Sebastien Martel – VP, IR
Christopher Viehbacher – CEO
Hanspeter Spek – President, Global Operations
Jerome Contamine – EVP and CFO
Olivier Charmeil - Head of Sanofi Pasteur
Elias Zerhouni - President of Global R&D Operations
Karen Linehan - Senior VP, Legal Affairs and General Counsel
Luisa Hector - Credit Suisse
Alexandra Hauber - JP Morgan
Sanofi-Aventis (SNY) Q4 2010 Earnings Call February 9, 2011 8:00 AM ET
Okay. Good afternoon and good morning to those of you following us from the U.S. Welcome to our 2010 annual results conference. As you well know, this conference is also available by webcast and the slides that we'll cover today can be found on our website.
As always, I must advise you that today's presentation will contain forward-looking statements, and those statements involve known and unknown risks and uncertainties which may cause actual results to differ, and I encourage you to refer to our Document de Reference and our 20-F for more details on those risk factors.
So with that, let me just introduce our agenda for the day and our speakers. We'll have our CEO, Chris Viehbacher, who will cover the 2010 achievements and the 2011 guidance, followed by Jerome Contamine, our CFO, who will cover the financial performance for 2010. We will then have Hanspeter Spek, president of global operations, who will provide you with a business update. Then Olivier Charmeil will cover the vaccines business. And then Dr. Elias Zerhouni will give you an update on R&D and after that we'll have about 45 minutes left for Q&A.
So with that, I'll leave the floor to Chris.
Thank you Sebastien. Good afternoon everybody. Sebastien's already made some introductions, but perhaps just a warm welcome to first, Olivier Charmeil on your outer right, who's just been named head of Sanofi Pasteur.
And of course a warm welcome to Dr. Elias Zerhouni. We're very excited that Elias has agreed to become president of our global R&D operations. As some of you know, Elias led the National Institutes of Health for six years in the United States, was dean of the school of medicine at Hopkins, but you may not know that he's actually also an entrepreneur, has created five companies. So he's got a broad science and business background as we'll talk about in a little while, we're moving from cleaning up and restructuring R&D to growing R&D, and I think Elias is extremely well-placed to do that.
Olivier, I think, is extremely well-placed also for Sanofi Pasteur. There's a huge opportunity in emerging markets and Olivier most recently has been very ably leading our pharmacy business in Asia-Pacific, and you'll see some of the results on that.
So let's talk a little bit first about 2010, and then I'll touch on the 2011 and then we can go into some of the detail. It's been very interesting. I was at Davos and ran into Joe Jimenez just after he had reported his first time results, and I think they were up plus 15% and the share price dropped 2.4%.
So he was a little discouraged. And I said, you know, don't worry about it. This is an industry that tends to focus on the negative. People start worrying about patent expires the day after you launch a new product. If you're any good in R&D they're not going to give you any value for it in your portfolio and if you're not any good at it they're not going to like you either, so the best thing - and we've got one major investor who says, just keep plugging away, and ultimately you will create shareholder value.
I don't know whether that's true or not, but it is certainly true that nothing in this business should be a surprise to anybody. I think two years ago, and I go back through every year and look at what we said in the past to make sure that we are being consistent. Two years ago I stood up in front of a lot of you and said 20-25% of the sales of this company are going to disappear between now and 2013 because of generic competition.
Not a lot we can do about that. When that goes, there's going to be a short-term cash effect, but I tend to look at those older products basically as area under the curve and a source of cash. But not any more accretion of shareholder value.
The other thing that I discovered over the years was that the only way that you're really going to create any shareholder value in this business is if you could actually show some level of sustainability and predictability of earnings. The number of quarters that I've been through in my life, even in the old company, where you come up with some double-digit earnings, only to see the share price slide again because people say "Yeah, you had a great year, but next year you've got this going off patent, and that going off patent."
And so that's why to me we have to really focus on sustainability because this whole industry is at, what, a 25-30% discount to the S&P 500, CAC 40, whatever your favorite index is, and so it's not really a question of can you make your share price go up 5% or 10%, but really to get back to at least being as valuable as people who make chocolate bars and soda drinks.
And that's not where we are yet. So that's what we have been really setting out to do for the last couple years, and we're continuing to do it. And I'll show you in a minute, but 2010 we lost EUR2 billion of sales due to generics. These aren't low-margin businesses, so you lose EUR2 billion off your top line, that has an even more disproportional impact on your bottom line.
We went through healthcare reform. It cost this company about $200 million last year in the U.S. alone. Cost reduction measures in Europe cost this company about EUR250 million last year, and again, when you take hits like that on the top line, they essentially flow straight through to the bottom line, certainly before tax.
The only little bit of satisfaction I get out of this, in fact, is that if a European government cuts our price, I get to pay a little less tax at the end of the year as well. But of course, since the tax rate's less than 50%, the government's still ahead on these things.
As we look at 2011, that healthcare reform is going to continue. The excise tax spiked this year, so it's another $90 million this year on U.S. healthcare reform versus the $200 million last year. Anybody who lives in Europe knows that the structural deficits are not going to go away anytime soon, and so we would expect the same level of activity on price decreases and the like in Europe as we go forward.
But I do think, what I like to look at, and I don't particularly spend all my time thinking about 2011, but really about where this company goes beyond that, is to say can you find sources of growth where you've got some level of competency, where you've got some ability to compete, and which basically offer you some barriers to entry that mean that this business isn't going to go away just as soon as you've built it up.
And that's why we defined our five platforms of growth, to which we've added Animal Health as a sixth, but all of these businesses somewhere are in pursuit of growth reserves somewhere in the world and give us some sort of competitive advantage. Doesn't mean that there's no competition, but it does mean that we're not going to lose 90% of the business within 3 weeks of a patent going.
And 2010 really was one where we really started to see these growth platforms start to get to critical mass, start to weigh heavily in the sales and profits of the company, and really start to emerge as what Sanofi-Aventis looks like longer term.
Emerging markets. No company in this industry can say they have sold more in emerging markets than in U.S. and Europe. I mean to me this is almost unthinkable. If somebody told me five years ago that a major pharma would sell more in emerging markets than U.S. and Europe, I'd think they were in their own warehouse taking some of their own drugs. And yet that's the case today.
And emerging markets is a EUR9 billion business, growing at 16%. Nobody thought of Sanofi-Aventis as being a consumer company two or three years ago, especially inside of Sanofi-Aventis. And you know, it's a few products here, a few products there. We've cobbled that together into a regional business, been able to bolt on some transactions. We were nowhere in consumer healthcare at the beginning of 2010.
Now we not only have a consumer business, but we're about to launch Allegra in the OTC market, a switch that one of the CEOs of the major pharmacy chains calls the most interesting OTC switch for the next five years.
We started off last year with no business in consumer in China, obviously a pretty critical market where you'd want to be in consumer, and within one year we had created a majority-owned joint venture in consumer health and done a NASDAQ-quoted Chinese pharmaceutical company with probably the only nationally recognized brand in this space in China, pole-vaulting us into one of the top 10.
We don't have a pipeline, but Jevtana came through where none of us were expecting Jevtana to come through - 30% survival benefit in advanced prostate cancer. Launched that in August - EUR82 million in the first four or five months out. For most people, a cancer drug is a major cancer drug if it does $100 million in its first year out. This has exceeded that in the first five months.
Multaq, we all read an awful lot about Multaq, but Multaq continues to progress - EUR172 million is a very interesting level of sales. And you know, when I look at it, we're included in guidelines. We got this product reimbursed in all major European markets within 12 months of an EU approval. I challenge you to go out and find how many other drugs in the last five years have accomplished that. The average in Europe used to be 4 years from the time of approval to reimbursement in all major markets. So somebody sees a value in Multaq somewhere, despite what we're reading.
Animal Health. You know, if I ever wondered whether animal health was interesting, I can tell you the level of interest that we have, and people wanting to buy whatever we're going to divest out of the Merial-Intervet merger tells me that everybody sees fundamental strength there. Growing populations, concerns about food supply, growing incomes leading to more pets around the world. Again, this is one of those sweet spots that provide sustainability of sales and earnings growth.
We all know that blockbusters have huge margins, and as we shift our business to these other businesses, we have to be mindful of our cost structure. Two years ago we announced a cost reduction program of $2 billion by 2013. We'll get there two years earlier, by the end of 2011.
I would also, I get a lot of questions about margins, but if you think about Sanofi-Aventis, it's a third in the U.S., a third in Europe, and a third in emerging markets. Nobody's got the same level of exposure that we do to emerging markets, and yet we've got one of the highest margins in this industry. So because we can produce locally, because we've got local cost structures, I think we've been able to do a good job with the cost-savings programs that we have been able to maintain our margin space.
External growth has clearly been part of what we've been doing. We did another 37 transactions in 2010. And I think one of the most important things was we were doing bolt-on transactions and partnerships in 2009-2010 when we had a whole lot less competition for those, when we had cash and valuations were suppressed. So there's no way that you could do - when I look at some of the transactions more recently in Brazil, for example, no way you could buy Medley for what we paid for it in March of 2009, just to give you one example.
R&D, I'll let Elias talk about that. We moved from restructuring to let's grow this thing, and apparently there's a possible acquisition of Genzyme out there. But we'll come back to that.
So again, here's where we see, despite the EUR2 billion and all the healthcare reform, sales dipped by less than really 1%. Still, EUR30 billion sales. We've got no Plavix in Europe and we've got a substitutable generic for Lovenox, and so forth. We actually grew the thing in profits. I mean, this time last year I was giving you guidance from 2-5%, excluding the substitutable generic for Lovenox. But we got the substitutable generic for Lovenox and still did over the 2%.
One of the interesting things is that - one of the things we do track, is what's the exposure to generic competition? And you know, if you look back at 2008, the first time I presented this slide, it was 28%. By the end of 2010, these are sales, this is down to 18%. Pretty much by the time you get through the end of 2011 there's not much left in sales.
Now remember, we don't consolidate Plavix and Avapro sales, so that's not quite fair the comparison, but we probably hit more or less the bottom point on sales, because of generic competition in 2011. There's going to be a little bit more of a hit in 2012 obviously, on a profit basis, just because of Plavix and Avapro, but we are progressively getting through the patent cliff. It's an ugly process. We're doing what we can on cost management, business development, and focusing on those businesses that grow. But nobody ever said this was going to be a picnic.
This is exactly the picture here on the growth platforms. You can see the EUR9 billion in emerging markets, EUR4.3 billion in diabetes is a huge business. Vaccines we'll come back and talk to. We missed the EUR4 billion on the target for this year, largely because of H1N1 sales being cancelled. We still did EUR400 million, but we'd hoped to do EUR600 million on that.
Obviously there's still a huge opportunity on vaccines, but we're going to need to unlock it. For that we're certainly going to need a low-cost manufacturing base with Shantha and the pipeline out of that. We did have a setback again on that in 2010, but I think to a degree what's reassuring is that nobody can operate that Shantha facility without the know-how of a major pharma or major vaccine company like Sanofi Pasteur. And I think we've talked about the others.
We're going to be boring here - strategy doesn't change. You know, we've got to get better at R&D. $63 billion spent last year in the United States between pharma and the NIH on research and development. 22 drugs only approved. We can't keep going like that, and I think you're starting to see companies taking ever-more radical approaches to that and I don't think we're done yet either in terms of thinking about things differently.
The other two things I think you know, and I'm not going to spend a lot of time on them. Elias will go into the R&D. Again, I would say we're really entering into a second phase. We did a stress test, to use the banking term, on our portfolio in 2009. That created opportunities within the budget, because we suddenly had capacity. We had budget free that allowed us to do a lot of the business development.
So I think we've been able to reinforce it. I'm very happy with what I see as an emerging oncology pipeline. I think we've reoriented our business from being a Lantus-product driven company to a diabetes company. We've created new structures, taken out layers, taken out people, focused our sights. But it's a whole lot easier to restructure than it is to rebuild and that's where obviously Elias is got a major challenge here.
Pipeline's not zero. You know, Jevtana we've talked about. Lixisenatide is an opportunity to bring a once a day GLP-1. You've seen the results versus Byetta on a twice a day, so I think we're in good shape. Allegra OTC, I think Hanspeter will tell you we'll almost certainly have very good sales this year, if only because the pipeline fill of an OTC switch is massively bigger than on a pharma launch. Obviously we're going to be interested in seeing what pulls through.
Fluzone high dose was a very strong success this year. I mean our whole flu franchise, whereas last year a lot of our competitors decided to stop production early of seasonal flu, we decided not to. We didn't maximize the H1N1 opportunity perhaps, but we didn't lose customer base on seasonal flu, and that came roaring back in 2010 with our flu sales up 33%.
Iniparib - you know, this isn't the first cancer drug to not make its primary end point in Phase III. I would remind you we had a 60% survival benefit in Phase II in a tumor area where there's no alternative therapies. You do a Phase III you're going to get an awful lot of patients of varying degrees of illness severity.
We announced on the Thursday and had a huge breast cancer forum here in Paris afterwards and I had an opportunity to personally meet with some of the top experts in the world on this. They're all pretty much unanimous. The second and third line are consistent with what we saw in Phase II, so the question is really around patient selection, but we are absolutely committed to this. It's a setback financially, but I think at least from a medical and a patient point of view I think there's still an awful lot of hope in here.
Teriflunomide - very interesting product and a number of you have been doing things with multiple sclerosis experts. I think you've seen the promise of a safe oral drug which is what teriflunomide represents.
Genzyme - you've probably seen and have been scouring the press already this morning. We're not saying an awful lot about that because we've still got our head down and we're working away on this. We've made progress otherwise you wouldn't have been able to sign a confidentiality agreement and start looking at non-public data. There's a timeline that's been put out there by people who shouldn't be talking to the press, and we don't really know what they're talking about.
So this is a company that's present in 80 countries and 14 manufacturing plants. Due diligence is not something you take lightly. So we're continuing to work through that. We are still absolutely convinced that this is a strategically sensible and financially attractive transaction for our shareholders. It accelerates us towards biotechnology. It reinforces our position in Massachusetts in a very hotbed of research activity. And there are some very interesting synergies that come out of that.
So nothing has changed on that, but we certainly - look, I'm spending shareholder money and we're not going to do that frivolously and we're not going to do that rapidly. We're going to make sure that we do that correctly.
And just in that whole line of the disciplined process, that's what we've been doing and you know, we have an audit committee that wants to go back and audit each and every one of these transactions, compare returns on investment to what was proposed. The performance criteria I can tell you from management stock options to all the people you have here.
So for stock options and performance shares one of the key performance metrics is going to be return on capital. An unusual metric in this industry, but because we have an external growth strategy, Jerome and I decided that because we've got a lot more focus on cash flow and really use of capital that that was going to be one of the most important metrics that we could use in our own remuneration scheme. So we're going to stand by return on capital as what we personally stand for.
We had Genzyme, but we haven't been sleeping in between. In between we managed to do the BMP Sunstone deal. We've done 37 transactions and all of those are pretty much still standing, so we're quite happy with all of those.
You've seen also that we've done massive amounts of work to really shift resources to where the growth is. That's really what we've been trying to do. We restructured and downsized our U.S. operations in pharmaceuticals this year by 40%.
Now we did 40% because so many of our competitors have been doing serial restructuring. Serial restructuring is terrible for morale and motivation, and I think starts to weigh on the performance of sales in companies.
We decided to say, let's look at the future of this business. It's Multaq, it's Lantus, it's oncology, teriflunomide. How do we design an organization that needs to be oriented to selling and marketing those products? And anything that's not there, let's bite the bullet today. Let's not wait for Plavix to go off patent before we start thinking about harvesting these products.
So Hanspeter Spek renegotiated the selling and marketing arrangements, not the profit arrangements, but basically reorganized it so we eliminated all of the duplications. Because you know, Sanofi had a marketing team, VMS had a marketing team. We had sales forces, VMS has sales forces. All of that we've managed to dispense with.
We're starting to do that in Europe. Equally we've been significantly investing in Asia-Pacific and Latin America, Middle East, and Africa. We have close to 19,000 reps in emerging markets today. So where we have been disinvesting we have also been reinvesting wherever we can find growth opportunities.
And that's the story. So as we look now to 2011, all of this just flows through. I mean, the numbers start to change a little bit, but the underlying dynamics haven't changed. The underlying dynamics are not going to change without something like a Genzyme transaction in 2012. And by mid-year we'll give you an update on where we see the longer-term outlook of the company.
H1N1 sales - I mean EUR400 million were in the books in 2010, fortunately there is no pandemic this year, and so H1N1 sales are going to be zero in 2011. And I've already explained the U.S. healthcare reform. Generic impact - I think if there's one difference I've seen over the last 10 years, if we ever get a little out of kilter in terms of forecasting between the company and the investor community it's generally around generic erosion.
Somewhere the investment community always seems to be a lot more optimistic about how much business we can keep, but there's a very frothy generic market out there, and so this is just something - it's a phenomenon I've seen now for years, and I think this is a little the case too because when I see some people putting comments that we've got some conservative guidance out there and if we've analyzed where the differences are it's around the generic erosion. And that's pretty much mechanical.
Equally, what's going well continues to go well. Double-digit sales growth for our growth platforms. Emerging markets becoming one third of our sales. We want to have a successful launch of Allegra in OTC.
The cost savings - and the cost savings are not going to stop. I mean, we'll get to the EUR2 billion. Now, we're not necessarily doing it all by restructuring. We didn't have any central purchasing in this company. We buy EUR10.5 billion of goods and services, and yet we are doing purchasing in every little nook and cranny of this business. So if we can put the EUR10.5 billion as a book of business on the table and organize ourselves, which is what we've done, there's significant savings to be had.
We've rationalized all of our Paris headquarters. We were spending EUR18,000 per person just for office space in Paris. By restructuring our offices, we can save EUR50 million year-over-year, just to give you an idea of some of the reserves that are within the company.
Focusing a lot more on cash. Jerome will show you some numbers. Jerome's done a bang up job on managing working capital and cap ex. Free cash flow increased by 27%. So continuing to look for those reserves in our company is something that we want to do.
So the outlook comes to this: Yes, we're going to lose an awful lot to generics. We don't really know how much, because we don't know when that second generic comes from Lovenox. Teva is supposedly going to have an approval soon, but we don't really know. They got this list of questions. How long is it going to take them to answer it? That will clearly have a change in the dynamic of that marketplace.
Taxotere - we don't have a clear idea as well. Eloxatin - we just assume that we're going to keep it, but obviously the last legal skirmishes are ongoing, and so that still remains a risk. We're hoping that when this goes back to the judge that the same judge makes the same decision, but you're never too sure of these things.
So what we've decided to do is say, all right, here's the guidance. It's a range because there are some moving parts to this. This does not assume a Genzyme transaction. This does not assume that we lose Eloxatin. And therefore we are assuming that we can hold the decrease in earnings per share growth or decline to between 5% and 10%.
So with that, I'll turn it over to Jerome for a little bit of a deeper dive into finance.
Thank you Chris. Good afternoon or good morning everybody. So I will get you rapidly through some of the key elements of our financial accounts for the whole year.
I start with sales. Here you have the Q4 sales. Inevitably you see a decline on the organic growth line. Keeping in mind that we booked all our sales of [inaudible] or vaccines in 2009 during Q4. In fact, if I exclude the H1N1, the decrease has been 2.2%, half compensated by the acquisitions, which are mainly Chattem during this period, and also helped by the FX impact which has just for the fourth quarter contributed EUR470 million.
So you could say, in fact, that the Q4 sales, excluding the H1N1, really consistent with what we report for the full year, which is a slight decrease on an organic basis, 2.7%, totally linked with generics, [inaudible] to that already. [inaudible] we feel more around that. We have lost a bit more than EUR2 billion of sales from generic competition. All we have [inaudible] EUR 1.2 billion organic growth of our growth platforms.
On top of that, we have the acquisitions, which [inaudible] on a full year basis by 1.9%, half of it coming from Chattem. And we have a very significant positive tailwind coming from the FX, as you can see, because all over the year it means EUR1.3 billion of extra contribution.
You should always be very careful with prognosis about exchange rate, but I'd like to just insist up on one point, that maybe it's not just by coincidence that we have benefited from this positive impact of FX valuation. As long as we benefit from the broad geographical presence of the company, our large presence in the emerging markets, showing that we are both mitigating our exchange rate risk while not just exposed to the U.S. dollar - euro exchange rate. But also we try to benefit from the reinforcement, the strengthening, of some of these currencies in connection with the strengthening of the economy, whether it is the Brazilian real, or the Chinese yuan, or the Indian rupee. So maybe there is something which is structural behind these short-term variations.
While clearly you see in the P&L the impact of the loss of patent issue, but on the other hand you see also that just over the year 2010 we have even been able to increase our business operating income margin despite the fact that the shift of sales has moved from very high gross margin sales to sales with a slightly lower gross margin and which has reduced the gross margin level. But we are compensated through a reduction of op ex on some extra contribution from the acquisition of Merial. I mean, you can see here that Merial is a bit ahead of what we expected. The full-year contribution of the 50% of Merial that we didn't book last year has been EUR177 million.
So a few words on gross margin first. While, as expected, the gross margin has decreased by 1.3% versus last year, in fact we still keep a very high gross margin. I mean a steady gross margin let's say, at 76.8%. This decrease is totally due to the impact of loss of sales from high-margin products, which are now genericized.
And also to one impact which has been valid all over 2010 and which slightly impacts still 2011, which is the higher cost of heparin. This has started in 2007. It has started to go into inventories and then going into the cost of goods and into the P&L. The impact for 2011 should be lower than what we have in 2010, but still being present. While now we see that heparin costs tend to decrease slightly, so we should see some of the end of this impact.
I'd like also to emphasize that we keep this level of gross margin despite the fact that we produced more volumes. It's clear that expansion in [Asia] emerging markets, on consumer health for instance, or even vaccine, are driving higher volume or higher [in the field] costs [inaudible] for vaccine, and we are able to maintain this steady gross margin also thanks to all the effort which has been launched through [adapt] industrial network, as you are closing or [inaudible] to close or to dispose from 2010 to 2011, eight [inaudible] eleven, ten plants out of the 70 which we had in 2008.
At the same time, we have acquired new plants through acquisitions and all of them being in emerging markets. So we are both shifting the structure of our industry or network to more to emerging markets while at the same time taking advantage of the restructuring that we are embarking on in Europe and in the States. We'll see the impact of that in the years to come, more as it always takes time from the time you decide to close a plant, or you decide to restructure your production, to the time you benefit in your P&L. However, this will partially compensate the dilution of gross margin, which is the result of further [diversification].
So for 2011 you should expect a gross margin in the range of 75% and here, along with what we said before, it may depend a bit upon the timing of new generic competition coming for either Taxotere or Lovenox.
R&D - clearly we see the result of all the transforming actions we've taken over the last two years, most in terms of streamlining our portfolio and stress testing portfolio, focusing on the main products, going for more partnerships, and also reorganizing internally. The bulk of the decrease in 2010 in R&D costs has been delivered by internal costs around the reduction. This is really the outcome of the efforts we've made to reduce the internal cost. At the same time, we have maintained basically stable our expense on late-stage [inaudible] [retires] and we have increased our spend on partnerships.
Even more during Q4 the R&D expense reduction has been somewhat more drastic, as you can see, close to 11%. And this is for P&L - I can't remember who had this question last year - what about cash. But as a matter of fact, we have also reduced very significantly our capital expenditure, our spend into [inaudible] in R&D. So this reduction by around EUR170 million year-on-year has helped, in fact financing in a way, the milestones we are paying with internal collaboration. So even from a cash point of view, we're reducing the spend we have in R&D and clearly trying to get more value out of that.
SG&A - we have always been among the best in class in this for the ratio of SG&A to sales. We have continued to reduce our SG&A expenses. They have been down 1.2% and 2.9% in the fourth quarter. But this also includes the impact of acquisitions, so without acquisitions for 2010, in particular with our Chattem and to a certain extent the contribution of Zentiva, I mean the reduction would have been so much higher, in the range of 5%.
It's not only a reduction. It's also a big reallocation. I think that both Chris or Hanspeter have or will speak about that. We have drastically reduced our sales force in the U.S. We are in the process of continue to reduce sales force but also administrative costs in Europe. But we are increasing our spend in emerging markets. We are also increasing our spending on some new launches such as Jevtana or Multaq.
So we are pleased to see that we are going to reach our EUR2 billion savings two years in advance. This will be achieved by the end of 2011. We have achieved EUR1.3 billion of savings in 2010 on the comparable structure, meaning without acquisitions, as compared to 2008, which was our target. So clearly, I mean this will continue to contribute to the improvement of the P&L for 2011.
While not nice to say on this line, I think that the net financial expense has been slightly above the level of 2009. You might have a question around that. I mean, the reason is that even if the net debt at the end of the year is lower than what we had at the beginning of the year, the average outstanding debt, all over the year has been higher in 2010 as compared to 2009. Also, importantly we get a lower return from the cash we have in the balance sheet if you compare to '10 and to '09, so these two elements explain the difference between the two years, which are really minimal given in the first quarter we have had net financial expenses reduce as compared to the same period of 2009.
On the tax rate, it has been kept stable, slightly lower at 27.8% precisely. I expect to have a tax rate in 2011 to be between 28% and 29%. So this has allowed us to post [inaudible] of EPS of 6.8%, more than EUR7 per share and 2.6% on the constant exchange rate basis.
But I think this slide is important, because we always speak about sales, and [inaudible] of sales, and the sales coming from new areas, but this is on profit. I don't think I have ever seen this slide. So this shows you how much we've lost as a result of generification for over the year, between 2010 and 2009, around 11% of our net profit. We have also lost the revenues we got from Teva on Copaxone since the first of April. We had some slightly positive contribution of the pandemic flu on a like for like basis in terms of profit, but this will clearly disappear in 2011. The acquisitions, again if you compare the two years, have contributed to around 4% of our net profit and the rest has grown by more than 10%.
So the message is not only the top line of the growth platforms are growing by more than 10%, but thanks to the contribution of the top line growth and some transformation of the P&L, transformation of our costs, we managed to deliver a top line underlying growth of our organic activity, of course putting aside the generification. So if you think ahead, and you think about how Sanofi-Aventis will look like, or the P&L of the group will look like, after we go through the patent cliff, I think it gives you an idea how we can deliver sustained growth in terms of profit.
While this is just to remind you that we have some restructuring costs, you are used to that let's say, we are continuing to restructure the group, and we do take amortization of intangible assets into P&L to go down to the consolidated net profit and the [inaudible] is on the bulk of the amortization of intangible assets is still derived from the acquisition of Aventis in 2005.
I'm rather proud to present this slide, because I think that while we have stabilized our profit we have really been able to increase significantly our free cash flow, and this is the result of the tight control we have started to put on our working capital, which has been kept stable in 2010. It was not the case in 2009. We put control on receivables. We put control on payables, and we have started to work on reduction of inventory in order to try to streamline the overall [inaudible] process.
And we are also paying high attention to cap ex spending and you see that while we are continuing to invest into large facilities such as the new BIOLAUNCH facility in Vitry or the dengue vaccine plant in Neuville, close to Lyon, and some others, we have decreased the cap ex by more than 13% between 2009 and 2010.
So all in all, the free cash flow has increased by 26.7% and I think that if you have to value a company you just need to discount the free cash flow. And we have been able, over the last two years, to invest in acquisitions more than EUR9 billion and here I take acquisitions plus in licensing in connection with new products.
We have given back to shareholders more than EUR6 billion, mainly through dividend payments on some share buybacks that we did over the last year, in 2010. Nevertheless, we have been able to post net debt, which is lower than the net debt we had two years earlier at the end of 2008.
While this slide does give you a bit more details around what I have said about just the year 2010, and I think I cannot more emphasize how strongly cash flow generation of the group is and how much it gives us ability to invest in development, whether in organic development, in R&D, providing, of course, it's profitable and in acquisitions, and continue to sustain return to shareholders, which is mainly linked to a regular increase of dividends.
So we propose for this year to increase the dividends from EUR2.40 to EUR2.50. Clearly we are taking into account the fact that we will have a decrease of the profit in 2011 and we can confirm that we will at least maintain the level of dividends next year and the year to come and try to clearly even grow the dividend regularly as long as we have more visibility on our ability to grow the profit beyond 2013. So I can just confirm the dividend policy of the group and just remind you that the Genzyme acquisition will not change this dividend policy if it takes place.
So I'll just summarize all the things we have seen already while going through the [inaudible] while taking advantage of the growth platform, reduction of op ex to sale ratio, good control of the gross margin, cost savings ahead of schedule, EPS growth on strong cash flow generation and I'll just repeat that. Over the last two years, the growth platforms we presented in 2008, just 42% of our sales into 2010 represented 54% of our sales, which shows how fast we have been transforming the company.
Good morning, good afternoon. I would like to give you a short overview about the performance of the company in terms of operations during 2010. My first chart shows what Chris already has mentioned. You see the significant impact of EUR2 billion lost sales due to generification. You see not precisely, but I remind you that we lost about another EUR450 million due to the American healthcare reform and the European measures, mainly on price.
So through the growth platforms, which are diabetes, developing countries, CHC, vaccines, etc. we have created EUR1.7 billion new sales, and yes it is true we have been also helped this year in 2010 favorably by a forex impact of approximately EUR1.3 billion. Amazing to say, despite a slightly negative growth rate, a constant exchange rate of 0.8%, the group has achieved the highest sales number ever, nearly EUR30.4 billion.
Now, on more detail, some of the growth platforms. I start with the legendary growth platform of emerging markets. You see that since 2005 we always had double-digit growth and you see that as of 2009 we even have an acceleration of growth of 19% and then in 2010 16% in those markets where we have as I said 16.3% constant exchange rate growth and 23% on a reported basis.
Unique our group, Sanofi-Aventis, also in this respect to my knowledge the only company which is achieving equal sales in all three major segments, precisely 30% in emerging markets, equally 30% in the U.S.A. and 30% in Western Europe. The 11% remaining for the rest of the world in essence is Japan and Australia. We assume, of course, that this will continue, and that as of 2011, emerging markets will grow well above the 30% share you had last year.
What is behind this? Yes, first of all, if you concentrate charts on [inaudible] countries the performance is even stronger, 31%, but also outside [inaudible] the gross has been even 61%. I have been questioned repetitively during 2010 what is your secret, and my answer is always the same. Part of the secret is we have a strong history in those markets. It's a history which goes back to the traditional pharmaceutical companies like [inaudible] on the German side, [inaudible] on the French side, but it is also part of the secret that we are not just a company going to those markets [inaudible] with commercial structure.
No, we are fully integrated a company in those emerging markets. You see that we have local manufacturing more or less all over. Chris mentioned this before. All of the acquisitions we have made brought additional industrial resources and we counterbalance this by reducing our industrial presence in the traditional markets. All over we have nearly 40,000 of our approximately 105,000 people working there and out of the nearly 40,000 people nearly 19,000 are promoting our products in our various [inaudible].
We also should mention that we just recently pushed our regional approach, our regionalization, even further. You may have noticed that we have nominated more managers for more regions, building a new region out of greater China and Southeast Asia, of Latin, which means South America, and the Pacific, consisting of Australia, New Zealand, Korea, and Japan. And we have headed also three regions with young managers just above 40, and those people who have significantly contributed to the growth I just could show you.
Diabetes we have achieved EUR4.3 billion sales, nearly two digits on a reported basis - 14.2%. You see some controversial growth rates also coming from one of our competitors. I repeat once again what we understand as diabetes is our total presence, consisting not only about Lantus but also Apidra, but also our traditional [inaudible] in diabetes. When we say we are the leading insulin company, our understanding is that it is overall insulin and this is what we are aiming for.
We have clearly committed to become the leading company in diabetes overall. We stay committed to this objective. We know we have to accelerate in this respect. We believe we have prepared. We have significantly increased our promotional efforts, especially in the U.S.A., but not only, into the second half of 2010.
We see a further acceleration in prescriptions in the U.S. in the second half, and yes, we're also at the eve of the launch of the new blood glucose monitoring system, which we plan to introduce as of the second quarter first of all in Europe and then also in the United States. And yes, you will hear later, we are also aiming for new products. Lixisenatide is only one of them.
We have launched in oncology a new product which was, I think it's fair to say, also partially overlooked by ourselves. And we got really alerted by a surprisingly positive Phase III result. This is Jevtana in hormone-resistant prostate cancer. We have launched the product in the middle of 2010 in the U.S. and the product has made a very, very good and surprisingly good performance, achieving in approximately 4.5 months EUR82 million of sales. You see how it has replaced what has been in this market before as a competition. We are going to launch this product next in Germany and I'm going to the launch conference at the beginning of March and then as for March we will roll out launches all over Europe.
We estimate big sales for this product, between EUR300 million and EUR500 million, and given the very, very impressive performance in the U.S. I believe personally that it will be much closer to EUR500 million than to EUR300 million.
The other launch of 2010, and the majority of course, has been Multaq. I had reported before that we had a bumpy start in the U.S. We had underestimated the importance of non-specialists for this segment. We had underestimated that the GP plays an important role at least in maintaining the patient on the product. Consequently, we have significantly nearly doubled our efforts in the U.S. We saw then immediately an acceleration which continues to show very nice effects. You see here to which extent the fourth quarter was superior to the third quarter. I think another important achievement is that we have obtained for this product in record time reimbursement in all European markets so far, including difficult markets like Germany.
Yes, it's true, we have recently discovered two cases of severe side effects. We have immediately, due to our obligations and our responsibility, started to inform both relevant agencies, the FDA and the European one. This has led already, and will continue to lead, to change it in the prescribing information in the sense of indicating that there should be a repetitive monitoring of the liver function. We take this, of course, seriously. On the other side, it is a fact of life that if you have treated in the relatively short-term 300,000 patients, you may discover events like this.
We remain totally committed to this product. We believe it's an important contribution to the treatment of the relevant patients and we believe there is huge outside opportunity and that the reason we continue, of course, to perform this study [inaudible] which may lead to additional indications in so-called permanent patients, which represents approximately one-third of the overall patient population of arrhythmic patients.
Consumer healthcare, we have been definitely not recognized prior to Chris's arrival as a consumer healthcare company, and I believe it's even more amazing to see how we have increased our presence between 2008 and 2010. We nearly have doubled our sales to EUR2.2 billion. We have done this through external growth, yes. I think it's fair to say the Chattem was a very good acquisition of ours.
We are very proud of our two acquisitions which we did in China - Minsheng and Sunstone. We are now just as we speak in the process of putting both organizations together, which will make us the leading player in the CHC market in China, which is not so evident to be done.
But yes, we have also done our homework. We have accelerated life cycle management for the products we have. Traditional brands like Maalox, like Lactacyd for example, and the outcome is amazing as you see, this 45% growth on a constant exchange rate. And I'm very, very optimistic that we will continue to by far overperform the market also in 2011.
And it is not only, but mainly, due to the switch of Allegra into OTC. The allergy market in the U.S.A. is approximately [$]1.5 billion. Say our two formerly leading prescription brands on this market, which share nearly two-thirds of this market. And it is clear that we are aiming to be one of those, which means one of the leading two or three products, which gives you an indication. But our sales ambitions are for this year.
We will launch in an OTC approach as of March. We will make very, very massive investment in terms of advertising and promotion and we are in fact very confident and even optimistic that in very, very short we will reach sales levels as the two leading products in this field. And this mainly by the effect that we are convinced, and we have reason to say so, that Allegra is extremely well-positioned to be a leading consumer brand. It has by far the least sedative effect. It's a very, very strong trademark, and our subsidiary, Chattem, has an excellent, really excellent, record in switching products and making them a success.
We remain a research driven company, but nevertheless we have an opportunistic approach to generics. We feel that generics are a good thing. It's a good thing also for research compounds, because it makes a proven medication available at reasonable prices. Wherever we see an opportunity, we do generics, and this was of course the main argument for acquiring Zentiva and Medley. And yes, you see once again a very impressive growth from even not EUR400 million, say, in 2008 to EUR1.5 billion in 2010, 41% growth.
Once again, we had a difficult start with Zentiva two years ago. We acquired 100%. We cleaned up the market. We made management changes. We reinforced promotion. You see that the Eastern European performance, which is small, as equal to Zentiva, was very nice with 17%. And yes, Medley probably amongst our acquisitions was the most successful acquisition overall, has a fantastic performance with 38%, and it is becoming more and more a model for a new market approach in Brazil and I believe even beyond that country where there's a growing middle class and where we have positioned Medley very successfully as an alternative approach to affordable medications.
We are currently expanding Zentiva all over Europe as our generic brand, which means Zentiva will replace Winthrop in Europe. This is a pure public identity approach. We had questions before if this would have any impact on social issues and the answer, clearly, is no.
Well, we have four major brands, and all of those brands are touched by generics and that's part of our issue, of course. But you should not overlook that even after the generification those products stay very important brands. You see that for Eloxatin even if we will have again generics in the U.S.A., which we hopefully expect to be not the case before 2012, Eloxatin, according to our forecast, will remain a EUR300 million brand.
We expect EUR500 million to remain sales of Taxotere, despite the fact that generics have been launched in the late months of 2010 in Europe. On the other side, we had a slowdown in sales in the U.S. because our competitor announced to be shortly on the market. I learned that within the next days that the shortly will become a little bit longer and we don't expect a direct competition for Taxotere even after the first quarter of 2011. But even if the generic companies will come to the U.S. market, we believe that worldwide the product will be approximately half a billion.
Lovenox, as you know of course, which has received a very direct competitor in the U.S., which may have another one within relatively short, has been nevertheless a product selling nearly EUR1.4 billion outside the U.S. and showing a very remarkable growth rate of 8%. And yes, also in the U.S. itself, I believe that our people have made really an impressive battle, continuously maintaining 90% of the hospital market, despite the appearance of the generic competitor.
Last but not least, Plavix, to make it short. We have offset with more than EUR700 million of sales in Japan and in China the losses we have suffered in Europe and inside the U.S. where the product is a EUR6 billion product. You see we still had a growth of 11% and once again I'm confident that we will continue to do so in 2011 and as you know we have quite recently also the pediatric prolongation for six months more until May 2012.
Those are the growth aspects, but there are others. Yes, we have to adapt. We have to tighten our belt. We have to restructure. We have to get organized differently. You see on the chart a short summary what we have done in the U.S.A. I believe that what we have done in the U.S.A. during the last two years is without reference. We have downsized overall our organization by approximately 35%, and we have not only downsized, but we have also totally reorganized what has been largely driven a GP business before, today is much more a specialist oriented business. We have done a lot of things in the field of general administration. We have integrated into our U.S. management a system of shares services. And yes, of course, we continue to pursue business development opportunities, also in the context, but not only, of Genzyme.
In Europe, the same, perhaps not to the same extent, also not having the same necessities perhaps, but nevertheless also here in a market which is considered by many companies as being totally hostile for doing reorganizations at all. You see here we have reduced our headcount and field forces by 1,800 people over the last two years. We are in the process of talking to our social partners who developed a new footprint organization for our European subsidiaries, which if we can agree with our partners will be an approach in terms of clusters where we will share services within various countries in order to become more flexible, better performing, and at the end, of course, become also more productive.
A last word on Merial. Remember we have acquired 100% of Merial during 2010. Merial gives us a lot of pleasure, I can say also personally being charge of it. The business has performed well with 2.6% respectively 3.2%. The major product of Merial, which is Frontline, which is the sole blockbuster product inside the veterinary market, has resisted well upcoming generic competition in Europe. As everywhere we have given more orientation for Merial to the emerging markets, and you see that the growth rate immediately accelerated into two digits. We have given a lot of concentration in improving the operating margin. We have improved it by 2.3% within a little bit more than six months, and yes, beside we profoundly prepare for the upcoming combination with our partner Merck in bringing Intervet and Merial together and start creating some market leading company in veterinary medication.
Thank you so much. And I think it's Olivier now.
Thank you Hanspeter. Good afternoon. Good morning. I'm very excited in my new role of Sanofi Pasteur, the vaccine division of Sanofi Aventis and the [inaudible]. I'm going to start by giving you an overview of our performance in 2010.
It has been another solid year for Sanofi Pasteur. Our sales have reached EUR3.8 billion, growing 4.8%, including the impact of the pandemic sales. If we exclude the impact of the pandemic sales, sales growth has reached 5.5%. We had a strong fourth quarter, reaching EUR890 million, growing 12.6% excluding the impact of the pandemic sales.
The performance of 2010 has not only been driven by the strong growth of our key franchises, but also significant growth in the emerging markets. In 2010 we had a record year for flu vaccine, growing by more than 18.7%.
The split between our pandemic sales and our seasonal sales, according to the guidance we provided you at the beginning of the year, our pandemic sales reached in 2010 EUR452 million, which is very consistent and very close to the amount of pandemic sales that we sold in 2009 that reached EUR440 million.
We are very happy about the resilience we show, and with Menactra in the U.S., in an environment where we are able to keep an extremely high market share, significantly above 90%. We continue rollout on the international front, and we are starting to have significant sales, especially in the Middle East.
We have a solid performance on Adacel, our ACP IPV combination, where not only in the U.S. we have a strong fourth quarter but also, and we continue the rollout of our internationalization program, and we are growing nicely.
The most interesting feature is probably our growth in the emerging markets, and this is for the first time that we hit the EUR1 billion landmark. We are growing by more than 15%. It comes not only from our Pentaxim, which is of course our five combination ACP IPV product. That is rolled out. That is showing an outstanding growth, both 40%, but it comes also from our broad portfolio and our strong endemic and travel franchises.
If we get a little bit closer and look to our influenza vaccine, we had a record year. On seasonal flu, we have shown a growth of more than 33%. It's very significant growth in the U.S. where we have been growing by more than 50%.
We had a successful launch of our Fluzone Hi Dose which is for the people that are over 65 years. We had the launch of Intanza, our intradermal form, that has been launched in Australia and certain countries of Asia and in Europe. We get very positive feedback from the healthcare providers, as well as from the patients.
We remain the undisputed leader on the flu market. We own in the U.S. a market share that is about 50%. We have an extremely high market share in the southern hemisphere, where our market share is about 70%. In the northern hemisphere, our market share is 40%.
If we look a little bit to the R&D front, we had some key milestones that have been achieved in 2010. The Fluzone ID has been submitted, which is intradermal form, in the U.S. and we are expecting some regulatory decisions in Q2 2011.
We are expecting also after the submission of Menactra in total 9-12 months. We are also expecting to get regulatory decision in Q2. Regulatory approval of Pediacel in Europe and [inaudible] licensure was granted in Thailand and Australia.
We have signed a monoclonal antibodies partnership with Vivalis. Vivalis has developed technology that would allow us to identify rapidly human monoclonal antibodies that are clinically relevant and the related antigens against infectious disease.
We have closed at the beginning of the fourth quarter the acquisition of VaxDesign. VaxDesign is a company that has developed a platform that is an in vitro model of the human immune system that would allow us to move faster and of course to take the right bets for these vaccines candidates.
In terms of dengue, we are very happy with the progress on the development front with dengue. We have started our Phase III. We will have by the end of 2011 more than 40,000 patients on the product.
Fluzone quadrivalent, you know that there has been some mismatch in the last couple of years about the B strain. The quadrivalent with two B strains and two A strains that we offer, of course, [inaudible] protection and we have started our Phase III trial in 2010 and our other program in terms of [inaudible] has just been completed.
On the C. difficile product for nosocomial infections, that is today in Phase II. We are progressing nicely and we got granted the FDA fast-track program status. That is the first step for us to be the first in the market.
So overall, for Sanofi Pasteur in 2010, a solid year. There are evidently a lot of opportunities in the vaccine world. Sanofi Pasteur is well-positioned to capture those opportunities. We have a very strong position in the emerging market with a very good footprint.
We feel also that further to the acquisition of Shantha, not only we have the right low-cost manufacturing base that will allow us to be competitive on the cost standpoint in this part of the world, but also a very portfolio that would allow us to have the right reach in terms of breadth of portfolio in the southern hemisphere.
My priorities are going to be focus on boosting the revenues in the emerging markets while continuing to leverage our leadership position in the more mature markets. I'm looking forward to work closely with Dr. Elias Zerhouni on the vaccine R&D side, and now I will hand it over to him.
Good afternoon. This is actually my first meeting. It's sort of my coming out party, and I want to really expose the fact that although I started in January, January 1st, my job as president of global R&D actually I know about Sanofi R&D and I have known about it for almost a year and a half as I was advising Chris in the R&D organization about what is fundamentally an issue that permeates the industry.
If it was only Sanofi that had a problem in R&D productivity, you'd say it's a Sanofi problem. But if it's the entire industry, despite great investments from the public sector and the private sector in research and development, you have to realize that we're facing a fundamental issue.
And I think my job going forward is going to complete the work that we've done in the first 18 months. And I think it's important to realize that R&D operations are fundamentally very hard to change, because the programs tend to be multiyear and once you've made a choice it's very difficult to change that choice.
Second, the traditional mindset of R&D has been more of a closed innovation mindset, where you really try to develop everything in confidential ways, and try to truly have a strategy that reaches market in the shortest time possible in an area that you feel is going to be successful. And once you reached registration, you knew that your commercial operations were going to sell the product.
Well, that part of history is over. If you are successful in R&D, there's no doubt that you can do very well, but you can only do well if the payers are willing to pay. And therefore, the fundamental mindset about how do you decide, what products do you choose, and what selection criteria do you apply, have changed.
And you have to take this concept to the next extension of it, and that is that well, if that's the case, and since no one has the resources internally to know about every part of biology and every part of the disease process, and all the targets we've discovered through the human genome and others, you have to go from a closed innovation model to an open innovation model.
And that means rethinking your internal operations, because you can't really just outsource your creativity. You have to outlook and look around for better ideas than what you have, have access to these better ideas, but you have to also have the inner capability to make decisions that ultimately increase your success rate. Because if you succeed, you do very well. But the problem is we don't succeed enough, frequently enough, in a time that is sufficient to justify the investment.
So the first thing we did, really was to look at the portfolio. As Chris mentioned, we stress tested it, and looked at it in the eye of someone who looks at it five years from now, three years from now, what are the payers going to do? Second, we looked at the science behind the portfolio. Was it solid? Was it validated?
And at the end of it we ended up with a pruning strategy which in my view has increased the quality of the portfolio. That's what you were saying. Jevtana is an example where the internal R&D folks said you know, there is something about this that is an unmet need. Hormone-resistant prostate cancer is a real public health issue, and we continued the effort there and now I'm pleased to see that with the efforts of the commercial operations it's successful.
I think the other change we have accomplished in the past year and a half was to really make R&D internal more visible externally. You can't really have access to open innovation unless you participate in the ecosystem of innovation, and this new ecosystem is what I think is positioning us.
And what excited me about probably the greatest challenge in front of us, and that is how do we transform and translate our scientific advances into real benefits for patients, in unmet needs, that payers are going to be willing to pay for. And to do that, you have to be able to change. You have to be able to implement change. This is what we've done.
I think you've heard from Jerome the fact that R&D has decreased expenses, in particular the bricks and mortar. We had 27 sites. You can't really have an effective R&D operation that is distributed around the world and not have the sort of interaction and critical mass. So we're not just restructuring. We're realigning. We're rethinking the way the process is done.
So our vision is that no one, and this is something that Chris told me the very first day we met, no one has written the textbook about how to do it right. And if you don't know the theory, you don't know the way to do it, what you have to do is use a diversity of approaches, be flexible enough, be nimble, so that you can in fact have access to opportunities you wouldn't have otherwise.
So our vision is really fundamentally based on a very simple concept. If you keep performing an experiment the same way you're going to get the same result, so we have to change the way we do it. And that means a total reengineering and all of us here on this stage agree to this. And it will require that.
And then you can ask me, so how do you intend to do that? I think you have to have a measurable target and to me what is really ailing the productivity of R&D is number one, the development times have become too long. On average we had development times of 8-10 years. Now it's 12-14, 15 years. And the success rate was one in eight. It's now one in 13. So if you don't change those parameters, you're not going to change anything. So this is a metric that as global head of R&D I want to put in place, but also do what's needed to make those things happen.
The key to me is that I believe that we have not adopted inside R&D a strong translational medicine capability. I think because of historical reasons, companies were basically tool-based. Chemistry was the thing. Small molecules, where you did antibodies, or you did vaccines, but you defined yourself by the tool, not so much by the disease you needed to address with whatever tool worked.
So what we've done is we've really built the toolbox with Sanofi Aventis over the past year and a half. Our biologics have gone up to almost 40% of the portfolio. But more important is the skill set, to have those tools. Partnership has increased with areas where we didn't have the internal skill set. We continue to do this.
But the key is going to be the ability as a company to understand the biology in humans as soon as we can throughout the R&D process. So we will do this from the get go, the discovery, all the way to whether or not something is going to be paid for, all throughout the process that we want to reinvent, essentially.
And this means rigorous efficacy and safety productivity as the working hypothesis. If you have a project that is going to take 12 years, and where you have no clear pathway to demonstrate the mode of action and no clear pathway that has biomarkers that are going to guide your development process, don't do it. On the other hand, if you have the opposite, this is where we will be the champion.
So our priorities right now are very simple. You've heard about the fact that we've pruned the portfolio. We've selected and increased the quality of it, and we have put a lot of investments. You've heard that our proportion of Phase III, Phase II investment is the highest it's been in the total portfolio, and what we need to do is deliver on the current late-stage portfolio. In your material you have all of the late Phase IIIs.
We made a decision over two years ago that oncology was going to be a strategic area, so we created a division and you'll look at the investments we've made in the portfolio that expended in that area. I think it's quite remarkable. We have to deliver on that. I think we have to build, again, our early-stage projects. The pipeline we have pruned. Now we need to really get the volumes that will allow us to in fact maximally use the resources.
And clearly in this business, there is no compromise with excellence. Usually R&D is a multidisciplinary team effort, and like every team, every player has to be excellent. You don't want to be playing football with a goalie that can't stop the ball, so you want to have excellence across the board, and that's going to be our motto. Let's be direct, let's be pragmatic. If we don't have the excellence internally, we'll get it, for whatever skill set we need to have. But ultimately this is the vision, including recruiting new talent, which we have done.
So I think you've heard about the green shoots, and I want you to take your time on this. You've heard about Jevtana. You've heard about Lixisenatide. The Phase IIIs are coming out exactly as we wanted to have them, with lower safety issues. Hypoglycemic events are lower in Lixisenatide.
And you might ask yourself why did you do this? There are other products out there. The key is this is a strategic decision. If we want to be number one in diabetes, you have to be holistic in what you offer patients, hence the decision to stick to an investment, a once a day Lixisenatide because it fits with what we believe is the appropriate sort of span of services and solutions you have to provide to these patients, including, for example, the glucose meter investments we've made, which you will see more of.
Iniparib, you've heard Chris talk to you about it. We've looked at it. We're going to look at it with the health authorities. But we're convinced there is value there that needs to be worked on. We have not stopped any of the programs. The results we've had in second line and third line tell us that this is an active molecule with a terrific safety profile. We'll understand it better, but we're not giving up on it.
You've heard about teriflunomide and this really is a question about whether or not our efforts in CNS are going to be expended or not. This is something we'll talk about over the year. And whether or not we'll build a franchise around this idea of multiple sclerosis and there are other reasons for that.
So, I think this is delivering on what we currently have, and I told you that we really try to build innovation in the earlier stages and realign, if you will, R&D at Sanofi along opportunities. For example, we've decided to change the strategy of how we do research and oncology. We've recruited new people.
We've established a site in Cambridge. While we have rationalized some of our sites all around the world, we decided to make a new investment. -Asia Pacific and the Cambridge area, especially in oncology. Why? Because you can have access there to a rich network of external innovators, and here you have the list of potential innovators based on this new notion that in oncology, you need to have a pathway research base that looks at targets in a functional way.
And that explains why we had an agreement with Merck Serono, because Merck Serono had a Mek inhibitor and we know from the biology that PI3K, which is our molecule, may have a synergy with this particular molecule, hence the collaboration.
I do not want to take too much of your time on the details, but I think you know about the milestones for 2011. We have to further the get go trials in Lixisenatide. Teriflunomide, I think you've heard about these results. We have important results in an angiogenic VEGF trap against angiogenesis in [inaudible]. Ombrabulin is finishing its trials. It's already recruited. So we'll go on to follow up, to see if it's effective, and you've heard about the results of [inaudible].
So this is our current late stage portfolio, and I hope that I'll be able to report to you throughout the year about the changes that we're trying to implement, going to the Phase II, from realignment to now reexpansion. Thank you.
So we've been through pretty much everything in the company, from all the way down through the pipeline through cash flows, from vaccines to R&D. So over to you.
A few questions. First, on your acquisition of Shantha, which you mentioned. What can be expected? Where are we in the reregistering of vaccines and what will be the future? On Multaq, could you come back on the patent life? Because this is one of the limitations in the U.S. Are there any initiatives here that could go through? Also there are some issues in Q4 in emerging and OTC which are a bit, especially in Brazil. So could you come back on that and elaborate? And more generally, if I may, your loss with Iniparib, potentially loss a major gross rival long-term. How do you react to that and how you see the future of the company with a decline in EPS this year, probably next year? Are you intending to accelerate shareholder value in one way or another in acquisitions or share buyback? I know it's not [inaudible] at Sanofi. Could you elaborate on that?
So we'll start with Shantha?
On Shantha, we had a setback, and we are busy fixing the Shantha five issue. We aim at participating to the new WHO Unicef bid that is going to take place in the second part of 2012. We remain very positive. The rational of the Shantha deal hasn't changed. We need to fix the issue, but in terms of business opportunities, we don't see a large opportunity with a cost-effective manufacturing base and the right portfolio in the south for the southern hemisphere.
Perhaps I'll take Brazil. What you see in the Brazilian CHC sales is a technical effect coming from changes in the trade and I think also there was a change in the sales tax, which led the wholesalers to deplete the stock by the end [inaudible]. So it's truly technical. I have to admit, I did not phonetically understand your question on Multaq -
Patent life I think. Karen? We have our general counsel here. Can you give us anything on Multaq?
Right now we're working very hard to ensure that Multaq has longer than the stated patent life. It has five years from launch, but we're working to ensure that through life cycle management it has a longer lifetime and in Europe it has the 10 years.
So basically, in Europe you've got 10 years and in the U.S. you've got 5 years, but you can't file a generic in those 5 years, so you end up with roughly 7. So that's where we are still. Nothing has changed on that.
Jerome, just on Iniparib, I guess, and longer term growth. I don't want to ever be in a position, quite honestly, where if one drug changes, a dozen [come], that this changes the company. I think the challenge that we have still is on the one hand, nobody in our investment community thinks that the small molecule blockbuster model is a good one to go with.
But equally, we haven't been very successful in selling the diversified model to the investment community, because essentially if you have an Iniparib or you have a Lantus, or you have a Multaq, or you have a [inaudible]. It doesn't really matter what it is, but most people want to see a blockbuster, and that's kind of still a millstone around our necks.
So I think one of the things that we're really setting ourselves a target of doing is trying to really show the composite value of this company. If you think about a vaccines business, what's a vaccines business worth today? You have EUR4 billion of vaccines business. What's that worth? And what's a consumer health company work that's doing EUR2.2 billion? What's a generics business worth? You think about how much money people are paying for companies in India and the like.
So I think the problem is that we're still looking at patent expires and new molecules in a very traditional way and we have to do a better job of explaining that. And I think that's really the objective we're setting ourselves for with this strategic seminar. A lot of people have asked, what are you going to do with the 2013 guidance? Is that going up, or is it down?
But the more all of us meet with our key investors, they're not really interested in 2013. They're interested in what happens after 2013. So that's what we're going to try to address in all of these questions, but also I think to really come back and really hammer home some of the multiples, and I think maybe we can do a better job of segregating the numbers and bringing those out, looking at multiples of transactions that have been done.
You know, Iniparib was never the lifeblood of the company. It would have been a great product to have. I think it's still going to be a great product by the way. I mean, I think if you go back and look at the early studies of Avastin, I can tell you a Eloxatin got rescued from the trash heap. The real problem is that when you have a really exciting new cancer drug, a lot of physicians want to put patients into that trial, and particularly patients who are really at the most end stage of disease. And ethically you have to - you can't really say anything about that. But obviously, it has an impact on how the numbers come out.
Now, you also have to say that the Iniparib study was against an active comparator and had a crossover design. So if you can still actually show efficacy on the second and third line, in that kind of a trial setting, and given the excitement about this and what kind of patients you have to go in. As I say, I've talked to the top breast cancer people in the world, and they're all saying this isn't really all that unexpected.
So please don't get a sense that Iniparib is not in the cards for the company longer term. It's not in the cards necessarily for 2011, but it's still going to be there. But more broadly, I take your question to say, you know, the whole objective we're trying to do is so that we don't have to rely simply on the pipeline. What I'd really like to do is get a nicely stable, growing business and then if something comes in the pipeline it's going to accelerate the growth because it's hugely accretive.
Obviously, yes. Results are decreasing in '11. We don't know where we're going to be in '12, but I mean given Plavix, it's going to be a tough haul to show any kind of growth on that.
Obviously that's partly where external growth - Genzyme - comes into play. Genzyme's not there because we need to do Genzyme, but just as you've seen how we've done growth through a Chattem, through the Minsheng, through the Zentiva, you can start to add onto a stable base.
But we couldn't really do that until we really had a stable base. We had to really get involved in cost-cutting. We had to really reallocate our resources to where growth was inside the company. Absolutely had to clean up R&D. So we had to do a number of things before you could actually just even use external growth as a lever. But I think we're there, and I think that's what we're getting to.
But again, that's what we really want to do mid-year. So why not do that today? The reason we're not doing it today is because most of our investors aren't really in the mood to listen. The very overwhelming sense I personally get is there's such a focus - everybody can see a patent expiring. That we can calculate and everything else despite what I might have said in terms of we're not as aggressive as we should be on calculating those patent expires.
But no one is really looking beyond the cliff today. I haven't sensed anybody in the investment community really trying to figure out who's going to win in 2014 and '15. That's just not there. I think it's partly because of where the economic crisis has been. There are a number of factors behind it, but I would suspect as we get through a bigger chunk of the patent cliff, and we get closer and closer to 2012 and 2013, I think we're going to have more of a receptive audience to that, and that's why I think we want to do it then. I just think we'd be shouting in the wind a little bit if we tried to do it today.
That's just a personal view, and I'd be happy to hear if you disagree with it. But we are sensitive to - that's where investors are going to want to go next, and that's where we figured we'd have a better chance at getting the story across.
Three questions please. The first one is a basic question on guidance for 2011. Can you clarify what is in the guidance or out of the guidance? I'm talking about Eloxatin, Lovenox, and Taxotere, and especially that's for Lovenox and Taxotere. Do you expect for Lovenox a second generic company to launch? And if, when. For Taxotere in the U.S., is it really in the guidance or not?
The second question is on diabetes. You have again said that your target is to become the world leader in diabetes. How can you convince investors doing that, given the fact that you have Lantus, which will be out of patent protection after 2015, Lixisenatide, which is a GLP-1 not superior to Victoza. It's noninferior to Byetta, but Victoza is superior to Byetta. And it is not on the market still.
And lastly, the BGM business, which is something on which we can be optimistic, but maybe not sufficient. So how to convince investors. And finally, the last question is on R&D, how to drive R&D productivity and basically what's your view regarding the two types of strategy, to put it simply, the Merck strategy of sustainable R&D spending, or the Pfizer strategy of a big cut in R&D in order to reallocate money and give money back to shareholders?
All right, let me, just on the guidance, be very simple. If tomorrow we woke up and found that there was a second generic for Lovenox, and there was a generic for Taxotere, that would have no impact on our guidance. If tomorrow we found out the Eloxatin deal fell apart and we were losing Eloxatin, we'd probably wait and see what happened with Taxotere and Lovenox, if I could put it that way. But Eloxatin is at the moment, we have assumed that we maintain that for the year, but we've assumed also - but that's a little bit why you've got the range.
Let me ask Hanspeter to respond on diabetes and then Elias on the research and development.
I mean diabetes, as you say, is a commitment, and we have to show it. And I believe that at the end of the day we will convince all investors only if we have showed it. The elements are clear. First of all we have to accelerate. The 9.7% or 9.8% growth we had in 2010 is not sufficient. We believe there is opportunity for acceleration in the U.S. whereas I mentioned we have a nice increase in the second half of prescriptions and if we continue to do so we will have stronger growth, significantly stronger growth, in the U.S. in 2011.
And in the emerging markets, giving you an example, just before Christmas we have obtained full reimbursement for Lantus in Shanghai, which represents about 20% or 25% of the Chinese market. We believe that the approval in Beijing is imminent. If we continue to do so, we will get the significant sales out of Asia, also out of Pacific, where in the second half of 2010, in Japan, the product has a very good performance.
As far as blood glucose monitoring is concerned, we believe we have good products, we have better products. We believe we can leverage the fact that we are the sole company which can offer insulin and meters and yes, it's to some extent a bet, but first of all it's a commitment and we have to deliver.
I don't share your point of view on Lixisenatide. I strongly believe that Lixisenatide is superior to Byetta and being it already just was effected, Lixi is once a day and the other product is twice a day. And against the Merck product, we have ongoing trials. We have to see what comes out of it. And it's premature, but yes, of course, we have [inaudible] a better product.
And I would just add a few things. First of all, I don't think we have, we're missing, anything that Novo has. I am a little surprised that people can see a value in Degludec, which is essentially a "me too" of Levemir, but don't want to believe the same thing about a Lixisenatide versus a Lictoza, so somewhere I guess we've got to get a little bit better at investor relations, perhaps.
I think we've got a GLP-1. We've got a long-acting insulin. We've got a better position in emerging markets. We'll probably be faster with a combo. We are slower on GLP-1 than they are, obviously. We're into blood glucose meters and they're not yet. So you know, this is a huge market.
Patent expiry, let's wait and see what that brings, but I don't think at this stage today that anybody really sees a patent expiry as being of a dramatic nature, certainly where we are and especially when you start looking beyond the traditional markets of Europe and the U.S. We are busy switching our business in the U.S. to the SoloStar. We're up to 40% conversion in the U.S., and we've still got another four or five years before we are really at that stage yet.
So at the same time, I think as Hanspeter said, we want to see some acceleration in that business. We will be investing and that's part of the reason why we also said we need to be a diabetes company. As long as we're just going to be managing a brand, we're not going to be really developing a diabetes business. So we've got all the elements, and it now has to come together and it now has to be executed. And I think we would certainly expect that we have to execute better, no question about that.
But I wouldn't say that, hey, our product lineup is not as good. Lantus is still the number one brand in the entire diabetes world. And you know, given everything that has happened to try to knock Lantus off its perch, I think actually it's shown a tremendous amount of brand loyalty and resilience.
Elias, the sustained budget of Merck versus budget cutting of Pfizer? I'm interested in this one too, so -
You're putting me in a tough spot here. But before I do this, I'd like to ask something about the diabetes question, because I completely agree with what Hanspeter and Chris have said, but there's a dimension that I think people don't see in why we went this direction. And the dimension is this, is that diabetes is only the tip of the iceberg for many other chronic conditions, chronic diseases, that are directly related to diabetes. The comorbidities in eye disease, hence our investment in Fovea in eye. The comorbidity in the cardiovascular system, the renal system.
And the epidemiology growth of this disease says that there is a need for you to look at holistically diabetes not from the end of product, you know, insulin and Lixisenatide, but the end of the other part of the spectrum, a population to which you provide a continuum across the entire spectrum. And remember that chronic disease management is going to grow, we believe, as a part of every public health system response. You're not going to take care of patients with diabetes in hospitals.
So you're going to develop systems that are going to be intertwined with the solutions that are provided over the continuum of pathologies. Remember that diabetes is part of the metabolic syndrome diseases. It's part of that, and that's why we have it in our portfolio, the PCSK9 molecule, antibody, which is essential to that population and a sub-part of the population.
So I'd just like to add that dimension. Beyond 2015, beyond expirations, you have a different strategic vision when you talk about diabetes. Diabetes is just the sort of anchor of many other associated comorbidities and conditions which tell you that unless you're a strategic player, you're just not going to be a player. And we want to be that player, regardless of what happens to one insulin or another.
I just wanted to add that. The second is what's the model? Do you sustain it, do you cut it? I think frankly, when you make a decision to sustain or cut that means you know what's going on. And you have a great sense of what's the textbook and what's chapter one and chapter two. I think we're more humble than that. I don't think we know.
So I think the best thing that we feel is the right strategy is to build a structure that's flexible. So reduce your fixed costs, make sure that you have variable geometry that despite all of the adaptiveness to your budget reality, that the free dollars that you have get allocated properly, that you really use opportunities. Some years it might be higher than the god-given percentage of 14%. I don't know where that came from, but frankly it could be 12% one year and then 18% the next.
So I think our approach is a more pragmatic, that says frankly, as long as you can realign your system to allow you the flexibility to go after opportunities, and if you have a good one, well, invest. If you don't have one, well, don't invest. So I think we have a more pragmatic, in-between if you will, approach. Sustain, but sustain without - sort of surgical cuts -do what you need to do from the fundamental design of 50% internal, 50% external, 50% biologics, 50% small molecules. Diversify your approach in a flexible way is probably our view. It's not just my view by the way. It's shared across the stage here.
Yeah, I mean if the company's spending EUR5 billion year-over-year and cuts its budget in half, but nothing comes out of it, the company's still wasted EUR2.5 billion. So I think a lot of it is either a huge waste of money or it's fabulous value, but it's probably not somewhere in between. And that's where I think Elias's point is extremely important, about looking at fixed versus variable costs, and really trying to get the things right. But the problem is there's no correlation today between how much you spend and how successful you are in R&D.
Luisa Hector - Credit Suisse
Just to follow up on the guidance, so you've given the range as if there were generics tomorrow, but if there were no generics does that get you to the top end of your range minus five - no generics by the end of the year?
And then Hanspeter, just to follow up on emerging markets, if we look specifically at the fourth quarter, the growth in pharma was just 6% and there seems to be weakness in Africa - Plavix and Taxotere. Is there any color you can give us on those three specifically?
And maybe for Jerome, just a quick question on the cost savings. Is it fair to assume that around half will be reinvested?
On the question on guidance, I mean yes, if we have given a range, because we don't know precisely when either the generic of Taxotere or the second generic of Lovenox are going to come into the market, because at the end of the day, everybody was convinced, even ourselves, that by before year end 2010 there would be a generic of Taxotere on the market in the U.S. So the basic reason why we have given this range is exactly what you said, meaning that if everything goes right, we will be on the high side of the range.
Maybe I can just go on to the cost savings. There are two questions. In the cost savings we measure on the constant [parameter] basis. So we have taken the 2008 structure of Sanofi Aventis. We have put acquisition aside and accretions we did in 2009 and 2010, and we measure the overall cost comparing to '08 to '11 before tax. And this is where we generate the EUR2 billion of savings.
In other terms, if I were to just measure all what we have cut, without taking into account what we have invested, the savings would be much more than that. Now we have invested, either in emerging markets - if you think about the commercial investment in emerging markets, we are increasing it by, let's say, EUR200 million every year? Roughly? And we have also supported more [inaudible]. We have launched Multaq. We've launched Jevtana. We're on the verge of launching BGM. So all this is investment.
But the EUR2 billion is from 2008 to 2011 on a constant [parameter] basis, so before the impact of acquisition and you compare the overall cost, whether it is op ex or evolution of cost of goods.
I think when you look at the guidance, Jerome confirmed if there were no generics on Taxotere and Lovenox it's minus five. We say why minus five? Well, remember that just the drop because of H1N1 is 2-3 points already, plus you've got the whole Lovenox effect even if there's not a second generic. Remember, they only came in halfway through, so you've got a whole year's effect of Lovenox in 2011. Plus you've got Ambien CR, and you've got Xyzal. You've got U.S. healthcare reform. And then you've got some reinvestment going on. So pretty much, you could probably get to between flat and a couple percent if you ignored H1N1 and you ignored - but you also have Taxotere in Europe, where there clearly will be generics, so there is a cumulative effect. So that's how we roughly, I mean in broad numbers, obviously get to some of that. And I think you had a question for Hanspeter.
In the emerging markets there's really nothing but some seasonality. I just was asking Olivier. He tells me that there was a lack of season for example in Russia. So I also can indicate that we have a very strong start in 2011. Evidently we already closed the first month. So what you see is purely seasonal and there is no change in trend at all. I have to admit we have to see what happens in Africa due to the events in Tunisia, which we are a market-leading company, and in Egypt, where I think we are number two or number three. If this has an impact. We will see something I believe in Australia due to the flood. December and January was very dead, but [inaudible] not going to our terminology of emerging markets. So there is nothing but a little bit of technical.
We also had the - in Brazil we shipped, we went to direct shipping -
What I said before, we had a change in the distribution system and in the tech system in Brazil. On the other side, Taxotere doesn't play any significant role in those markets at all.
Alexandra Hauber - JP Morgan
Jerome, there was an announcement this morning that you gave the shareholders an election to proceed with dividends in shares instead of cash. I just wondered where the shares are coming from. Are you going to issue new shares? Or do you have treasury shares that you're going to use to recycle for that?
Second question is for Hanspeter. Could you give us an idea what kind of pricing impact you expect in 2011, and ideally separately for the pharma business and for your generics divisions?
And the third question I had for Olivier, for vaccines, you said your key focus will be to grow the emerging market business. Do you have any vaccines in your existing portfolio? I know you have some candidates from Shantha, which will allow you to capture additional volume through innovative pricing modules?
On your question, it's an option given to shareholders. So it's a free option let's say. Clearly you don't know - I cannot know, what shareholders will decide. It's common practice in the CAC 40 companies, and we decided to do that also to give a chance to whoever shareholder may be. [inaudible] shareholders to reinvest in the company. Now, is it going to create new shares? Mechanically, yes. Legally, yes. But on the other hand, we can continue to monitor the number of our outstanding shares by doing some share buyback, as we did in 2010, where because of stock options there was some new shares which were created, and we brought back the shares in order to maintain the number of our outstanding shares. So I tend to consider there is one thing which is I would say a dividend policy. Another thing, which is a [inaudible] of the capital structure on the number of outstanding shares, and here again, depending upon - clearly today we are more thinking about looking at possible acquisitions or using our cash for these acquisitions, but still, we can clearly monitor the number of outstanding shares.
On pricing, I think we are active in about 18 markets, and if I look to 80 budgets, we have one form where we see the volume growth and the price growth. I would say in less than ten I see a positive development on price. In all the remaining 70 I see a negative, and this will not change in 2011 for reasons we all know. So I believe the more difficult question is what happens in the volume column. And of course, classical example, in China the volume column for the time being and I believe also in 2011, will be largely positive because there is more and more access, there is more and more reimbursement. There is more and more kind of system. Now I admit, remaining in the example as more and more [inaudible] are given access there will be more and more pressure on the price. But as I've said before, I believe that in countries like Brazil, Russia, and China, the volume side will for years to come overpass the growing negative effect on the price column in my budget form, and we will continue to make, of course, good business. But in the historical markets as the U.S. and evidently Europe, there is not a single one where we would have a positive effect on price in our anticipations and unfortunately this will continue and we have to continue to adapt.
On the emerging markets, if we look a little bit where the incremental volume growth could come from our existing portfolio, I'm not looking to the potential opportunity of Shantha, which is of course big, we see some opportunities on Menactra. [inaudible] and with the early development in some part of the emerging markets and more specifically in the Middle East area as well as in Latin America. So in the long run, could we grow faster in terms of volume for Menactra. Second, we have opportunities evidently with Pentaxim. We have very strong growth, over 40%. At some point we will move to [inaudible], which will be a big opportunity as well. On the last front, evidently on flu we have a very significant market share in the emerging market, above 70%. You know that we have recently built two plants, one in Mexico and one in China that puts us in a situation in terms of market access that is very favorable. So in the short-term, before we get access to the Shantha portfolio, and this could be the main driver, without forgetting Adacel, which continues to expand in the international region.
Audience Member - Citi
Just three questions. Jerome, on the dividend, I was surprised that you only committed to a stable dividend given the large opportunity for working capital restructuring and the significant growth in free cash flow that you've generated this year and you should continue to do.
On vaccine margins, they seem to have progressed at the EBIT level every year for the last two years. Cleary there's some H1N1 impact in there, but is that sustainable going forward? Could you give us some idea of a level?
And then just finally, on the cost restructuring, clearly you have some more challenges to deal with next year. Should we continue to assume that you push those restructuring levels further going forward?
On your question about dividends, if I speak historically, we have tried to have a dividend policy which is consistent with our strategy. And our strategy is to resume growth and to resume growth with more sustainable growth and [inaudible]. So all the idea around dividends is to have a dividend payment or dividend trend which is consistent with that, i.e. the ability to sustain a regular growth of dividends, not having any short-term movement in terms of the evolution of the dividend more looking medium term. This is really why we saw that, yes, short-term you could decide to give back more to shareholders. But on the other hand we clearly want to commit to continue to grow the dividend even if the profit is going to decrease, for instance, next year. So that's what I would say on dividends.
On the cost cutting, A) let's reach the EUR2 billion. There's still 11 months ahead of us. You could say, well, this is behind us, but this is still to be done. B) There are some actions which have been undertaken which will deliver extra savings beyond 2011 already. Typically all what has been launched in terms of industrial reorganization as usual takes some time to deliver its contribution to improved profitability or productivity just because it takes you 2 to 3 years to go strong for the projects and close the [inaudible] of the corresponding facilities. So we know from what [inaudible] has launched that there will be some extra hundreds of savings in the cost of goods in the year 2012-2013.
We have just recruited now, less than one year ago, a global head for purchasing and clearly we have not driven all what we can get on taking advantage of our purchase power, on the renegotiating as well as streamlining the numbers of suppliers and the number of type of sources we use. So there is still some more to come from that. And not to speak about any further reorganization, but here I would say that all what we have guided is really to try to do it to the extent possible once for all. So clearly what we've done in the U.S. was really to put behind us all the restructuring and to a large extent this is now ongoing in Europe.
So I would say that yes, there is more potential. The update we plan to do - in the middle of the year would typically be the right time to give you some revised figures both in terms of cost cutting as well as long-term outlook for the company.
And what about the EBIT margin on vaccines? I mean, there was clearly a benefit from H1N1 because you've got essentially a cost with no marketing outlay against that.
So there has been an improvement in the - I would answer this way, the gross margin in 2011, as compared to 2010 and even more 2009, has increased, has improved, and this is largely linked to the H1N1. And you could say while you've sold as many doses of H1N1 in 2011 as compared to 2009, but in 2009 we had some extra costs linked to the use of the facilities and also some R&D, or clinical spending or clinical costs. So yes, in gross margin I think that there is something in the range of 2% that may lose, or go back let's say, to the previous situation in 2011 as compared to 2010 as a result of no H1N1 sales.
And I think just on the cost reduction, I can tell you when we introduced a EUR2 billion program two years ago that nobody internally thought we could do this. And I think the company's come a huge, long way on this. But the first part of it has also been the hardest part in terms of actually doing the restructuring, getting through social plans and the like. But pharmaceutical companies have never really been run to the last penny, and so there are lots of reserves in the company. It's purchasing, it's package redesign ahead of manufacturing. As I said, 30% of our SKUs in production account for 1% of sales. So there are a number of opportunities there. So we're not going to stop at the EUR2 billion. But it's probably going to be around some of these, you know, let's be really a lot more sensible about how we spend money.
Now, in terms of the dividend, also I think we're clearly looking at having a sensible level of debt on the balance sheet. So we've seen that we reimbursed the first EUR9 billion of transactions pretty fast. If we actually do Genzyme, and that's going to put EUR10 billion of debt on the balance sheet, as that gets reimbursed then you're also going to make, at any time, a decision on capital allocation. Do you actually do more acquisitions, or at that point do you increase dividend, or do you do share buyback? You know, the share buybacks in my view really only make sense if you have a company that's got a stable outlook. If you have a company, and today most, not all, but most companies are in a perspective of a declining asset base. So the buyback probably is a waste of money. But if you have a stable outlook, then that might actually start to look like it has value. So we're going to try to keep a sensible level of debt on the balance sheet. Now, exactly how that gets used is something that is a dialog between our board and shareholders and management.
Audience Member - Raymond James
Just one question. Just if we listen to you carefully, it looks like free cash flow could be a better metric than EPS or results. If we look at 2011, to what extent, according to what you know about working capital and what you're doing on cap ex, do you think that free cash flow could remain into the positive territory versus a minus 5% or 10% decrease in the results?
It's a difficult question. You have to look at it two ways. One is basically the cash flow you generate is very much linked to your profit in this industry, unless you improve your working capital or you spend less on cap ex. So I will say that we are going to continue to make efforts to reduce the working capital requirement for the company.
I would not like to commit today, in front of you, a [inaudible] figure, but I can tell you we have put in place an organization which is there to really try to capture any way to improve that, knowing nevertheless that as long as you expand your business in the emerging markets you tend to have delays of payments, which on average are higher than what we are used to. I say on average because I will say in a way, today, the ration of the receivables is somewhat longer in southern Europe than it is many emerging markets. Not to speak about countries where the habits are different, particularly Japan, a practice of the business.
Now on cap ex I think we could assume that the cap ex for 2011 should be in line with what we have in 2007.
One financial question please to Jerome. You made an interesting comment about the dividend, that you're committing to keeping it at least constant, but you would commit to continued growth as soon as you have visibility on some additional issues driving the growth beyond 2013. So I was just wondering what are these issues beyond obviously the outcome of Genzyme. And how confident are you that you're going to have the answers by the mid-year seminar?
And my second question is for Chris, relating to pricing and rare diseases. The space is attracting new entrants that might not have the same level of pricing discipline, nor in fact [as you get vocal] about it, and I was just wondering if you sort of run a stress test, if you had like one or two rare disease drugs launched at prices that are maybe a fraction of what we're currently seeing, how long do you think the current prices and margins of the existing drugs could probably be sustained?
You know, on dividend, it's a decision which you take year-on-year, and I think this is one decision which boards like to keep to [inaudible] decision year after year [inaudible], whether we like it or not. Once again, I think that we are entering into two years where the results will be more difficult for the reasons we all know, which are the patent expiries of some of our main products.
So the first idea, which is to say well, whatever happens on the profit - and we know what will happen on the profit in 2011, and you can all of you around this room make your own calculation on what will happen on the profit in 2012. I mean it's not rocket science. I think you can do that. And I mean all what I have given also today on the underlying of on the other businesses give you also ways to refine your calculations.
So I will say that by committing to at least maintain the dividend we clearly give an indication that we are committed to deliver shareholder value short-term. We still believe that really to deliver shareholder value that's in the medium term, and we are back to what Chris said on the [inaudible] of our seminar. It's all about how do we resume growth, and how do we give visibility and credibility, that our whole portfolio has changed dramatically, and that you can compute an underlying growth for several years beyond 2013, as many as possible. In that case, I think you would share with me that the multiple, we deserve a higher multiple than what we have today. And if you get that, what about dividends you give back to the shareholders, it is at much more value to shareholders. So all the focus is on how do we deliver the highest visibility on growth on 2013 onwards, I think we have to [inaudible].
The third thing, and maybe we'll have more visibility by mid-year, is having to have a clear overview on the acquisition of Genzyme, obviously by mid-year we'll know, and then it will also give us a better picture, not only on the trends, not only on the cost savings, but also on the cash flow available to accelerate, let's say, dividend payment or cash being sent back to shareholders, either through dividends or through share buybacks. Share buybacks being [inaudible] totally what Chris said, making sense only if you are not declining, decreasing, your set of assets.
So rare disease pricing. I get this question a lot. Is it a risk? Absolutely it's a risk. But is it a greater risk than anything else that we're doing? I'm not so sure about that. First is there's kind of a misnomer that the high prices are only in rare diseases. When you actually look at the top 20 most expensive drugs, you've got an awful lot of orphan diseases that are in cancer indications. So when you actually look at the price of an Avastin, for example, where you might be prolonging life for a number of months, versus a drug for Gaucher's disease where you can allow a child to grow up and live a normal adult life, you've got different value propositions on this.
When you look at the top 20 most expensive drugs, you're going to find that there's a mix of big companies and small companies, so I think the idea that big companies can't charge as much as small companies - it has to do with the value proposition, I think, today.
The interesting thing about rare diseases is you typically know whether the drug works or not. You put it in a patient and it works. If you think about how much money is spent in healthcare systems for treating people with drugs that don't necessarily work for everybody, that's a much bigger budget item for them in most cases. The whole global rare disease market is something like 1% of the total healthcare market. So there's a lot of headline numbers in it.
So to me we live with a lot of risks anyway. I mean, European price cuts, are they really going to pick off products that actually are helping children to grow up and lead normal lives? Or are they going to go out saying do we really need to be reimbursing Viagra, which happens in a number of markets? So you know, we can't discard any of that, and all of this is a balance, but I actually think that if you - in tomorrow's world, if you have a biomarker, you can define a population, you can show that the product works, and there's a clear value versus something else, then I think you know, people are going to be willing to pay for it. And that's as simple as it is.
Thanks Chris. That actually concludes our conference and webcast.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: email@example.com. Thank you!