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Elias Zerhouni - President, Global R&D

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Steve Scala - Cowen and Company

Sanofi (SNY) Cowen Group Health Care Conference Call March 6, 2012 6:00 AM ET

Steve Scala - Cowen and Company

Good morning and I'd like welcome Sanofi to the Cowen Conference. Representing the company is Elias Zerhouni, who is the President of the Global R&D effort. I'd like to point out that in the Cowen pipeline work, Sanofi has one of the top five most expansive pipelines in the industry and perhaps the most unique, with such a wonderful blend of small and large molecules and vaccines.

So, to here to tell us all about that phenomenal pipeline is Dr. Zerhouni, thank you.

Elias Zerhouni

Steve, thank you. Thank you, Steve. What I'd like to do is really give you first an overview about R&D within the context of the entire group story and what is really happening at Sanofi. I think before you can understand what we're trying to do in R&D, you have to place it in the context of the Viehbacher Sanofi strategy of what has been put together since 2009, which was, fundamentally, how do you lean a company that was really a blockbuster dependent with patented products from a patent cliff that is in front of you and the idea was very simple, I'm not going to go over it again, try to focus on growth platforms where you can have predictable growth, that you can manage in some ways by executing properly, focusing on the emerging markets, on diabetes and you know that story. I'm not going to go into that, that's not my place to do that, but frankly the idea was, let's make sure that we have reliable ability to sustain the company through the patent cliffs, at the same time give leading room for R&D to restructure itself and basically kick the engines of R&D again.

And I think when you look at the sales, obviously what you're seeing is that the growth platforms have performed and when you look at the incremental sales they have gone up, even when we look at Genzyme at a 5.3% constant exchange rates. Genzyme contributes 40% of the $10 billion growth since 2008 due to growth platform. So when we you look at that, you will realize that our dependency on patented products have come down. If you look at the composite contribution of growth platforms, they went for 42% in 2008 to 65% in 2011 and conversely our dependency on the key [generic] side products has gone down from €7.5 million to €3.15 million and you know in 2012 we are seeing the end of the patent cliff with Plavix and Avapro coming off patent as well.

So I think the strategy has functioned and if you look at the earning per share, it did not collapse as many people predicted because the strategy worked. On the other hand, sustainability of the strategy is going to depend on continuous investment in the growth platforms, but R&D performance as well. So when you look at our strategy, it is very, very clear that the one of the pillar is going to be increase in innovation and R&D, pursuing the external growth opportunities as we have done over the past three years including, for example Genzyme, the Genzyme acquisition, but many others, in other markets especially the emerging markets where we have had a significant success and we passed €10 billion sales last year. We are the first company to do that.

So it's still necessary for us to continue the strategy and adapt the structure for future challenges and opportunities. So how do you deliver sustainable growth and have a consistent performance is really the strategy, part of it is the increase in innovation and R&D. So what have we done there?

Well the first thing that was quite obvious to me when I started advising Chris before I became President of Global R&D is that when you maybe look at R&D organizations what you see is what was decided 10 years ago before, seven years before, five years before. And when you look at the portfolio at Sanofi, it was very clear that it wouldn’t make it on its own.

So clearly we decided to look at the portfolio as it was and define our strategy in three buckets. One is what I call the short term. You have that you have, you need to absolutely sustain what you need to do. You need to execute and you need to really make sure that what gaps you have you need to fill. And that was really what we did the first year when we pruned the development portfolio, focused on opportunities, looked at alliances, looked at things that we knew had a prospect to basically hit if you will the pipeline in 2011, 2012, all the way to 2015.

The clear mid term requirement is that you really have to have a strategy that you can execute and therefore you need to have an engine of R&D that you can count on and we realized that an efficient R&D organization needed to have synergies way beyond what was done before. And that's why the last year I took the decision to close sites, consolidate for example research and early development in Boston and exploit the economies of scale across the company and improve the R&D cost structure.

Typically Pharma R&D has very high fixed internal cost structure, low external costs. So what we have been doing is reducing our headcount, reducing our fixed costs and increasing our external spend. And when you look at our performance I think you will notice that it's actually going into that direction. The second is the market has changed, we believe that the thinking of the past. the strategies of the past won't work. You need to execute on these projects as you have them obviously, but you need to select those that provide the maximum medical value and I will tell you what we have in our portfolio.

But I think you also need to prioritize what’s earlier upstream according to a certain metric that is not aiming for the current market, but what is the market likely to be five or 10 years from now and in that context we have developed a strategy that really focuses on two things. One, we are going to focus on differential medical value for the projects that we select and the second is that internally in our process of research and development, we are going to focus on our ability to prove as early as possible in the history of our project its translatability for human disease.

And that is what many, many companies and academic centers don't do very well. This is something that is lacking in my opinion, this is something that we could do with and using emerging methodologies that are extremely powerful, that we have not done as much as we should. So those are the two things that are going to guide our early stage of prioritization.

And the third is no company, I would even say no country, no institution is capable in my view of comprehending the biology, the complexity of biology and human disease in particular and to even have the thinking that all of the good ideas are internally located is I think preposterous, everybody understands that. So new models of external innovation are going to be key, the key thing in science is that when you look at a scientific project, it doesn’t last 30 years.

I mean you will know in 4 or 5 years whether it has any possibilities of success. So having a very high rate of evaluation, launching projects but also terminating projects internally and externally or in combination is going to be key to how we run our R&D. And we have made some significant changes in that regard.

For example we have just created a company called Warp Drive where in fact some skill sets were brought in by a Harvard professor clearly bringing the ability for us to exploit our natural product expertise which we have had for 50 years to a level that is unprecedented. And that's why we very created Warp Drive. We didn’t import the knowhow. We said no, let's keep the knowhow where it is best and let's combine it with our own internal capabilities.

So those are the three pillars if you will to think about. Now, as I said my goal was to make sure that as we think of the long term, we do not forget the short term and we focus our energy on executing on what we have. And so last year I have to tell you, it was probably the busiest year of my career, in my professional life because we decided to absolutely make the organization accountable for filings, what we had in the late stage, complete the Phase III, do the filings and we had five filings which are listed here and one coming in the second quarter, Lemtrada.

And I think what's really remarkable here is that, these have a synergistic effect with some of the platforms that we already have. So if you look at Lemtrada and Aubagio, the top two, that’s the beginning of an MS franchise we had before you know Copaxone and so we have certain knowledge there and we think that's the place. Lyxumia, absolutely critical for our growth platform for diabetes. Zaltrap, we'll talk about first androgenic agent that addresses multiple targets and Visamerin again in cancer. This is a compound that can address the problem of Deep Venous Thrombosis and I will talk to you about the next wave of late stage project.

So what I wanted was to make sure that our R&D organization not only was going through its paces in restructuring but I wanted development to be absolutely outstanding in performing, why we have the leisure, now that we have a better prospects of growth across multiple platforms, the ability to change the organization in the deeper way than you would have if you been prepped for results.

And so I am going to just go over these, so you understand. So first we have decided to combine our multiple sclerosis access into Genzyme. So Genzyme is going to have both Aubagio, an oral agents that is taken once a day and Lemtrada, which is a very unique compound in my view and we will talk about it. But the reason we think is important is because when you look at MS patients, clearly all agents are going to be a key player, a key factor especially the early stages of the disease or limited stages of the disease where convenience is more important and safety is more important. And then Lemtrada is going to be more important because of its unusual efficacy at the other end of the spectrum where you really need to stop the disease because the patient is going through an aggravation, through a severe highly active form of disease.

So the spectral approach is really what we are trying to build here. Now, why do we think it’s possible to see that? First, I think Lemtrada is unique. It has a unique mode of action. It has a unique annual dosing. It is superior in efficacy in Phase III versus Rebif. The safety I think is manageable. I think when you look at the issues of safety, they all are related to basically autoimmunity. Sometimes when you look at the efficacy on the both CARE-MS I and CARE-MS II, it’s very clear that it has a relapse reduction that is quite remarkable and in addition when patients have been treated, you get actually a sustained accumulation of disability reduction at six months, which is quite remarkable in those patients that had been treated before. We don’t see that at the statistic significant level in treatments naive populations, and not many reasons why that could be.

So when you look at Lemtrada, what you’re really looking at is a immunomodulator that acts at the beginning of one year, you get five doses and you don’t treat the patient. You do a catch-up dosing a year later and then you don’t treat again. You can re-treat later if there is a rebound of the particular lineage in the immune population that you want to effect. So it is a immunomodulator that has a very, very convenient annual dosing with an efficacy that’s remarkable. We will see what the story says. It’s supposed to be filed in the second quarter this year.

Aubagio basically, is the value proposition. It’s a once daily, it has an efficacy on both relapsed rates and disability progression, at 14 milligrams. It’s not superior to Rebif, it’s not [itinerant], but it has a lower rate of discontinuation. So patients seem to tolerate it better and the safety profile is well-known because we have this drug and development for over 10 years. So when you look at it, it’s certainly something that is an option to be considered in the treatment of these patients.

The next platform is diabetes and it’s clear that in the long run, we’re seeing very nice growth rates in our diabetes franchise. It’s very clear that diabetes is going to grow in importance of those in public health. It is a major bet of Sanofi. We want to remain in the top category and this so, we’re looking at a strategy, where we complete the portfolio of products we have to satisfy to the maximum extent possible the needs of the patient.

NO, people compare products to products and I really think that is important, but I think what is also important is to not miss the point that in diabetes today, the compliance rate is low, the success rate in maintaining patience below 7% A1c is low and I think the key here is going to be, can you maintain a population of diabetic patients for the longest time possible within the range that is preventing the co-morbidities in the complications in the long run. So we thought it was very important to have a GLP-1 agonist, so we developed lixisenatide. The one thing that is really important by this is that it has a unique post-prandial effect and it is simple to titrate. So for the patients it is ten or twenty very direct, there is no complication in combining it with anything else. You can use it by itself.

It has a very safe profile. low risk of hypoglycemic event and it is quite important in terms of controlling, both the post-prandial effect but also in the future, as we see the evolution of this one, because it has an effect on weight loss as opposed to insulin that has weight gain, we think that we can actually transit these patients into a combination later on, where in fact you can maintain them and we have shown that through the trials at below 7%, while not incurring the risk of higher titration in insulin, which is what the Lyxumia product is, that is that is going to be launched in Phase III at the beginning of 2013. So it is part of the spectrum of what we are working for diabetes.

Now, if you look at basal insulin, you really need to have to understand why it is important to continue to maintain basal insulin as part of the regimen, because if you look at the world today of eight million patients on basal insulin, about half of them are in Lantus and half of them are other basal insulins. But when you see them, how many of them are really controlled with A1c is below 7%, only half of them are controlled. Why is that?

When you really think about it, the reason is because patients are typically under-dosed with insulin across the world, because hypoglycemia is the danger that physicians are really worried about. So when your physician, looking at managing a patient with diabetes, what you do is you titrate to the peaks, you don't titrate to the base, because you want to avoid hypoglycemia during the peaks and so one of the holy grail of research has always been to look for basal insulins that have a lower peak. So when you look at this, you realize that you can control that by combining the GLP-1 agonist because it has a post-prandial effect that does not associate with a high risk of hypoglycemia and so the two together get you to a much higher percentage of patients that will fall within the, less than 7% A1c recommendation. This is what we hope to do with the combination of products.

Likewise when you look at basal insulin over time you realize that as you imagine patients are going to need different doses, you need to titrate, obviously doses can be quite important for some patients but more importantly the same effect is needed, In other words, you need to have a more predictable pharmacokinetic, so you can bring the patient closer to optimal insulin therapy. So you can do it by combining with the GLP-1, which has the advantage of controlling weight and controlling the post-prandial effect, which is what our GLP-1 is supposed to do and therefore gives you a chance to titrate better. So the same thing is true here where you are really trying to get a better pharmacokinetic, so you can titrate better and this is what the new glargine formulation provides because of the biophysics of having more molecules, which is really what this does. You can pack more molecules of insulin of Lantus, in a smaller physical space because of crystallization breakthroughs we made and that gives you a unique, very flat profile, over lower injection volume for a slightly longer period of time.

So we are trying this first in patients who needed the most and that is the high dose insulin users. So, in that category of patients we can actually achieve better results. So that’s the story on diabetes.

So we have an MS franchise or building a diabetes franchise, continuing to reinforce it, what about oncology. As, you know, oncology is one of the main space of Sanofi with Taxotere, Jevtana and amoxapine but those are coming through an end of cycle. So we are really working very hard in the redeveloping our portfolio of oncology. First one is we filed last year is Zaltrap, which is in partnership with Regeneron. It’s a novel VEGF trap that acts on multiple angiogenic targets and it’s very important to say that because as you act on all of the effects, and as you have seen from the latest studies, it is clear that treating through progression is going to be very important in managing these patients.

In the past you treated until progression occurred, then you said, okay. If progression occur, therefore anti-angiogenic agents are no longer useful. What really has become obvious is that in fact if you treat two progressions, you prevent relapse for a much longer period of time. But to do that, you really need to act on all of the components of the angiogenic cascade and so we’re really very, very hopeful that this particular product will expand as it is now in finding for metastatic colorectal cancer.

On the right side, one of the things we try to do again, same idea, is to try to provide solutions to clinical problems that have very significant impact on the outcome of the treatment and sometimes that does not mean an anti-cancer agent, but managing a complication.

One of the most common complications oncologists will tell you about this is when they start chemotherapy, especially in patients with solid tumors of the chest or abdomen, the risk of deep venous thrombosis is quite significant and therefore there has been a long search for something that would prevent that and the Visamerin the first ultra-low molecular weight heparin that has been shown in Phase III without a major impact on bleeding to reduce the incidence of VTE is these patients and it’s very consistent across. So again this one has been filed and we’ll see what the health authorities tell us about it.

One of the things that I also tried to do is to be consistent in terms of making sure that whatever we do, we could have synergies between the different parts of our portfolio. If you look at our diabetes portfolio, it’s important to understand that in diabetes as the disease progresses, complications that are cardiovascular related and the complications that are renal disease or retinal disease becomes very important and very dominant. And one of the things we realized is that we need to really have a presence, continued presence in the cardiovascular areas, especially in the hyperlipidemia space.

Well, it turns out that Genzyme had an approach with Kynamro which is an antisense oligonucleotide Type 2 to really target very rare familiar hypercholesterolemia. Now how important is that category of patients, about 40,000 patients in the US and Europe of which about 5,000 to 10,000 are the familiar homozygous patients very severe hypercholesterolemia cannot be controlled with statins and patients have a mortality that is quite high in the 35 or 40 year life expectancy range.

So clearly an unmet need and Kynamro is going to try to do that and we have shown that clearly achieves that goal it does have injection side reactions and other side effects, but they are really manageable with the population of very high need.

And the second category of patients that is hypercholesterolemia are all of the patients that we have grown the number of patients on statins of 60 million patients, in the older patients where there is actually poor control for various reasons, poor control because they are heterozygous in hypercholesterolemia, but because they may be at high risk for either intrinsic reasons or genetic reasons that we don’t necessarily appreciate or because of compliance reasons whatever it is, it turns out that there is a huge need beyond statins that has achieved good results in about 60% to 70% of the population, but there is a large part of the population that really needs a solution and this is why PCSK-9 molecular antibodies had been developed. Ours is a first-in-class in addressing that unmet need.

So why is that important; because it’s a new mode of action; it’s a new mode of action. I would like to tell you just a little bit of a story about how this was discovered. It’s interesting because I was at the NIH that and there was an observation in Texas by a scientist named Helen Hobbs, who noticed that there was a group of patients in the study that NIH had been funding, the IREC study that didn't seem to suffer from hyper high cholesterol or coronary heart disease and when she did the genetic study, she found that these patients have a mutation or a couple of mutations that made the PCSK-9 protein inactive.

So that was proof-of-concept that if you could inactivate that pathway you could achieve reductions in LDL-C the major risk factor. And sure enough that's what worked and so we launched into this in 2009. We finished the Phase II. We presented them recently and the Phase II data is quite interesting at 65% LDL-C reduction on top of statins and then its very, it seems safe and tolerated, so we are going to start Phase III this year second quarter hoping to really address the need in heterozygous hypercholesterolemia in high risk populations because those populations do not have as many options beyond statins.

Otamixaban; this is again a, this is a Sanofi legacy research product; far excellence in thrombosis that came from our understanding for example Plavix and other and the low molecular weight heparin. It was very obvious from my experience that there was a huge demand from the interventional physicians, radiologists, surgeons for a product that would have a very short onset of action and at the same time the ability to stop the action.

The offset would be fact; because when you do a procedure you really want protection during the time of the procedure, but you don't want to have to wait two hours to get to the protection stage unpredictably and you don’t want to wait two hours for the patient to get off of that. And so what Otamixaban is completing its Phase III in 2012, by the end of this year. But we believe that this again fulfills our criteria of a defined unmet need in a defined patient population that we can manage.

Other categories in our portfolio and this is, again this is a short-term portfolio. Potential game changer is Eliglustat; it’s a small molecule substrate inhibitor. So it’s another for addressing the disease, not by replacing the enzyme, but affecting the accumulation of ceramide which is the toxic product and it will eliminate the challenge of infusing patients hopefully or reduce the need for infusion.

The clinical profile, as we just reported a month ago in February is outstanding. I mean here for example, you see in shaded areas, the results of Cerezyme, I can bring this back. You can see in the shaded area, the results of Cerezyme and the lines are basically showing you the results of Eliglustat. And you can see that in terms of hemoglobin or platelet actually a little bit better hemoglobin in terms of reduction of liver size or spleen size, as effective or slightly better than the current Cerezyme. So this is something that we’re hoping will change the pattern of treatment of these patients over a longer period of time.

Last but not least is our vaccine franchise and what we have been doing over the past year is really through this creation of global R&D is to find all areas of synergies that we could find between the different components of the company. And one of them is to really accelerate sometimes which you have to do is really go forward when you have the ability to move resources and reallocate resources and this has what has been done with the dengue vaccine.

So we decided in 2009 to build a plant at risk and in Lyon, in France there is a first plant for this sort of quadrivalent chimeric vaccine and so the dengue vaccine is coming up. As you know, it’s a disease that is growing in importance because of global warming. It’s not affecting just the sort of tropical regions; South America, Thailand, very effective, but now on the South of the United States and that the traveling public, because dengue is transmitted by mosquito that lives in cities. It’s a very urbanized mosquito and as the urbanization grows, this disease grows in importance. And the first submission is planned in 2013 for the dengue vaccine.

So in summary, I think that the overall strategy I described seems to be executed properly. I think we are seeing the growth platforms sustain, the ability of the company to continue to invest and think through its R&D innovation strategy. We’re going through many changes at once, but what we decided to do is to make sure that we didn’t miss a beat on the short-term and medium-term.

I think what you're seeing here is the result of that policy and then you’ll see as we go forward the impact of what we’ve been doing over the last year in terms of the upstream part of the portfolio which we don’t have time to cover, but if you look at 2012-2015, here is the result. You have five potential launches in ’12. You have Lemtrada in ’13. As I said, dengue and Eliglustat and Otamixaban in ’14 and in ’18 you have PCSK-9 and the other vaccine components.

So, with that, I would like to just tell you, what are the important catalyst is very clear. In 2012, you have Kynamro, Lemtrada and Lyxumia as expected filings, expected data released of Zaltrap, Aubagio, Lantus and Otamixaban those are things we will let you know and Phase III studies initiation of PCSK-9 and the new Lantus.

So in summary, I think we are continuing to execute that strategy that Chris Viehbacher has been explaining that I believe is the reason why we have the ability now to have a little bit of a -- take a little bit of breather in terms of choosing what we want to do strategically and take the time to have contributions from R&D kick-up again. So the compound average growth rate 5% beyond 2012.

Diversification, I think we are there; scale in business I think you can see this; there are several of them that have that scale. We are not as exposed to small molecules and patent exposures, we have moved up the curve in biologics, I would say actually that Sanofi is the most biopharmaceutical of all the pharmaceutical companies. I think we have a larger emerging market presence with 38% or 40% of our sales by 2015 and as I just told you, the portfolio is not as empty as it could have been.

Operating margins are rebounding; what we look at is obviously the sales growth as you and then the ratio; I am really also very hopeful based on what we have today, I can tell you that 50% of the growth based on what we have in the portfolio, just what I described on a risk adjusted basis will contribute 50% of the growth for the sales by 2015.

So with that, I will thank you for your attention. I know we have a session for questions in the next room and I’ll be happy to take these questions.

Thank you very much.

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