Sanofi Management Discusses Q3 2013 Results - Earnings Call Transcript

Oct.30.13 | About: Sanofi (SNY)

Sanofi (NYSE:SNY)

Q3 2013 Earnings Call

October 30, 2013 9:30 am ET


Sébastien Martel - Vice President of Investor Relations

Christopher A. Viehbacher - Chief Executive Officer, Director and Member of Strategy Committee

Jerome Contamine - Chief Financial Officer and Executive Vice President


Richard Vosser - JP Morgan Chase & Co, Research Division

Graham Parry - BofA Merrill Lynch, Research Division

Mark Clark - Deutsche Bank AG, Research Division

Tim Anderson - Sanford C. Bernstein & Co., LLC., Research Division

Michael Leuchten - Barclays Capital, Research Division


Ladies and gentlemen, welcome to the Sanofi 2013 Third Quarter Results Conference Call. I will now hand over to Mr. Sébastien Martel, Head of IR. Sir, please go ahead.

Sébastien Martel

Thank you. Hello, everyone, and welcome to our Q3 results meeting. Before we start, I'm obviously very pleased to let you know that, with the recent launch of SANOFI IR, our mobile application for Sanofi's financial communication, you can actually follow today's live audio webcast directly from your iPhone or iPad. The app is, obviously, available already for download on the App Store. So that's it for the 2-second commercial.

As always, I must draw your attention to the Safe Harbor statement. I must advise you that the information presented in this call contains forward-looking statements that involve known and unknown risks, uncertainties and other factors that may cause actual results to differ materially. And I'd like to ask you to refer to our Form 20-F on file with the SEC and also our document reference for a description of some of these factors.

Our presentation today will be simply divided in 2 parts. First, we will start off with a review of the key highlights for the quarter with our CEO, Chris Viehbacher; and then Jerome Contamine, our CFO, will then provide you details of our financial performance in Q3 2013. As usual, we will then open up the call to take questions.

And so without any further ado, let me turn the call over to Chris.

Christopher A. Viehbacher

Thank you, Sébastien. Does that mean, with the launch of this app, did I just become chief app, the CEO? So everybody, welcome to our third quarter earnings call. Hopefully, this is the last call where we really talk about the patent cliff.

If I turn to Page 6 -- 5, sorry, what you can see is really the evolution of sales over the past 5 quarters. And as you can see, for the first time, we have been able to significantly reduce the erosion of sales due to generic entry for some of the blockbusters that have historically driven Sanofi over the years. The last one, of course, was Eloxatin that went in August of 2012. So in a sense, if you're looking at Q3, you're really looking at 2 months where you've still got a patent cliff on the comparator period.

And really, it's from the 1st of September that we, internally at least, talked about new Sanofi emerging from the patent cliff. And so obviously, if we emerge from the patent cliff on the 1st of September, my first question, "What is that -- what is that happened in September?" And we don't want to over-interpret or extrapolate results, but it was, at least internally, satisfying to see that we had sales growth in the month of September of 6.1%. Obviously, giving a monthly sales number is not something we would normally do, but it certainly was the first thing I looked at when we came out of that.

Now why that is, of course, you see on the next slide, on Page 6, and you can see on the green bars, for 2012, the impact of the generic erosion in 2012 and the same sales of those genericized products in 2013. I would remind you, all, that when I first started showing graphs like this, that instead of the EUR 813 million, which you see in Q1 2012, when we started it, I think EUR 2.2 billion. So we've come a long way, baby. We've gone down from EUR 2.2 billion to EUR 0.2 billion on a quarterly basis by the end of 2012.

And when you look at the blue circles, you can really see what the drag on the business has been because of this, even as we go through the year. We have been running now for a couple of years at a loss rate of something like EUR 500 million per quarter just because of product sales losses. And of course, if you're looking at sales, you're not even looking at the bottom line. Because -- I would remind everybody, of course, that Plavix in the United States faced generic competition from May of 2012, but we didn't consolidate sales in our partnership with Bristol-Myers Squibb in the United States, so there is a bottom line impact. So this has been a -- certainly, a deep and concentrated patent cliff. But when you look over to the right end of that curve, you can see that there's not enough a lot of left -- not a lot of sales left out of those products.

So in that sense, when you look at it by region on the next page, on Page 7, you can actually see, for example, that the United States now has returned to sales growth for the full quarter on Q3. In Europe, we don't see that yet. But remember, generic erosion tends to occur slower, and some of the generic expires occurred a little later. But even in Europe, you can see that we've come up from a negative 13% in the last quarter of 2012 to 4.8% negative in Q3. And again, I've often said to many of you in one-on-ones that we actually return to growth by subtraction, that the growth platforms continue their progress and they just get diluted every quarter less and less by products going off patent.

So now let's look at the growth platforms, and that's on Page 8. And -- obviously, we'll go through it a little bit. We've had some setbacks through the year, some internal, some external. But despite all those setbacks, I mean, I think you see the value of the diversified model. It means we can take some hits in Animal Health and in Emerging Markets and in vaccines and still, growth platforms grew by 5.5%. And those growth platforms now represent 75% of the company.

Now we can look at these on an individual basis. I mean, Emerging Markets, at this point, we decided not to bother to separate out Brazil in all the press releases. Some of you have asked questions on the phone this morning. So to give you an idea, if we were to take Q3 and we ignore the effect of the Brazil generic sales, Emerging Markets would have grown at 5% in the quarter and 6% for the 9 months year-to-date.

We'll cover a lot of these. Animal Health, which we won't go into, I would expect, for the rest of the year, to continue on the rate of the 5% down for the rest of the year, that's probably where we're going to end up the year, largely driven by a poor seasonality in the spring and increased generic competition for Frontline, particularly in the U.S., somewhat in Europe as well. This is a product that's held on really pretty strongly for 4 years after its patent expiry but faced much more competition this year. Really, Merial's future now is in -- rests with the launch of new products. And in particular, you'll see we've got NexGard coming on later on.

I would point you to the Other Innovative Products. Now of course, because we have Genzyme separated out, you don't have the MS products in here. But I think you're going to see that line grow significantly over time. I mean, it's a pretty modest line. These are the products that have really been launched since 2009. So you can see at EUR 191 million, our R&D hadn't been particularly productive up until now. It's a pretty pathetically low number. But equally, I think that's the number you're going to increasingly see grow.

Consumer Healthcare grew at 9.8%, a pretty robust number. A lot of the distortions in the trade channels in China for the Consumer business have reversed, and we saw double-digit growth of our Consumer Health business in China. We also launched the Rolaids in the United States. For those of you who don't know -- who don't live in the United States, Rolaids has been an iconic brand in acid relief. It was a product by Johnson & Johnson that got disrupted by Johnson & Johnson's manufacturing difficulties, and we acquired that brand last year. And so this is a relaunch of that product.

We've also had the approval of Nasacort to go OTC in the United States, so this will be the first inhaled corticosteroid in that class. I think given the success we've had in switching Allegra that we'll be able to use a number of those skills to be able to successfully launch Nasacort OTC as well.

Moving to Slide 9, a little deeper dive into Emerging Markets. You can see still that Emerging Markets are still 31.5% of our sales. What you're also seeing is the U.S. is starting to grow more strongly. As I look out to 2015 and beyond, those are going to be the 2 biggest chunks of our pie chart here. You're going to see Western Europe probably stay slightly declining to flat over the next couple of years, with the U.S. more strongly growing and therefore, taking a greater proportion of sales and the same for Emerging Markets.

If you break that out across the piece, you can see this by region. I would say -- people ask, "Now we're seeing slower GDP growth rates in Emerging Markets. Is anything changing?" My personal view is that what you really got to look at is the conversion rate of the middle classes, which continues often to be very robust despite variations in GDP growth. The other is, is that I think where we've just been trying to hang on and stay with the growth going up, you're starting to see some areas become less attractive as they get bigger, as they get more mature. And therefore, I think we're going to be a lot more selective in our investments. If you take a country like China as an example, you've got a Shanghai and a Beijing starting to look like OECD countries in terms of their income levels and spending on health care, whereas, a lot of Tier 2, Tier 3 cities offer significant growth for us.

Moving to vaccines. Vaccines was a delay on supply in phase -- in Q3. We had expected to begin shipping our pediatric vaccines. This is the Polio/Pertussis/Hib vaccine series that includes, particularly, Pentacel, Pentaxim and Imovax. This was largely a technical issue that delayed release of lots for 3 months. So we ended up having the costs for 3 months but no sales of those particular products, and that's why you see the decrease of 17%. Those technical issues, which did not have any impact on product quality, have been resolved. We have begun shipping again as of October 15. So that was a one-off factor in the quarter.

The flu vaccines you see down 3.9%. This is really the usual issue we have with flu vaccines. In some years, it's stronger in Q3 and less in Q4. This year, it's a reverse. There'll be a lot more shipments at Q4. What I can say is that I think flu vaccines should have a record year for us. We're extremely happy, particularly with the uptake of our high-dose flu. You've seen studies published that demonstrate 50% higher efficacy than the normal flu. And this is particularly important for more senior patients.

We have the Quadrivalent approved, but that won't really be at market until next year given the recommendations won't come in time for this flu season and we're waiting approval in Europe at this time. So the essential message, really, for vaccines is, from a market point of view, we can sell absolutely everything we can make. We were just inhibited on our ability to produce in that quarter, and those issues have now been resolved.

So turning to Slide 11, and I try to recap what -- where we see things going in the quarter. Here are the things that we think are doing extremely well. Diabetes continues to go along extremely strongly. You've seen the 20% growth in the third quarter. That's the 11th consecutive quarter of double-digit growth. We also have been able to prepare for the future of our diabetes franchise in publishing a very positive data, earlier this year, for EDITION I and II. We would expect now to be able to publish soon EDITION III and IV, which are 2 studies, one in type 1 and the other one in sort of a lower-weight, earlier-stage patient. And we expect to file in both the U.S. and the EU in the first half of 2014.

On Genzyme, we saw not only the approval of Aubagio and Lemtrada in the EU, Lemtrada actually got a first line indication, which I don't think anybody was expecting externally. And this really is arising out of a growing feeling in the neurology committee that one needs to strike earlier and more aggressively, if you have an efficacious drug, before a lot of the CNS damage is done. We have an ad com coming up on the 13th of November. We have also expect to file -- sorry, we've also had the acceptance of the file for Cerdelga, which is the brand name for eliglustat. That has been accepted for review by the EMA. We've talked about the launch of Rolaids and recovery in China and Nasacort in CHC and the flu vaccine business.

And on our PCSK9, if we can go to Slide 12, we published our first Phase III study. And this study was against ezetimibe, and that is a -- we've not only demonstrated 3x the efficacy, this was a study where we are treating to goal. So we wanted to get people to 70, which is the target really for at-risk patients. And I think what we've seen is, is that actually most patients remained on the initial low dose of 75 milligrams to treat-to-goal in this study, suggesting a very strong potency of this drug. We had very few site -- injection site reactions, and we used the 1 milliliter subcutaneous auto-injector for both the 2-weekly dosing of 75 milligram or the 150 milligram.

Now areas where we need to really continue to focus to fully get back on track, you see on Page 13. So vaccines, we can really put a checkmark beside the first one because we've actually started the shipment of Pentacel, Adacel and Daptacel. And we would see progressive U.S. supply improvement in Q4.

On Animal Health, the Frontline competition will continue. I think, the new head of our business, Carsten Hellmann, is already in there on how we can really, I think, do a better job of defending Frontline against the generics. But the real relief comes when we are able to launch NexGard in time for the next flea and tick season.

We have the situation in China. This is in pharma, and you've seen this with everybody else's results, largely as a result of some of the press around government investigations. You've probably seen even IMS data that the whole prescription market slowed down, partly in July and certainly in August. But I think, we're seeing, certainly, within Sanofi, promotional activities and sales progressively coming back to normal. I spent a week in China in the middle of October and saw firsthand the situation of the marketplace, and I'm pretty confident that things will get back to normal on a progressive basis.

Brazil generics issue, which was a story out of the second quarter. We took the reserve for the excess inventory. Obviously, the inventory that stayed in the channel of distribution had to get burned off before we started getting fresh orders back in, and that happened in the middle of August. What I can tell you is that the underlying Medley brand continues to be strong, and the underlying sales out continue to be strong, this has only been a trade channel issue. A recent external survey of brands in Berlin -- in Brazil put Medley amongst the top 3 brands in Brazil, and this is looking across any segment, cars, cosmetics, anything you want to mention. And this was done in September. So the underlying the value of the Medley franchise continues to be intact. We've now got this inventory situation cleaned up, and we're starting to see a return to growth.

Now Slide 14. I hardly ever comment on exchange rates because we report everything at constant exchange rates. The only thing I'll say here is that in all my years of seeing results reported, this one is a strange one in terms of currency movements. 2 years ago, there were some companies saying they wouldn't even put any money in European banks. Now 2 years later, we find ourselves with one of the world's strongest currencies, who would have thought. And so as a result, pretty much everybody's currency is down against the euro, whether it be the dollar, particularly the yen and emerging markets' currencies. So now the good news is that if you wait long enough then the exchange rates tend to reverse, but it has been a big impact, EUR 0.17 per share in the quarter.

So when we look at business earnings per share on Slide 15, there, again, you're seeing much like as you saw on sales, a significant reduction in the erosion of the generics. So we're down 29% at constant exchange rates in Q1, 18.5% in Q2, 9% in Q3. But 9% really would have been less. But most of that is a result of a -- of the vaccine disruption of supply, and that was really what led to the minus 9% in Q3.

So what does that look like for 2013? Well, if we take into account, the expected return to growth in Q4 but also the impact of the extended vaccine shortage that we faced in Q3 that I already described, the outlook now is going to be at the lower end of previous guidance range. So 2013 business earnings per share is expected to be around 10% lower than 2012 at constant exchange rates and as always barring major unforeseen adverse events.

And with that, I'll turn it over to my colleague, Jerome.

Jerome Contamine

Thank you, Chris. Good morning, good afternoon, everybody. So I'm now on Page 18, so some more detail on the P&L. So I'll start with the sales. I mean, you've seen the last part of the graph already. So maybe a few other comments.

So first one is that, as Chris has mentioned, the negative impact of the key products which have been genericized last year has now been reduced, EUR 191 million. There will be still a bit of a gap as a result of Aprovel in Q4, but pretty limited, in the range of EUR 100 million. The column Other is the impact of tail business in Europe, as well as generic competition in Japan, and this is starting also to be somewhat smaller as compared to the previous quarter as we are heading to a situation where we are less faced with the erosion of our sale of the tail business.

On Brazil generics, this is the last quarter you will see it. As a matter of fact, as Chris mentioned, we resumed sales in mid-August, so we just benefited from 1.5 months of sales during the quarter. But now that we are back to full supply and basically, back to normal, we expect this to be reestablished. So for our fourth quarter, we should see at least stable sales, a little -- probably slightly higher sales than we had last year. And definitely, sales in this fourth quarter will be at least higher [ph] than the ones we did in the third quarter as in the third quarter it was only for 1.5 months.

So growth platforms, I would say, by difference or by subtraction, as Chris would say, have been growing by 6.5% over the quarter. And of course, you see the importance of the FX impact, and here you see the importance of the Japanese yen, which is, on its own, impacting by EUR 180 million our sales over the quarter. When the U.S. dollar being weaker, again, versus the euro for the reasons that Chris described, is also impacting us by roughly the same amount. Many of the impact of the other emerging markets or I'd say -- also, I mean, the Australian dollar, which is not really emerging but [indiscernible]. So all in all, we have a slight increase of sale of plus 0.6%, but with a turning point in September as the sales in September have been growing by 6.1%.

So Slide 19. So the P&L shows, of course, the impact of these various elements, as well as the end of the patent cliff. So if I look at the line other revenues, now, I mean, this line is basically stable, of course much smaller than what we used to have. I'll just remind you that we had the last impact of the settlement of litigation we had BMS in connection with the Plavix partnership in the third quarter for EUR 80 million, which impacted positively, last year, this line, other revenues. We'll comment later on, on the cost of sales, as well as R&D and SG&A.

So maybe a few words on the other lines. So first of all, the other current operating income and expense, there's basically nothing specific to mention for 2013. In 2012, we had the reversal of an environmental provision, which helped somewhat this line. On the contrary, the share of profit is higher -- of associates is higher in this quarter as compared to the same quarter last year. But here, there is some effects, which I'd like maybe to describe more precisely. As you may remember, we have 2 joint ventures with Merck in the vaccine area: one is the commercial joint venture for Europe, which is SPMSD; and another one is a research joint venture, which, in particular, is developing DF51 [ph] .

Up to now -- first of all, yes, up to now, we were accounting the share of loss, but I would call it just reserves, for this second joint venture as a loss coming from associates. Our auditors asked us to reclassify, so we have reclassified. So in fact, this cost is now R&D, vaccine R&D. When -- then, of course, we don't have the impact anymore on the loss of associates. So basically, it will be neutral on the profits, but it's a reallocation. And this reclass, which begins in the fourth [ph] -- third quarter, so effect to the first quarter -- the 9 months of the year has been EUR 14 million [ph] .

And the second thing, which maybe some of you will remember is that in the third quarter last year as we were on the verge to file and get approval for Hexyon, or hexavalent for Europe, we had to reinvoice [ph] the former R&D expense we had to the joint venture, which here, again, had a positive impact on our R&D line last year by EUR 44 million. And then half of it basically went back into the cost of the joint venture. So there is some -- here, a gain from FX last year, which explains why we have a specifically high level of profit from associates in connection with our vaccine joint venture and a much, much lower last year controversy [ph]. So -- and I'd like also to add that everything being included, put this FX aside, the performance of our joint venture in Europe has improved very significantly.

So now I move to Page 20. A few words on the cost of sales. Well -- so I mean, we have a cost-of-sales-to-sales ratio, which is a bit on the high side, that's clear. We have 34.1%. This is a bit above what we expected. And here, I think that you deserve some explanation. So first of all, when -- in vaccines, in particular, you don't sell, you continue to incur the costs. This is rule, in particular, in biological products. So this is really impacting the cost-of-sales-to-sales ratio on our vaccine business in the quarter. And on top of that, because of lower sales of Frontline, the mix of the business is somewhat less favorable in Merial. So if I put all that together, this impacts negatively our cost-of-sales-to-sales ratio by 0.9%.

Currency impacts, when we are producing more in a hot currency, like euro, and selling more in other currencies, impacting by 0.5% in this quarter. At the same time, the truth to the new portfolio on the loss of sales from key genericized products is reducing its impact, fading away. So it's still 0.5% for this quarter, but that is going to continue to decrease. I will say that when it comes to the Brazil generic impact, it's basically very small for this quarter, which was mainly visible in the second quarter.

R&D. Well, I think that -- I mean, I already commented on the reclassification of the vaccine R&D, so if we can take that aside. The R&D expenses have increased by 2.3%. This is, in fact, the effect of continuous reduction on cost control, our internal costs, but then some reinvestment into the Phase III trials. And as a matter of fact, we have still the Phase III trial ongoing for Dengue. We started on C. diff during the quarter. Alirocumab, I mean -- clearly, I mean, we have a large set of Phase III studies ongoing, as you know, as well as on U300, the IL-6 and the IL-4. So all in all, we are exactly in our guideline, which is to keep R&D expense somewhere in the range of somewhere below EUR 5 billion, but with a shift towards more expenses associated to Phase III studies.

SG&A. Well, here, again -- I mean, we managed to keep SG&A-to-sales ratio on the lower end of the spectrum, along the pharma companies. During this quarter, the ratio was 33.9%, and the overall SG&A expenses decreased slightly by 0.8% on a constant-exchange-rate basis. This we achieved despite increased investment in Genzyme multiple sclerosis to sustain and to support the launch of Aubagio in Europe and prepare for the launch of Lemtrada and also some sustained investments in diabetes, which shows also that we are continuing to reallocate our investments very carefully on maintaining the SG&A ratio or expenses, I would say, in a -- at a good level.

23. I can just confirm to you the effective tax rate over here, which we put at 24% at the second quarter. So this is a result on the optimization of our tax rate, as well as the outcome of some positive -- positive results and some tax credits, which impact both Q2 and Q3. So I confirm the average tax rate for the year at 24%, which leads to a business net income at EUR 1,789,000,000 and an earnings per share at EUR 1.35. EUR 1.35 is, of course, impacted by the negative FX impact of EUR 0.17. So if you we were -- of course, I mean just an if, but if we had been at the same exchange rate as last year, we would have posted earnings per share of EUR 1.52.

Cash flow. The first 2 quarters, if you remember, have seen a significant decrease of the free cash flow as a result of the lack of revenues coming particularly from Plavix. Now we have stabilized it. So the free cash flow for the third quarter has been exactly stable versus last year, which shows that we are, again, behind the cliff. The stabilization of free cash flow is also a reasonable satisfaction as long as we still have some decline of sales -- of profits, sorry. And as long as -- at the same time, because of the increase of sales in September, we have outstanding receivables, which have been somewhat increasing in connection with that in September. So all in all, we've been able to maintain a good control of the working capital and to really maximize our cash flow and manage to stabilize free cash flow while profit has been still declining over the quarter. So all in all, this leads to an overall free cash flow for the first 9 months of EUR 4.5 billion.

The CapEx have been kept low at EUR 865 million, which is slightly below the level of last year. We continue to do opportunistic share repurchase. So we have bought back shares for a total amount of EUR 500 million during the quarter, leading to a total acquisition of shares of EUR 1.4 billion. It is, firstly, to compensate for the dilution arising from the exercise of stock options, which was 1 quarter [ph] , EUR 800 million of proceeds, but a bit more than that over the quarter. Our net debt now, at the end of September, has been EUR 8.8 billion.

So if I just summarize this -- the outcome for this quarter. I think that the first outcome is that we are really at the dawn of Sanofi coming back to growth. So in fact, the first outcome, in fact, is that we expect the profile of -- the growth profile of Sanofi to emerge as from Q4. Q3, once again, has marked an inflection point. The growth platforms account now for close to 75% of our sales. They've been up 5.5%, despite the huge gaps, which happened over this year, which demonstrate the value of Sanofi's integrated business model.

Finally, we had satisfaction to have several high-potential R&D projects progressing in Q3: approval of Aubagio and Lemtrada in MS in Europe, the approval in the U.S. of NexGard for fleas and ticks for dogs in Animal Health, positive first Phase III results for Alirocumab, Cerdelga filing accepted for review by the EMA for Gaucher disease, and the approval of Nasacort for OTC use in the U.S.

With that, I think I can now turn back maybe to Sébastien to open for the Q&A.

Sébastien Martel

Thank you, Jerome. We are indeed now ready to take up questions. [Operator Instructions] Operator?

Question-and-Answer Session


[Operator Instructions] We have a question from Mr. Richard Vosser from JP Morgan.

Richard Vosser - JP Morgan Chase & Co, Research Division

Two, please. The first just on the development we can expect in pediatric vaccines in the U.S. Obviously, you've -- your vaccines have been replaced by others. So how gradual of a recovery should we expect for the pediatric vaccines? And then second question, just on the Animal Health business, of course, with Frontline declining, your margins have come under pressure. So the 30% or so level that we've seen is now more around 26%. So how should we think of this with NexGard coming through next year? Presumably, we should think of a 26% margin going forward. And just on Frontline, of course, you're suggesting that the decline will continue at around probably about 25% going forward for Frontline. That suggests to me that NexGard had to be EUR 100 million or so next year to offset that, maybe slightly less than that. So just if you could give us some ideas of previous launches in the Animal Health space to give us some help there, that would be very useful.

Christopher A. Viehbacher

Thanks, Richard. So on pediatric, we started shipping on the 15th of October. But as you rightly point out, there are other competitors out there, which is why actually you never recover the quarter that we lost. You really just get back in there in the marketplace. So I think you're going to see a progressive return in the fourth quarter, with full supply really being available in the first quarter of 2014. On Animal Health, it is certainly true that I think the margin on the business will come down. Frontline is the only billion-dollar brand in the entire Animal Health space and obviously, carries with it pharma-like margins. And so as you decline, you do get a mixed variance, and so I think the level of margins that you were looking at are probably more in line with what's going to go on forward. I'm not so sure I'd agree that we're going to expect the same level of decrease. There's 2 elements. One is generic competition, and that's not necessarily going to go away. I do think that, on that front, we can do a better job of defending it, and I think, we're already seeing some of the benefit of that. It was also a difficult season, at least year-to-date. I mean, the whole -- this is a market that used to grow at double-digit rates and it actually declined this year, so you've had a massive swing on the growth rate in the marketplace, largely because of the weather conditions. So I think next year, we'll see -- we're seeing actually even a better fall. So I think that may not be as dramatic next year. It is true that NexGard has to do well next year. It's very difficult to look at analogs because, in this space, there aren't that many launches that have ever been done. I think our view is, is that this should be a pretty successful product. It won't necessarily be the size of Frontline just because Frontline will still be there. But I think, having a chewable -- and having been a dog owner, I can tell you that putting the drops on the back of the neck, you're not supposed to touch the animal then for a while and you've got kids and everything else, just being able to toss your dog a chewable tablet is actually a whole lot easier to use. So I think -- and this will be the only product in oral form that is approved for both flea and tick. So I think, actually, we'll be able to come back with a very strong offering in that space. But I think as you pointed out, we're probably not going to be quite up at the levels of profitability that we had before. But I'm not so sure that, at this stage, we would want to accept the level of decline in Frontline that you were suggesting.


Our next question is from Mr. Graham Parry from Bank of America Merrill Lynch.

Graham Parry - BofA Merrill Lynch, Research Division

This is on cost of goods. Just looking into 2014 and beyond, you obviously can't offset the FX hit. But should we anticipate that you would see, into 2014, the bulk of the hit that you've seen on COGS this year rolling off from the vaccine and Animal Health hit? Also, could you remind us of the EUR 2 billion cost-savings program that you announced, that's 2015, how much of that was in COGS, how much of that has been realized and how much is yet to be realized? Secondly, on the midterm guidance that you gave out to 2015 of mid-single-digit top line growth, '12 to '15 and faster EPS growth, do you think that still applies? I know you'd said before that you felt that you could make it but there was no buffer. Just wanting to hear whether you still believe that's the case. And then thirdly and finally, on your PCSK9, just wondered if you had any comments related to Pfizer's claims yesterday that its outcomes trial on its new PCSK9 that it started as part of its Phase III program differentiated versus yours and Amgen's because they investigate population of patients not at goal despite being on statin and they look at LDL reduction levels below 70 mg per deciliter.

Christopher A. Viehbacher

Okay. Thanks, Graham. Jerome, do you want to take the COGS question?

Jerome Contamine

Yes. So Graham, so -- I mean, if you remember we expected to, I mean, to stabilize and even slightly improve the COGS-to-sales ratio. This year, obviously, it's not the case. I mean, the reason for having too much we mentioned. But we have not yet gone through the budget review so I don't have all the details, and it may take a bit of time to overcome the impact on the vaccine part because as long as we are reviewing production -- I mean this production goes first into inventory before getting into production, that as long as we are not back to full supply and regrettably, you have -- we have some costs incurred in connection with the shortage of supply, which we felt before, this will somewhat impact the 2014 COGS ratio. So -- but on the other hand, we still are continuing to cut costs on the rest of our industrial organization. As an example, the gross margin of Lantus has improved significantly this year and some other products as well. The overall cost savings, which is a EUR 2 billion plan, so where do we stand? If you remember, we had saved EUR 1.2 billion at the end of 2012. We said that for 2013, we would continue to save within the range of EUR 500 million but we would reinvest a large part of it. As a matter of fact, we have saved a bit more and don't have yet the full figure for the year, but definitely outcomes will be somewhat better. Now if I go into 2014 and 2015, the bulk of what remains to be saved out of this plan is precisely on the industrial costs. So today, I can tell you that we will: a, beat the EUR 2 billion savings, that's what we aim to do; and that: b, the large part of the further savings to come in 2014 and 2015 are going to come from the industrial savings. So I won't to give you yet the full figure. This will more for the full year results when we have come through the detail of our budget. But we know already that this will take place as a result of actions that we have taken in the past year. Now I mean, it remains that -- I mean the ratio is highly sensitive to an event, and this has been clearly the case on vaccine. So we should always be aware that this could be -- it's part of the improvement that we are implementing. But I think that as long as things get back to normal, we should see an improvement of the COGS-to-sales ratio next year.

Christopher A. Viehbacher

Yes. Graham, I'll just add. I think COGS is probably still one of our biggest cost-savings opportunities. Obviously, a lot has been done. We've acquired a number of businesses, and now we have a much higher ratio of businesses in places like generics and over-the-counter medicines, more in Emerging Markets. And in addition to just site closures, there's an awful a lot of work that has been done on efficiency, lean manufacturing, for example. But there's still plenty to be done. The -- again, when you run a pharma company and you have a couple of products like Plavix in there, it tends to hide a number of other things. And so there's an awful lot of work going on in that, and that's one of the biggest areas of focus for us on COGS because, really, when we look forward, we actually see more investment now slowly in R&D and in product launches as a late-stage pipeline comes to market. So I don't think we want to necessarily be cutting costs in that area. But COGS offers an opportunity. On midterm guidance, I can really see nothing, really, has changed at this point. We'll give an update at the year-end as we always do. On PCSK9, yes, I read the comments overnight from Pfizer. I mean I'm not so sure I would agree with the comments. When I've gone back to our own people, I think all the population set that Pfizer is talking about are actually covered in ours. I mean there is a primary prevention study, which is -- our belief, would be -- this will be in familial hypercholesterolemia population, one where we actually have those patients in there as well. We have a number of high-risk patients. I think between Amgen -- all the studies that Amgen is doing and Sanofi is doing, I'd be surprised if there's too many holes in that between the 2. I mean the interesting thing, I think, you're going to find is that with Pfizer climbing in, you're probably going to have about 60,000 patients on PCSK9. And if you go back to the statin class, I think a lot of those studies really drove quite a big market. So one would never underestimate Pfizer with their experience out of LIPITOR, that's for sure. But equally, for us, the competitor is Amgen because it is we and Amgen who are ahead. And -- but I think, in general, the more studies that are out there will demonstrate the value and importance of this class of medicine and probably make this a more interesting class for all of the participants.


Our next question is from Mark Clark from Deutsche Bank.

Mark Clark - Deutsche Bank AG, Research Division

Two things. Firstly, on Rare Diseases, I wonder if you could just talk us through the pricing environment. I noticed the comments about austerity measures in Cerezyme in the statement. My understanding had been that there's a small amount of austerity impact in Europe in the class. And that generally speaking, for example, in the U.S., there's a lot of -- there's still freedom on pricing to a fair degree. And second question is on structural change in Emerging Markets. I mean given the change in leadership in LatAm and the slowdown in China, do you think there is a case for reversing some of the huge infrastructure expansion for both yourselves and peers who have been indulging in recent years with huge field forces, et cetera?

Christopher A. Viehbacher

The pricing in Rare Diseases, I mean, I would still say -- I mean, we're seeing little bits of pricing pressure in places like Australia and a little bit of pressure in the EU. But I think it's nothing of that significance. I mean you've seen still double-digit growth of our businesses. As we've kind of move from the catch-up population, you've got more of a true underlying growth in Rare Diseases. So nothing that I would call out at this point on that. On the structural changes in Emerging Markets, I don't think so. I mean, our Brazilian pharma business continues to grow at double digits. I think the opportunity in China -- the issue in China, I think, is more temporary. I think you're going to see -- and I haven't seen anybody predict anything less, I think you're going to still see extremely strong growth in the Chinese market. I think, actually, you will probably see the reverse. I think we'll certainly continue to invest and expand into China. I mean, we have 4,000 sales representatives in China. That's about the number of sales reps we have in the United States and considering that the population is so much greater and the number of physicians is so much greater. There are new hospitals going up every day. So I think we'll make sure we're not spending ahead of the opportunity, and we'll certainly see what comes out of the current situation. I think what you will see us doing is what I was saying earlier, that one of the issues of Emerging Markets has been very little granularity of detail. And it affects not only pharma but consumer, Animal Health. If you talk about the vaccines business, for example, with pediatric vaccines, what you really want to start to do now is -- since we operate in private markets, so far you've just had growth. But now what you really like to do is, "Where do you find Tier 1 mothers?" These are mothers with enough disposable income to actually pay for private vaccines. So how do you actually find those? Up to now, it's just been getting out there and just getting market presence. When you start looking, even in China, you start to see variable rates of growth. I mean, trying to characterize China's growth by one GDP figure really doesn't reflect what you see on the ground. I mean, just as you do in the United States, you see differing areas of growth and spending on health care across China. So whereas I would have said we would have just put more feet on the ground and got out there, now I think we can start to be a little bit more thoughtful about it, a little bit more targeted. So you may not see the same rate of investment increase. But speaking for Sanofi, I don't see us pulling back, that's for sure. And the more likelihood is we'll continue to put things in. But remember the cost of this is nowhere near what it is in the United States. I mean, if I just take Europe and U.S. and look at average personnel costs just like that, I mean, you're over EUR 100,000 all in, in U.S., Europe, and you're EUR 10,000 to EUR 15,000 in Emerging Markets, so you can afford still to expand. And it's pretty much all field force, so you're not really putting enough lot of capital into most markets. But even markets like Algeria, I was in Algeria a couple of weeks ago and we've got -- our business is growing at very strong double digits. We do EUR 250 million of sales there. The market is still growing. It's a market -- a lot of Emerging Markets still are not spending even 5% of GDP on health care. Even 5% is half the OECD average. So it's going to be some ups and down. You're going to have some situations like you've got in the Middle East, where you've got some of the social unrest having impact on supply chains here and there. You're going to have some currency movements. You'll have some governments -- as they start to spend more money on health care, there are going to be some issues of pricing, so you're going to have, on a particular year, potentially a price movement in a couple of key countries. But generally, I think you're going to still see a volume increase. I mean, if you went back to the early '90s, I can remember when managed care was coming and we've said "Oh, the end of the market is here because we're going to have to start paying rebates to managed care organizations." Well, the 1990s ended up being the best years ever in this industry because more and more people got coverage and the volume started to offset that. And I think, that's a phenomenon that you see over the next 10 years in Emerging Markets. It won't to be fairly smooth or as easily predictable as our Western business. But every time I go and spend a lot of time in detail and look at -- you just have to look at the number of hospitals being built. Every time a hospital is being built, it isn't replacing an old one. There was nothing there before. As you have people moving into cities, they generally move into cities because they're pursuing higher-paying jobs. And when you're in the city, you actually have access to care, whereas if you're living in rural areas, you don't have access to care, which is why the government is having to spend so much in hospitals. So I think it's still a significant opportunity, and it's probably one that requires deeper analysis. There is no question that here and there, there are some pockets of slowdown, but I think there's still growth to be found. We just probably have to look a little harder for it.

Sébastien Martel

Mark, just an additional precision. Sébastien speaking. On the Rare Disease side of things, you saw the Fabrazyme numbers sales being up almost 20%. The market share in value terms actually of Fabrazyme on a global basis is now 54%, so we are back to leadership position on Fabry disease. On Cerezyme, sales were up almost 9% in the quarter, which translates to a market share globally of 71%, so very well-established leadership position here. The comment you referred to about EU austerity measures was essentially applying only to Italy, where, basically, during the quarter, we had a situation in Italy where local authorities, which were looking for additional savings, have started to make a clawback clause that we cabled to the Rare Diseases portfolio and Cerezyme in particular. And we took that charge in Q3 for the full year. So starting Q4, you will accrue as time passes, and obviously, the impact will be much less.


Our next question is from Mr. Tim Anderson from Stanford Bernstein.

Tim Anderson - Sanford C. Bernstein & Co., LLC., Research Division

A couple of questions. You've called out that the patent cliff has largely moved into the background. But as I look ahead, naturally, there will be some future patent expirations, and it's not clear to me when some of these products might go off patent. So I'm hoping you can address 5 different products, Lovenox in Europe, Renagel in the U.S. and then the Genzyme products, Fabrazyme, Cerezyme and Myozyme either U.S. or Europe. And then second question is, there's been continued speculation about L'Oreal considering disposing its stake in Sanofi, and I'm wondering if it's ever a possibility that you would consider being a buyer of that stake. If you think you're at an inflection point in terms of your growth profile and while the valuation is low, it seems like this could fit that definition of being an opportunistic opportunity that you've sometimes referenced in the past regarding share buybacks?

Christopher A. Viehbacher

On the patent expiries, so Lovenox, there's no patent in Europe. There are some guidelines about biosimilars, but there isn't one really on the horizon. Remember, the price of Lovenox is already pretty low in Europe. You'd have to do some spending. I mean, biosimilars are not cheap to develop. So I wouldn't exclude it, but we don't really see anything. On the renal care business in the U.S., there is -- there was an agreement actually with a generic company that went to, I think, it was the end of this year and with impacts. But we haven't seen anything as to the actual approval of a deal.

Sébastien Martel

September 2014

Christopher A. Viehbacher

Sorry, September 2014 was the deal, sorry. So what happens beyond, we don't know. But there is that patent expiry. On the Fabrazyme, Cerezyme, Myozyme, these are all biologics. There is a -- has been a biosimilar under development in South Korea, has been around for a number of years. I don't think you're going to really see much biosimilar activity in most of the key markets. If there is one, it may start to try to eat into some of the sales in Emerging Markets. But again, these are businesses where you have to spend a huge amount of money to develop them. There are only a few patients here, there and everywhere. And if you actually have to go around and sell this to -- if you have a country where there's a tender, and we do have some of that, for instance, Brazil, runs a tender, they might be able to gain in there. But I don't think we really particularly see anything of significant concern on the biosimilars. The marketing plan is really just to continue to find patients. There's a -- we know that there are a whole lot more patients out there, and Genzyme is actually becoming quite adept at actually finding them. And so I think, even if there is one at some point one day, I don't think a patent expiry is what really triggers it because I don't think they're really in a U.S., European situation anyway. So I'm not too concerned about that. On L'Oreal, this is all conditional on what Nestlé does. And the Chairman of Nestlé said all options are on the table. It, of course, leads to speculation. What does L'Oreal do? And that's the second conditionality. Does L'Oreal buy back that stock and do they need to sell our stock? Nothing is going to happen anyway until the shareholder agreement expires in 2014, in -- I think, it's April. I think we've already said, if, if, if all that occurs, then that would be something that we would clearly look at. But there could well be other options for the stake, who knows. But it's obvious that we would want to make sure that we're protecting Sanofi shareholder interest in that.


Our last question is from Mr. Michael Leuchten from Barclays.

Michael Leuchten - Barclays Capital, Research Division

Two questions, please. There were 10 discontinuations in Phase I, II announced during the quarter and in your press release. Is that a natural conclusion of these programs? Or have you gone through a reprioritization of the pipeline? And then a quick question for Jerome. I noticed there's a comment in your press release regarding net debt and exceptional funding for pension plans in the U.S. to the tune of $305 million, just wondering -- sorry, EUR 305 million. Just wondering what that was and what that means for your pension liabilities.

Christopher A. Viehbacher

So phase -- not really. I mean, I think, we're going to have a very clear policy of "kill early." I mean this is not something our -- this is something our industry likes to talk about, but actually doesn't end up doing enough of. And so we'd rather kill them in an earlier stage. I have to say, none of those projects were of any particular significance to us. So I hadn't actually even heard of a couple of them. So not so sure that has any particular reflection. The one thing I would say is that when you look at our research pipeline, we essentially inherited a situation where -- I mean, one of the things that really stunned me about the research and development situation when I came to Sanofi was -- is that we had virtually nothing in Phase I. I mean, I've seen -- poor pipelines, we've got nothing in Phase III or Phase II, but the bar has not typically been high in this industry to get into Phase I. But we actually had nothing in Phase I. So there are still some assets around that got -- that managed to get into to Phase I and Phase II coming out of that time. Some of them were early-stage business development, and we're a company that didn't do much business development. So some of the early stuff wasn't probably as robust as it should have been. But I think the projects that we're doing now in research, now and over the last 2 years, is really overhauled research. So I think it's just going to take some time for that to get into Phase I, Phase II. But quite honestly, I'm feeling pretty, pretty relaxed because if I look at our Phase III pipeline, there's an awful lot of really good stuff in there, whether it's the U300, whether it's the dengue vaccine, whether it's in the Lyxumia rolling out. We've got Aubagio and Lemtrada rolling out. The IL-4, IL-13 looks particularly good, PCSK9, IL-6. We're going into Phase III with the IL-4, IL-13. This is a drug that showed remarkable benefit in severe asthma and in atopic dermatitis. If you are operating in 2 autoimmune diseases with those kinds of results, there is probably something underlying that, that would allow you to go into a number of other indications. So we have, I think, another -- list of 14 indications that we're going to consider molecules for. So I think, in any case, we've got a pretty robust -- we've got the C. difficile vaccine in Phase III. So there's actually quite an awful lot on our plate. I mean, the interesting thing is we're actually still spending less money on R&D than we did 5 years ago, with the exception that we actually have all of those assets in Phase III. So there's been a massive shifting of funds from essentially people and infrastructure costs to project costs and development. To the point where I'd say it is -- actually, I'm not so sure how we're actually going to get along with doing that. We're, for the first time, actually struggling to fund everything we even have in development. So that's a luxury problem that I certainly haven't had in a long, long time. So I'm actually feeling very good about the whole R&D situation. But don't be surprised if you see a lot of this stuff getting killed. I mean that's a -- we have Gary Nabel, who is our Chief Science Officer. Gary's job is to really make sure that we have the absolute top quality of science, and if it ain't good, it's going to get killed early. He's not got the line so he's got an objectivity. And this is something that the industry hasn't done enough of, and I'd rather kill it then than kill it in Phase III, to be honest, before we spend a lot of money on it. Jerome, you want to take on the pension question for Michael?

Jerome Contamine

Yes. So Michael, in fact, I mean, we had the opportunity to fund beyond normal our pension funds in the U.S. This took place in Q2. In fact, this took place the 1st of April this year. Basically, the level of funding of our pension in the U.S. was, before this funding, somewhere around 70% and as we've gone through this funding, up to 85%. Why did we do this funding? There are 2 reasons. The first one is the low interest rates. If you remember, we raised $1 billion in April of this year at a rate of 1.25% coupon, 1.25%. And second, there was an opportunity, as long as there would be penalty for companies underfunding their pension in the U.S., which would -- this October, to be implemented. On the contrary, there was an incentive to do that, if you could do that in the right time. So now the level of funding of our pension in the U.S. is somewhere between 85% or 90%. And of course, we just mentioned that we had impact on the cash flows in there because of this pension plan.

Sébastien Martel

Okay. Thanks a lot, Jerome. So we're actually now going to close the call. Just before doing that, I'd like to ask you to put a -- save the date in your calendars for February 6, 2014. This is when we'll report our full year results.

With that, on behalf of management, I'd like to thank you for your participation.


Ladies and gentlemen, this concludes the conference call. Thank you, all, for your participation. You may now disconnect.

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