Sanofi SA (SNY) 2003 Q3 法說會逐字稿

Ladies and gentlemen, good afternoon and those of you in the U.S. good morning. What I'd like to do is take the next 10 to 15 minutes and give you a brief perspective regarding our performance in the third quarter. I will also take some time to talk about some of the key product trends during the quarter. And after my presentation I also have Patrick Langlois, who has been our Chief Financial Officer, and such Patrick will talk specifically about the outlook for the remainder of the year.

Let me start off by summarizing some key messages that I would like for you to think of and that I would like to use to characterize the third quarter. Good sales and earnings performance in Q3, significant improvement in free cash flow. One of our key products Lovenox has resumed a very good growth trend in the U.S. market, four new chemical entities developed and submitted by the end of this year. And we've reaffirmed the full-year outlook today for EPS growth in mid-to-high teens.

Let me start off by giving you a brief run down of the P&L for Q3. Our net sales for the core businesses were up 8.3%, excluding the impact of currency to about 4.3b euros or 4.26b euros. Though on a reported basis, sales were up 0.6%. Now, currency continues to affect reported sales growth and the average exchange rate at the end of September was $1.11 to the euro, which is almost 20% below the level that we had last year through the end of September, which was about 93 cents. Sales of the prescription pharmaceuticals business rose 6%, and the human vaccines business rose 26%. Specific product drivers within pharmaceuticals included Lovenox, which was up 26%; Delix, which was up 24; Taxotere up 21%; Lantus up 76%; and a very strong evolution or strong growth in the influenza vaccines. Gross margin was flat at 73.5% as compared to 73.6 last year and was affected negatively by the currency fluctuation. As a matter of fact, the currency fluctuation impact was 0.9%. R&D expense was 16.8 expressed as a percentage of sales, and SG&A expenses declined to 28.6% of sales versus 29.6 in Q3 of last year. Restructuring charges rose to 84m euros during the quarter, and reported EBITDA margin is flat at 27.8% versus 27.9 in Q3 of last year. Though if you look at the underlying margin meaning extra restructuring charges, regardless if you look at the operating margin or the EBITDA margins, we have an improvement of about 1.5 percentage point there. Goodwill amortization, bit lower at 120m euros, but this is mainly because of the currency impact as part of the goodwill is denominated in U.S. dollars. Interest expenses declined to 30m euros due to lower debt and a more favorable interest rate environment, even though the net debt was at roughly the same level as at the end of Q3 of 2002 which was 3.5b euros.

Miscellaneous expenses declined to 26m euros as compared to 76m in Q3 of last year because of lower impairment of biotech investments as well as litigation provisions for previously divested products. Preferred remuneration declined to 9m versus 21m in Q3 of last year, as we redeemed certain Quasi-equity instruments and net earnings rose 14%. The average number of shares outstanding declined to 784m compared to 792 last year and earnings per share rose almost 16% to 82 cents per share.

Let me switch gears and talk briefly about the key geographic zone that we conduct business in. And let me start off with the U.S. Sales in the U.S. were almost 40% of total core business sales and grew 12.2% during the quarter. We have very good performances in the U.S. by Lovenox, which was up over 27%; Taxotere up over 23%; Lantus up over 57%; and Copaxone, which was up over 12% during the quarter. Just as the side note Copaxone's growth in the non-U.S. markets was even stronger at close to 46%, as it continuous to grow faster than the overall MS market in Europe. Back to the U.S. market sales of Allegra declined nearly 8% in the U.S. The fall allergy season actually has been reasonably decent Just about 5% higher than last year. The total prescriptions for the Allegra family declined 3.8% during the quarter. Despite this Allegra remained the market leader through the end of the quarter with the 41% share based on the total prescriptions. Now you may have noticed that the total prescriptions for the Zyrtec family of products grew 7.3% during the third quarter. But once again, this has largely been driven by the syrup formulation. If you compare the promoted version of Allegra which is the Allegra 180 mg, once daily tablet and if you compare this to Zyrtec tablet, total prescriptions for Allegra grew by 5.4% as compared to a flattish trend for Zyrtec tablet.

Just a few comments on what's happening in the overall antihistamine marketplace. The dynamics of the over-the-counter products are now in full swing and actually Wyeth has been pretty aggressive with their OTC version of Loratadine. Announcements of the fall allergies season has been strong, I think it's important to note that 65% of Allegra prescriptions are generated in the first half. The reason is that the fall allergy season is a combination of allergies, cough, cold, flue, etc. And as a result, over-the-counter preparations are used broadly in the fall. Discussions with managed care organizations regarding next year's contractual agreements are progressing, though we are not anticipating any major shift in reimbursement level. No meaningful update from the patent challenge, I think you are well aware of the fact and we have previously communicated that the trial date has been set for September of 2004, though the discovery process is moving along pretty slowly.

One of other key products are antithrombotic product Lovenox, had sales growth of over 27% in the U.S. during the third quarter and it's up 17% on a year-to-date basis. Sales in Q3, of course, has benefited from favorable comparisons, though underline growth is consistent with the growth of more than 15% in the U.S. on a full-year basis. Our anticancer products Taxotere, sales were up over 23% during the quarter. I think there is one notable achievement that I would like to acknowledge is that as of August 2003, there are more metastatic lung patients with even Taxotere than all versions of generic Taxol combined. This breaks down to a share of 28% in first-line lung cancer and 48% share in second-line use.

Between the end of 2003 and early '04, we expect three new submissions on Taxotere, adjuvant breast cancer is one of them, advanced gastric cancer for which there is no U.S. or European approved chemotherapeutic agent for chemotherapy, and also for hormone refractory prostatic cancer. As a matter of fact, early review of the data for HRPC suggests the survival benefit in these patients. The second analysis from the Taxotere adjuvant breast cancer study is going to be presented as part of a late breaking session at the San Antonio Breast Cancer Symposium, and this presentation will be made on Friday, December 5. As this falls on a Friday, we will conduct a conference call for the investment community together with one of the investigators on the following Monday, and over the next few days we will send out the requisite details. Our long-acting insulin Lantus, sales in the U.S. increased over 57%, and the average dose of Lantus continues to increase as we increased our focus on diabetologists and endocrinologists. Through the end of September, we had captured almost 44% market share of the intermediate to long-acting insulin market in the U.S., and almost 18% of the total insulin market.

Looking at for the other geographical regions, sales in France declined 1.5% and continues to be impacted by the French health policy, with reference pricing implemented on September 8. The overall evolution is affected by a decline in the rest of the portfolio, though we had good performances from Lovenox, which grew almost 7%; Ketek which grew about 4%. By the way our market share on Ketek now in the French market is 4-7%. Our anticancer product Taxotere grew over 9% in the French market but we ran into some price competition from Bristol Myers, which is offering 20% rebates to anticancer centers just before the arrival of Taxol generics. We are also in the process of implementing an action plan to benefit from the head-to-head study comparing Taxol to Taxotere, and you might recall that the data from this study was actually presented at the European College of Oncology Meeting, which was held in Copenhagen back in September. Sales of Delix increased 22% and with Lantus we have had a strong launch in France though it's still early days. We have already captured about 9% of the total insulin market in France and 23% of the basal insulin market.

Sales in Germany were essentially flat at -0.9% and this performance once again reflects the overall pressure from the healthcare measures that have been implemented in Germany and also to be implemented in Germany in 2004. You may know that reform has passed the Lower House on September 26th and that now needs to pass the Upper House and after that the reform is expected to come into full force on January 1, 2004. Despite this, we had good performances from Lovenox, which grew 22%, Lantus up 25% in Germany, Taxotere up 23%, and Delix up almost 8% in Germany.

Sales in Japan rose slightly by 0.8% though on a like-to-like basis, meaning adjusting for product divestitures sales would have grown 8.6% for Q3. Allegra had good evolution in Japan; it was up over 10% because of good growth for the indication of seasonal allergic rhinitis. Staying with the Japanese market, you may be aware of the fact that recently Lantus and Ketek were approved for marketing in Japan. Regarding Lantus there is certain peculiarities of the Japanese market which should be borne in mind. Type I diabetes in Japan is almost non-existent, so our marketing of Lantus in Japan is going to be exclusive dependent on Type II diabetes, though the use of basal *insulin's in the Japanese market is not very strong. We launched Lantus in the Japanese market only in disposable and reusable pen form. As for Ketek, we are now negotiating the price and we expect to complete that by November, and in Japan we have the full spectrum of indications including the resistance claim.

Few comments on the vaccines business; sales within this business were particularly strong in the U.S.; they rose 31% during Q3 and sales were also very strong in the international zone. A larger strength of course was driven by sales of the flu vaccine because of the fact that we had earlier shipments this year. The pediatric combinations did well based on the successful launch of Deptacel in 2002 and the meningitis vaccine, are up about 17% during the quarter. Now the base business here is very much driven by military youth and also by adolescents and there were no specific outbreaks during the third quarter to report of. On a year-to-date basis, the vaccines business is up 24% though we would expect Q4 to be weaker because of the comparative trend related to the flu vaccines that I explained before. We decided to advance shipments of the flu vaccine beginning with mid-August to ensure adequate inventory levels given the production issues in the U.S. the last couple of years. I will stop here and I will ask Patrick now to make a few comments about our performance on a year-to-date basis as well as the outlook for the remainder of the year. Patrick

Yes, thank you Arvind and good morning and good afternoon to everyone. Just looking at the overall performance of the company for the first 9 months, as you can see top-line in terms of activity is up by 6.2%. The gross margin is at about 74% slightly down from compared to last year on a reported basis, but as we explained to you in previous quarters that we have negative currency impact. If we exclude the currency impact, our gross margin evolution should be positive compared to last year and should be about 0.6 of one percentage point improvement compared to this first 9 months of 2002. EBITDA margin is improving by 1.7 percentage point to 26.9% for the first 9 months, and the net income is up 15% and EPS for the first 9 months is up by 16% to Euro 2.19 per share. So, based on these performances, how do we see the whole year 2003?

In term of sales and again in terms activity for 2003, we should see sales growing at about 6% in terms of activity. And this reflects several factors; first, some slower growth in the overall pharma industry either U.S. or in Europe. When you look, for example, at U.S prescription growth for the first 9 months and just looking at the old sector excluding HRT and antihistaminic products, the U.S market prescription grew by 3.8% compared to 4.10% the year before. And in Europe you are all aware about some governmental healthcare reforms and different actions taking place in different countries, which of course has some impact on the sales of pharmaceuticals in those different countries. So, overall market is not as good as what we have been expecting or it is not as good as what we have seen last year. The second element is it reflects also the Allegra, the way we see Allegra sales for the full-year in the U.S., as we were expecting before to get single digit growth for Allegra in the U.S. in 2003. Based on the recent trends, we feel that Allegra sales for 2003 in the US should be flat compared to 2002.

[inaudible] as you have seen also is related to the non-strategic products and the evolution of these products as because either of generic competition or because of lack of support and promotion behind these products, we have seen some negative evolution in the first nine months. It's about minus 10% in the first nine months for these products in the first nine months. So all these elements explain this sales evolution of 6%. I just want to show you, not to forget the impact of some of the divestments in term of products that we do on a regular basis to try to reduce the tail at Aventis and the impact of the divestment of some of the products, as well as the impact of the sales we did, the biotech sales we did in the first quarter of 2002 that also had a negative impact of about 1 percentage point, which can also explain the 6% evolution for the full year. So, in term of sales about 6% in term of activity for 2003, in term of margin evolution. In term of gross margin, we should see -- for the full year, the gross margin evolution on a reported basis slightly below 2002. But again if you exclude currency impact because many of our production operations as you know is in Europe, we should see about 0.5-0.6% improvement in gross margin compared to 2002. EBITDA margin, we have reported 1.7 percentage point improvement in the first nine months and objective or estimate of about 1.5 percentage point improvement for the full year of 2003 compared to 2002 is realistic. And again in term of EPS -- net income and EPS growth, what we have said since the beginning of the year which is an objective of about mid-to-high teens for earnings we feel comfortable to deliver on this objective and we think comfortable to deliver this objective in spite of the negative currency evolution or the impact of the negative currency evolution because we are working today on the Euro to dollar currency [factor] of about 1.12 for the full year, as we were working in several way on [factor] of about 1.02. So we have been able to absorb the negative evolution of the currency. So, this is the guideline -- the confirmation of the guidelines on the P&L basis. On the cash flow basis, we had stated that the full year for the core business we should be able to generate about 1.8b free cash flow. Based on the performance of the first nine months, which is about 1.6 for the first nine months, we should be able in fact to deliver something about 2b euro of the free cash flow for the core business and no significant change from what we have been saying before as far as the negative cash flow from the non-core activities, which is about 600 to 700 negative evolution for the full year on the non-core free cash flow. So, those are the few elements I wanted to mention on the guidance, just a word about divestment. You know, that our objective is to do by either '03 and '04 the divestment of the non-strategic, non-core activities.

A word on the Aventis-Behring situation. There is no major news on that aspect, but the discussion which we said are ongoing and our objective is get by the end of the year or two the binding agreement for the divestment of Aventis-Behring. You know that it's an important step for [inaudible] to focus our provision on the pharmaceutical business. As far as few remaining holdings we have, some of them could be completed or divestment could be completed in '03, some others would be during the year 2004. So, we expect to get back to you before the end of the year with some new news on this divestment of the non-core activities. So those are the few comments I wanted to make about -- just before moving to the Q&A, we'd like to tell you that what we intend to do in the first half of 2004 is to have a meeting with all equity investment community to do some kind of what we call business day but -- on Aventis, which should happen in the first half of 2004 and more precise date will be communicated to you let's say early February at the time where we release the full year of 2003 numbers. The objective of this meeting would be for the management to update you on the new product, the pipeline, the new product flow either on let's say coming from -- into the pipeline as well as products coming from outside. It would be also the opportunity to present the different strategy we have developed and we are developing at Aventis in terms of our disease strategy on one side, [inaudible] of product portfolio management we want to do in terms of trying to accelerate the divestment of some of the products and specially the lung strategy products, which are decreasing as you have seen in the first nine months at the pace which is much faster than what we have seen in the past.

But also to discuss a little bit more about our licensing strategy, of portfolio development strategy and to tell you what do we want to do, what have we done, what do we want to do in term of strengthening product portfolio strategy. So, it would be a complete review about the strategy, about the products and about the pipeline and we see that it would be a good opportunity for us to update the investment community about what's happening and what could we expect for the first two years -- for the next two years or the three years at Aventis. So, again, a date would be communicated at the time of the earnings release in early February. Arvind.

Okay, Patrick. Thanks very much. Operator, I think at this point in time let's go ahead and open it up for the Q&A session. So, if you can please review the procedure for asking questions.

Thank you sir. If any participants would like to ask a question, please press the "*" followed by the "1" on your telephone. If you wish to cancel this request, please press the "*" followed by the "2". Your questions will be polled in the order they are received. There will be short pause while participants register for questions. Once again, if you would like to ask a question please press the "*" followed by the "1" on your telephone; to cancel this request please press the "*" followed by the "2". The first question comes from Ms. Iris Henry (ph.). Please state your company name followed by your question.

Yes, hello it's not Iris, [inaudible] from [inaudible]. I had a question for Patrick Langlois please. I would like to what is your assumption for the net debt at the end of 2004 basically?

At the end of 2004 or 2003?

No 2004.

I cannot give any specific guidance first because it's unforeseeable end point because it depends a lot on what opportunity we want to do. You know that the cash flow generation and increased cash flow generation we see in the company and the fact that we are clearly moving out of the legacy and the non-core activity, makes us -- we are gaining a lot of flexibility, the financial flexibility -- the objective is of course to look at excellent opportunities in terms of acquisition of products, acquisition of biotech companies or doing some licensing transactions even if they don't use or consume a lot of cash flow, and also to use more significant part of this cash flow to do share buyback. So, the share buyback, okay, we know that what we are doing now, we know that we will be doing more in the future, but as far as being able to forecast in a profit development activities and opportunities in terms of acquisitions, which are difficult to -- that is why we are projecting much more of communication in our guidance based on free cash flow generation as just being the total net debt in 1 year or 3 years time line.

Okay. So, let us put it in another way, what is your assumption for free cash flow generation, you know, for the pharma business in 2004? It will increase substantially or be under pressure?

Let us say every year we are making progress and if you allow me, I would be reserve anything related to the 2004 to the February next year when we give overall guidance for Aventis in terms of sales, in terms of profit, as well as, in terms of cash flow. But the objective is to get free cash flow generation going up.

Okay thank you, Patrick.

The next question comes from Tim Anderson; please state your company name followed by your question.

Tim Anderson at Prudential. A couple of questions on Allegra and then one of Menactra. On Allegra, is it reasonable to assume that the net revenue that you guys recognized per unit of Allegra sold is going to be lower 12 months from now than it is today? That's the first question. The second is on the Dr. Reddy's 505 (b)(2) filing. Is there any way that the 30 months stay period from the previously filed ANDA can actually be applied to the new 505 (b)(2), and refresh us on when that stay expires or if it already has expired? Even on Menactra, I am wondering where the bigger growth opportunity lies, is it with young children like age 2-11 or is it with older children and adults, 11 and above?

Would you like to address the first question, Patrick.

On Allegra, we said it would be -- it's too early to make any comment because we are in the midst of the mediation with the Insurance Ministry Of Organization. We see that I mean let's say there is not particular or significant returns from this structure of reimbursement we have at this stage, but to make any estimates about what it could be 12 months from now, I think, again, that we would reserve those kinds of comments when we talk about the 2004 objectives.

Tim, let me address your two other questions in terms of applicability of the 30 months stay. They are different; as a matter of fact we would be entitled to a different, to a separate 30-month stay on this 505 (b)(2) application that Dr. Reddy's has filed. I don't recall exactly when they had filed the initial ANDA but we are still in the midst of the previous 30 month's date, which was triggered when they sued against the initial filing, which -- I think it will [inaudible] in at least Q1 of 04, if I recall. In terms of your question on Menactra let me throw out a few comments in terms of why we feel that this could be a very interesting product. First of all, this is going to be the first quadrivalent vaccine for meningococcal meningitis, so it addresses four specific [serotypes]. Now, just the one distinction that I would like to make, of course, you know the product which is very well know today is Wyeth's Prevnar but that's for pneumococcal meningitis, it's not for meningococcal meningitis. What we are expecting to do with Menactra is we expect to submit it in the U.S. by the end of this year for children who are 11 years of age and above as well as for the adult population. For children in the age bracket of 2-10 years, the finding is going to be made next year in the U.S. In Europe for both these groups, children above the age of 11 and adults as well as children below the age of 11, the applications for these groups are going to be made in 2004 simultaneously. Now, one of the principal advantages that we have with Menactra, of course, is that fact that this is a conjugate vaccine and conjugated vaccines consist of more than one antigen; you may well aware of that fact given that you are a physician yourself, with the combine of bacterial [tacharite] or the antigen specific for the disease together with the protein carrier, and this protein carries allows the immune systems to respond to conjugated vaccine with the significant and boostable response. So those are some of the key distinguishing factors that we see with Menactra that we think are going to convert into some marketable advantages.

Okay, so what's the bigger commercial opportunities in, is it the younger children or the 11 and above?

I would say it's the younger children.

Okay great, thank you.

The next question comes from Kane Aracine (ph.). Please state your company name followed by your question.

Thank you for taking my question, Kane Aracine (ph.) of Midwest (ph.) Securities. I have a couple of questions here. First of all this is just a confirmation in terms of Genasense [inaudible] strategies. You were [plotting] year 2004 of [higher market] for myeloma under CLL, the other two indications, which [press] conformation? And second question is, this third quarter you slightly revised top line growth guidance for 2003 full-year, in spite of that you still maintain the bottom-line EPS growth levels. So does that mean in terms of the cost drivers especially R&D, SG&A line, that will slightly decrease your budget compared to earlier this year. The third question is the Lovenox -- I believe you still the medical use -- I am sorry, the medical use and the cardiology use, these are major growth drivers for Lovenox in the future. If possible, could you put [inaudible] me the revenue proportion right now for Lovenox, especially for medical use and the cardiology use and in addition to that the possible the underlying growth rate, specially for the two indications? Thank you.

Okay, [Kane] let me start off with your first question about Genasense. I think you might recall that just a few weeks ago we had a preliminary analysis -- presentation of the preliminary analysis of the pivotal trial on Genasense and this was based on an evaluation of 480 patients and we had defined that as being on a per protocol basis meeting that what was envisioned at the time the study design had been put in place. Now you know that towards the middle of 2002, we had elected to increase the patients' size in this particular trial by an additional 350 patients. So the second portion of the analysis, the second analysis is going to have to be completed after this entire patient population base meaning roughly 771 patients now have been followed for an adequate duration of time and that adequate duration of time being defined as something between 9.5-12 months. Now we think we should be able to accomplish that within the first quarter of next year and because of that -- because of the fact that an interim analysis has been done, which gave us a good indication at least in terms of reaching statistical significance of the secondary end points and providing at least a positive indication for the primary end points, we have commenced a rolling NDA which is going to be supplemented or rather added to over the next few months. So, the NDA application will be complete after the full analysis for -- on an intent-to-treat basis, meaning all 771 patients has been completed and that's something that is anticipated by Q1 of next year.

Now in terms of the two other indications that you have referred to the multiple myeloma and the chronic leukemia indication, what we can tell you at this point of time is that the patient enrolment is complete; the data has not been unblended as of yet. And you know, up until that of course we can't give any more information of the regulatory timeline for making submissions on these indications. Your question on Lovenox -- first of all your assessment is absolutely correct, Medical Prophylaxis and the cardiology use -- I mean these two remain high growth indications for us, since the clarification in the label. If you recall, last year we had some difficulties in the market, because of a warning letter that had been sent out. But since then the label has been revised; there is adequate clarification in the label now that has been pointed out to the medical community, and as a result, we are able to regain some of the market share that we had lost unfractionated heparin in several indications including Medical Prophylaxis access in cardiology indication. I don't write-off the that has specific growth rate for these indications, but I can tell you collectively these indications represent in excess of 50% of the sales that we generate in the U.S. market in particular with Lovenox. Patrick he had some questions about the sales growth.

Yeah, the sales growth and the expense, the expense evolution; yes we can say that we have [inaudible] on the liquidation of expenses and certainly more, bit of which we allocate the money we spend in selling, marketing, R&D just to be sure that we get the most of it and the best quality which you had of the spending. But clearly, yes we are spending a little bit less than expected on those lines. Even if we -- when looking at the selling and marketing and SG&A expenses for the 9 months excluding currency effect by 3.7% and the research and development expenses is up by about 5% including, of course, this one-time payment of [inaudible], so we are still in treating of -- we are spending in term of [inaudible] money excluding currency aspect, but we are certainly doing a little bit better portfolio of the expense.

Thank you. Once again, if you would like to ask a question, please press the "*" followed by the "1" on your telephone now. If you wish to cancel this request, please press the "*" followed by the "2". There are no further questions at this time. Sir, please continue.

Okay operator. So let me thank everybody for their participation in this conference call this morning. If you have any follow on questions or comments you can either call myself or the Investor Relations team in Europe or of course you can call Philips (ph.) in the U.S. Thanks again.