Sanofi-Aventis reported progress in talks to buy U.S. biotech Genzyme and predicted 5-10 percent lower earnings in 2011, underscoring the French drugmaker's need to find new sources of revenue growth.

Shares in the company fell 1.6 percent as Chief Executive Chris Viehbacher gave very little away about talks to complete a takeover deal expected to be worth approximately $20 billion, designed to rejuvenate the company's product line.

As we announced about 10 days ago, we have signed a confidentiality agreement with Genzyme, Viehbacher said in a media conference call on Wednesday.

We continue to review non-public information. Talks are progressing and we'll keep you updated, he added.

Genzyme shares were quoted down 0.9 percent in Germany.

Sanofi and Genzyme, which specializes in rare diseases, have been thrashing out remaining issues in a takeover deal since the U.S. firm finally agreed to open its books on January 31.

After seeing its initial overtures rejected last year, Sanofi is widely expected to sweeten its original $18.5 billion cash offer while adding a fee tied to the performance of Lemtrada, a drug Genzyme is developing for multiple sclerosis.

People familiar with the matter have said recently the two sides are close to a deal, which many investors thought could be announced in time for Sanofi's annual earnings on Wednesday.

Viebacher said Sanofi was carrying out due diligence as we speak and reiterated all options remained open.

It's not all that surprising. Large-scale transactions like these do take time and they can't be rushed, said Helvea analyst Karl-Heinz Koch. But there's an element of disappointment in the sense that the uncertainty does not go away.

Navid Malik of Matrix Corporate Capital said he still expected a deal to be announced pretty soon.

GENZYME COULD DEFY GENERICS BITE

Sanofi is struggling to replace revenue from drugs that have lost or are set to lose patent protection and it is looking to the biotechnology industry to provide replacements.

Cambridge, Massachusetts-based Genzyme, founded in 1981 and one of the first entrants into the young biotech sector, has become all the more compelling now that Sanofi has suffered setbacks with two of its promising treatments.

U.S. and EU health regulators are examining whether heart drug Multaq may have caused liver damage in some patients. And, unexpectedly, breast cancer drug iniparib, seen as one of Sanofi's future key treatments, failed to meet its main goal in a late-stage clinical trial.

Genzyme's drugs help patients with uncommon diseases and the prices they command are among the highest in the world.

For 2011, Sanofi predicted 5-10 percent lower business earnings per share, at constant exchange rates. It said this did not include any benefit from a Genzyme deal, nor the damaging effects of a return of generic copies to cancer drug Eloxatin.

The drop equates to EPS in 2011 of 6.35-6.71 euros, against a consensus of 6.63 compiled by Thomson Reuters I/B/E/S.

Sanofi's fourth-quarter earnings exceeded analyst expectations, helped by a lower effective tax rate and cost cuts. The company now expects to achieve 2 billion euros in savings this year instead of in 2013.

Sanofi said it would propose increasing its annual dividend to 2.50 euros a share from 2.40 euros.

Business EPS, which excludes items like amortization and legal costs, were flat at 1.41 euros in the fourth quarter, above a Reuters poll which suggested 1.35 euros.

Quarterly sales, however, undershot expectations, edging up to 7.395 billion euros compared with a consensus for 7.501 billion, as generic competition hit for several products, notably blood-thinner Lovenox in the United States.

Sanofi posted a business operating income of 2.515 billion euros, or higher than the forecast 2.474 billion.

U.S. and European drugmakers, such as Novartis, AstraZeneca and Sanofi's U.S. partner Bristol-Myers Squibb, have also given cautious outlooks for 2011 as higher costs from U.S. healthcare reform will hurt a sector grappling with patent expirations and pressure to curb prices.

Sanofi expected U.S. healthcare reforms to affect sales by $290 million this year and public spending cuts in Europe to dent sales by more than 200 million euros.

(Additional reporting by Ben Hirschler in London; editing by Tim Hepher)