taxotere.
(Reporting by Caroline Jacobs, Editing by Matt Driskill)