Chris Viehbacher - CEO
Alexandra Hauber - JPMorgan
Sanofi (SNY) JPMorgan Global Healthcare Conference Call January 10, 2012 12:30 PM ET
Alexandra Hauber - JPMorgan
Ladies and gentlemen, we continue on our large cap pharma track this morning in this room. I'm Alexandra Hauber, European pharma analyst at JPMorgan and I'm very pleased now to introduce Chris Viehbacher, CEO of Sanofi.
Chris will give a 25 minute presentation in this room and then he will be available for your questions at the breakout session in the [Borja] room across the hall. Chris, the floor is yours.
Thank you, Alexandra. Good morning, everybody and I think we can still wish everybody a Happy New Year; on into the second week of the year. Just if I could, 2012 has been one of those years that’s been circled in red in Sanofi calendars now for at least five years. It’s of course, the year of the infamous patent cliff and one that obviously a number of companies in our industry are facing. Pretty much three years ago when I joined the company, my focus was all around 2012. And it wasn't really so much how were we going to compensate for the loss of sales, but really how were we going to transform the company so that we didn't go through this again.
I always am fond of saying that this is my fourth patent cliff in my career and my principle objective was to avoid a fifth. So how do you avoid the fifth patent cliff? Well, the first thing you've got to avoid are patents on small molecule assets. So what we decided to do was really invest in growth platforms that where we saw that there was competitive advantage or other barriers of entry that didn't protect, that protected the business beyond the patent.
So it doesn't mean that innovation is not a part of this. It doesn't mean that we won't have some small molecules in the business, but when too much of the business is on those patented small molecules, it creates a volatility and if you want to get a share price that has the same value as Coca-Cola, you have to have some degree of predictability and sustainability of sales and earnings. And it’s very hard to do that on a small molecule patented business alone. So we’ve identified businesses like vaccines where you’ve got clear barriers to entry in terms of capital expenditure and knowhow.
Consumer businesses, low government reimbursement clearly but also extremely long brand loyalty, we acquired a company in the US called Chattem. It had grown for over 140 years before we acquired it and it’s continued to grow obviously through the successful launch of Allegra in the OTC market. But that’s a type of a thing that we were trying to do.
So it wasn’t just a question of dealing with the patent cliff, but it was fundamentally changing the structure and the shape of the company and so that’s path that we have been on and 2012 really is that year when obviously PLAVIX goes in May of this year and AVAPRO goes in March of this year and we will lose a ELOXATIN somewhere in August.
But those are things that have been predicted for some time and it will certainly hurt to lose that cash flow, but I think 2012 was also that period of time where we start to look forward to a growth period that goes out to 2015 and beyond. So we first decided to this, not a lot of people believed it. I said, my god you have got one of the deepest and most concentrated patent cliffs in the industry, you can’t possibly compensate for that.
It was absolutely in the minds of everybody that we were going to have to do some big pharma merger to compensate for that. Well in fact these growth platforms have done the job. We had €7.6 billion in 2008. Sales for those products that were going to face patent expiry, so those are the Plavixs and the Taxoteres in US, Europe and Japan. They represented in 2008, 27% of the business.
Well we fast forward to 2011 and we see that that business has shrunk from €7.6 billion to about €3 billion. So we have lost €4.6 billion of sales in that interval, which is pretty significant and the good news though is that those businesses, although it’s still €3 billion only represent about 9% of sales.
They, of course, will never go completely to zero and it still means that €3 billion has to come out, but you know, we’ve got a big chunk of the patent cliff certainly as in terms of what's consolidated in our sales behind us. So what's happened on the growth platforms? Well in the same timeframe when we identified these platforms, they were about 43% of our business or roughly €11.8 billion
Now we fast forward again to 2011 and you see that those businesses have largely doubled to €22 billion and they now represent 66% of our business. So on the left we lost €4.6 and we gained 10.
Now, I am not going to tell you that the 10 was all organic. But 4 was acquired and 6 was organic. So, even just the organic piece of €6 billion still outpaced the losses of the €4.6 billion. So, we’ve compensated, but we’ve also changed the shape of the business. So all of that gives us an awful lot of confidence for the rest of the year and I am not going to go, obviously we’re going to give fourth quarter earnings results in early February.
But we’ve guided to minus 2 to minus 5% versus 2010 at constant exchange rates and that’s still where we are today. Here you can see again this structural change in the business. You know in 2008 every bit of communication from the company was around the top 15 products, Plavix, Plavix, Lantus, and Eloxatin and all of that and 61% of the business.
Today you can see the importance of those growth platforms and they have been growing. The emerging markets is the real core strength of Sanofi, nobody has the position in the emerging markets like Sanofi and that’s for historic reasons. European companies had to leave their home market earlier, so it was natural.
Companies like Hoechst in Germany had built up positions for decades in Latin America, had created an affiliate in 1956 in India. Sanofi was the first foreign company into China in 1982 and as a result we’ve got manufacturing and we’ve got a product portfolio that is adapted to those markets. And that’s why we are the leaders in this and that’s why it’s not going to be that easy for anybody to catch us up because if we don’t have the manufacturing, if we don’t have the portfolio, if you don’t have the local knowledge, if you haven’t built a bench of management expertise in those countries, it’s not quite that easy to just go out and say I want to hire another 2000 reps in China, let me put a add in newspaper.
You have to have an organization that is capable of identifying people, training them and actually operating a field force throughout a vast country like China and you’ve seen in the three years that we have increased that business by one and half times. Diabetes is probably the most interesting therapeutic category in the entire pharmaceutical space. Over 300 million people have diabetes and all of the megatrends are driving to higher incidents of that disease. As you have urbanization in the emerging markets when we see the rising incidence of obesity, as you see the changes in all of our lifestyles, this is driving up unfortunately Type 2 diabetes.
My personal view is that we are never going to get healthcare costs either under control, unless we actually manage this better and there is an awful lot that could be done on prevention. But even at that, there's a huge marketplace and its largely at least on the insulin side largely really dominated by two players.
So an extremely interesting space. We've tried to transform that business from just being a LANTUS seller to actually a diabetes company and I think we've had significant success in that. Vaccines in an era of extremely cost-sensitive payers, investing in prevention is huge. The fact that we have with Shanta in India probably the only, significant, manufacturing facility using Western quality standards at Indian costs. Means that this is also a strategic platform for us for vaccines.
The best cohort every year is around 110 million babies. Less than 10 million of those are actually in US, Europe and Japan. So you've got a birth cohort out there, if you can access it of a 100 million babies per year and as the leading manufacturer of pediatric vaccines there is a huge opportunity for us.
Consumer healthcare I like because again when you look at the economic crisis you want to be careful about how much business you have in government reimbursement. The consumer isn't affected by this. Brand loyalty doesn't mean you don't have competition. You have private label and the like. But this is an opportunity also for us to take some of our previously prescription brands OTC and Allegra was clearly a fantastic success here in the United States in 2011.
In animal health I like is a business just because they are seven billion people on the planet today and they all need to be fed. Production, animal health and quality is extremely important to the food chain and what you also see is a although the pet’s market today is dominated by Europe and U.S., what you actually see as a emerging middle classes grow, there is actually growing of pet segment as well. And again a lot less sensitivity to generics. There are certainly generics. We have generics for the key brand front line but it is not the loose 90% of your business in two month’s type of generic erosion that we also see in pharma. And of course there are innovative products and you will see a little bit more about that in a minute.
So all of that just says, we have dramatically shifted not only the nature of the business but the size of the business and the diversification of the business. And so as we look out and say, what happens post the cliff. This is what we call the mission guy to Sanofi. So three star growths means that is double-digit. Two star is high-single-digit and others are low to mid single digits.
Emerging markets as I said is the biggest opportunity. New Genzyme which is rare disease and multiple sclerosis, we also expect to grow at double-digits. Obviously we have a huge opportunity with the launch of Lemtrada and Aubagio, so two major new medicines in the multiple sclerosis franchise.
Our manufacturing operations in Genzyme are on track and we are very confident about being able to come back to supply. So those are going to be two major growth drivers, vaccines and consumer healthcare and diabetes, equally growing at high single-digits.
Animal health under its current configuration low single-digit and that really is until we get better at developing this business in emerging markets and increase our portfolio in production animals.
Most people when they think about Sanofi, do not think about pipeline and in fact we actually have filed in 2011, five new products and six will be Lemtrada filed in 2012.
I haven’t been able to find another example going back 20 years when a single company has filed this many new molecular entities with regulator agencies in a nine-month period. And I think the reason that we’ve been able to that is when three years ago when we looked at the development portfolio, we decided that we’re going to be extremely vigorous. We did what, we call the equivalent of the bank’s stress test on our portfolio and we chucked our 40% of the portfolio.
Nobody ever chucked 40% of their development portfolio before. But what we kept has survived. So what I am particularly feeling good about is that I think we were sufficiently rigorous in figuring out which things to keep and which not to keep and that argues well going forward, because the biggest value that we can create in R&D is making sure we have rigor and we’re only developing high quality assets. I wont go through all them here but obviously we have a significant opportunity with Kynamro, Mipomersen and Lemtrada, which we achieved with Genzyme. Lyxumia is our GLP-1 which we will launch later this year. Zaltrap is a VEGF trap that we have from our partner Regeneron. Visamerin is not on people's radar screens, but. Actually VTE is significantly higher in patients undergoing chemotherapy and there is no product today that is indicated for VTE prevention in chemo-treated patients. And of course, Aubagio comes out of Sanofi’s shop but this is an oral agent for multiple sclerosis. So again if you got an Aubagio NLM product, we’ve an opportunity to have a well- tolerated oral therapy for earlier stage therapy and then we have Lemtrada, which I think is going to really be able to demonstrate actually the best-in-class efficacy in fact it is the better than anything that has ever been demonstrated in the clinical trial so far.
Now one of the things about all the transformation is of course you loose these block busters and the block busters are very significantly cash generative and profitable. So in order to compensate for that we actually have to make sure we are taking cost out of business and we announced a cost reduction program of $2 billion Euros in 2009. This was a company that never really announced anything on cost reduction. So it wasn’t actually that hard to achieve. We originally said we would achieve it in four years, in fact we have been able to do it in two.
With Genzyme we have been able to now completely review our cost structure, we will get obviously significant savings out of that we have already indicated 700 million of savings at least out the Genzyme transaction but beyond that this gave us an opportunity to redesign our business. We put in place we shared support function in North America. We have been able to get synergies out of our research organization.
So now being a leader in life sciences in Cambridge, Massachusetts for example, meant that we can look at all our research network and we concluded for example, that we didn’t our research facility in Bridgewater, New Jersey. This a huge facility a 112 acres, almost a 1000 people on the site and we have been able to get synergies because we have Genzyme. So not all of the synergies that we are achieving are coming out of Genzyme.
Beyond that no pharma company has really been managed like most other businesses and so they continue to be significant cost reduction. So beyond the $700 million of Genzyme savings, we also planning on getting another including Genzyme savings, another €2 billion out between now and 2015. Now just as we said last time we will get €2 billion out by 2013 and we did it faster. I think you can be pretty confident and we are not going to wait for 2015 either to get the €2 billion of savings out.
So you know we will see some change in the margin clearly this year back in September; we guided to 2012 as having at least a 31% margin after we lose Plavix and Avapro in particular, but we also believe that we can actually rebound again from that. That will be, I mean the impact of Plavix and Avapro short term is just too big to compensate in one year, but we have said R&D, I don't believe that R&D should be linked to sales and so we would expect that the roughly €5 billion level that that will be flat to declining.
The SG&A ratio improves because a lot of the businesses that we have do not require so much SG&A; vaccines for example is a business like that. The rare disease business, the multiple sclerosis business and of course this is a company that generates very significant cash flow.
So what you do with the cash flow? Well, there is four things you can do with it, you can spend them on working capital, on CapEx, you can pay back your debt, you can go buy some things or you can give it back to shareholders. And the reality of course is that we will do all of those things.
Our belief is that we should have no less than €10 billion of net debt on the balance sheet, that's nothing racy that corresponds to roughly one year of EBITDA for the company. But we also believe that especially in today's economic climate that keeping an investment grade credit rating is important. That was one of the reasons that we did share option on the dividends. We don't expect that to be repeated, but equally we were able to fund the Genzyme transaction very cheaply and we actually were able to avoid downgrades and in fact Fitch has actually just given us an upgrade to a stable outlook more recently.
So even after we acquired Genzyme, we are pretty quickly back to that €10 billion. We will manage our capital expenditures carefully. We look at what’s the best way to return money to shareholders, any study that you want to do, you can go back 30 years; BCG did a study, that was on a five year basis. Companies that offer high dividend policy outperform those who do buybacks overtime. It doesn’t mean never going to do buyback and in fact bought roughly – buyback roughly €1 billion of shares in 2011.
We did that largely to soft-up some of the extra dilution that came out of that share dividend and at one point we were actually able to buyback the shares at a lower price than that we have done, had issued them at the time of the dividend. But in general, our preference is to have an aggressive dividend policy and so we will raise our payout level from 35% currently to about 50% with the payment of 2013 dividend in May-June of 2014.
So this comes to the score card. This is how we evaluate our business. This is how our investors are looking at it. We have forecast sales growth coming out of the cliff of on average of 5% at least between 2012 and 2015. We did that, we didn’t really realize it, but having seen what’s come out since, that would probably put us at up amongst the top performing companies in the industry if we can achieve the 5%.
We talked about the importance of the diversification and the barriers to entry, this low small molecule patent exposure in mature markets of 6%, I think is the lowest anywhere in the industry. Part of that is because we haven’t launched an awful a lot of new products in the last five years and part of that is obviously the choices that we’ve made on the growth platforms.
The emerging markets we’ve talked about, they grow to roughly 40% of our total turnover by 2015. And so we still have the biggest share of our sales in emerging markets. Again, for a company that’s not known for R&D, we have 19 potential new product launches between now and 2015. So Elias Zerhouni likes to talk about the short and medium and the long-term in R&D.
Short-term, we actually have a late-stage pipeline that stands up with pretty much anybody in the industry on average. Medium-term, you know, we want to get these new products out. So we have six products to launch and another 13 that we’re getting ready to launch in 2015 and going forward, we’ve changed our research model. You know, there is not that many new products coming out of big pharma research facilities and yet we have these giant facilities. So our objective is to move from roughly 70% internal spend to 50%.
We want to go work with where we thing the best science is occurring and with the people who are doing the best science. In this morning, for example we announced the deal with Third Rock Venture Capital, where we're actually investing on an equity basis in a start-up biotech. This is certainly a new experience for Sanofi; we believe in the science, we believe in Greg Verdine who is doing that. We have a number of competencies on natural products that we can bring.
So we want to create a venture fund. And I don’t really believe in that; personally I think if our investors want to invest in that, they can do it themselves. But we will invest and bring some of our own people to work with people outside the company in exciting new areas and so I think you’re going to be seeing Sanofi investing much earlier. I think you have to take actually a little bit more risk on the research side.
I think you want to de-risk your business in development, but I think we can potentially too risk-adverse at the early stage and this comes at a time it has never been more difficult to actually get a new idea funded. So I think there is an opportunity for a company like Sanofi to step-in, and work with partners and create a new collaborative paradigm on research.
So I am going to close with that; I think overall, you know we are prepared to take a little bit more risk on research. The overall risk profile of the company is clearly lower. We have got leading positions in sustainable growth platforms like vaccines, like emerging markets, like diabetes, like consumer health, like animal health.
I think on the acquisitions, we got a good track record of execution. I think the Genzyme integration was not and easy job to do, completely different cultures. When I stood up in front of you this time last year, we were still actually in the middle of that deal and yet actually I think today when I look at it, we have maintained all of the key people that we needed in research and development, in commercial and manufacturing. We are still a little different and I think that’s a good think. I think Genzyme is having a big impact on the Sanofi culture as well, and we spend an awful lot of time on it and I think Sanofi has actually got a track record on this.
So with that, I think we did a awful lot in 2011, it was an extraordinarily busy year. Doing the Genzyme transaction, don’t forget Merial, we have had to integrate that. At the same time we are buying a consumer company in China and significantly investing in emerging markets, significantly restructuring our research operations, introducing a significant new cost reduction program.
So all of that I think put Sanofi in an extremely good position and is poised to enter now a growth phase coming out of the cliff.
With that, I’ll come join you for perhaps some Q&A.