Sanofi SA (SNY) 2004 Q1 法說會逐字稿

Ladies and gentlemen, welcome to the Aventis 2004 First Quarter Results Conference Call on Thursday, the 29th of April 2004. Throughout today's presentation, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. If any participant has difficulty hearing the conference, please press the star key followed by the zero on your push-button phone for operator assistance. I would now like to turn the conference over to Mr. Arvind Sood. Please go ahead, sir.

Okay Diana, thanks very much for that introduction. Ladies and gentlemen good morning. For those of you in Europe good afternoon. I would like to first of all take this opportunity to welcome you to our Q1 results conference call. I will spent the first few minutes talking about our performance during the quarter. I also have with me Patrick Langlois, Chief Financial Officer who is then talk about Aventis' growth outlook for the reminder of the year, as well as the rationale behind the supervisory and the management board decision to recommend Sanofi's revised and substantially increased offer for Aventis. Before I jump into talking about Q1, I would like to mention that beginning with January 1, this year, we have eliminated the split between core and non-core business activities. As a result, the performance of Aventis is presented as a group in 2004 as compared with the 2003 Aventis core business results. So this is an important distinction as we look at the P&L. for the Q1 of this year.

Let me get some definitions out of the way. First of all for 2004, Aventis as a group includes the ongoing core-business activities in prescription pharmaceuticals, human vaccines, the Merial Animal Health equity joint venture, and certain corporate activities. It also includes the remaining non-core businesses whose sales are not consolidated, which includes the equity stakes in the chemical companies Wacker and DyStar as well as the investment that we have in Rhodia. As the plasma proteins business Aventis Behring was divested on Mach 31, 2004, it was treated as a discontinued operation in the first quarter of 2004. Let me highlight one other change on the P&L. I am sure you have noticed a total revenues line for the first time. Now on the past core promotion income from joint marketing agreements on certain products was included in SG&A and other incomes. As Actonel is now a significant product and to better reflect income generation from our business activities, we have decided to break. The co-promotion income separately and to add it to net sales. All profitability margins are now computed on the basis of total revenue. So with that, let me now turn to our quarterly performance. By the way all references to activity sales growth mean excluding the impact of currency. Total revenues, which includes the co-promotion income from Actonel and other prescription

drugs rose 7.1% on an activity basis. Now within that, net sales rose 6.4% to EUR 3.95b and this compares EUR 3.97b in Q1 of last year. Sales of prescription drugs rose 5.1% to EUR 3.6b, driven by strong performances of Lovenox, Actonel, Ketek as well as Lantus. Sales of the vaccines business rose 13.8% during the quarter driven by strong performances of adult boosters and Influenza vaccine.

Sales in the US market rose 8.7% on an activity basis, and products recording strong performances including Lovenox, which was up almost 26%, Copaxone, which was up over 26%, Amaryl up about 50% and Lantus up 76%. Sales of our allergy product Allegra in the US were down 12% over previous year's quarter, which was pretty much in line with prescription trend as Allegra's total prescription declined 10.3% during the first quarter. this year are about the same as last year in the US, the first quarter of 2003 was relatively strong for Allegra as the over-the-counter changes really impacted the market adversely beginning with the second quarter and even more so in Q3 and Q4. Our market share is stable at about 40.1% and we can still say that a majority of covered lives continue to be covered in the preferred category of reimbursement at the managed care level.

Let me provide just a quick litigation update as relative to Allegra. During the quarter, we filed additional lawsuits in the US District Court of New Jersey based on certain patents, which are owned by Albany Molecular Research and licensed to Aventis. These patents will expire in 2013 to 2015 and claim certain processes for making Fexofenadine, which is the underlying chemical in Allegra. We've requested that the newly filed law suits involving the process patents be consolidated with the previously filed law suites and the district court has now set April 15 of 2005 as the end date for the discovery phase of these new cases. The previously set trial date of September of 2004 is no longer in effect and no new trial date has yet been scheduled. Sales of our anti-cancer product Taxotere were essentially flat in the US during the quarter as we continue to be affected by average wholesale price-related reimbursement issues. We expect the trends to improve in the second half of this year on the back of new indications and of course a more favorable reimbursement system beginning in 2005.

Let me come back to the P&L now. Gross margin as a percentage of total revenues was 73.7% in the Q1 of 2004 as compared to 74.5% in the first quarter of 2003. And this is mainly due to the negative currency translation impact. As a matter of fact the constant exchange rates, gross margin would have been almost at the same level as the previous year. SG&A expenses and other operating income were 32.6% of total revenues in Q1 as compared to 32.3% a year earlier. Within other operating income and expenses, we incurred EUR 28m in hedging losses as compared to a hedging gain of EUR29m in Q1 of 2003. This negative swing of EUR57m was offset by a gain on the disposal of Azmacort. R&D as a percentage of sales, as a percentage of total revenue was 14.8% in Q1, as compared to 17.4% of total revenues in the same quarter last year. Now excluding the impact of currency, R&D spending declined by 9.6% and let me outline some of the reasons behind that. This decrease was mainly due to the completion of some key studies, major studies on Allegra and Ketek in 2003 for which a significant amount was expensed in the first quarter of 2003. Also compared to the first quarter of last year lower spending on Genasense, Exubera and Apidra was pretty much compensated by higher development cost for Re- generon, Lantus, Lovenox in the first quarter of this year.

Restructuring expenses were higher at EUR 53m in Q1 of this year compared to EUR 19m in Q1 of last year, and the restructuring amounts relate to the productivity enhancement initiatives launched in '03 and '04 in our prescription pharmaceuticals business. In Q1 of 2004, the increase can be attributed to the reorganization of R&D activities in France. EBITDA at constant exchange actually rose by 15.5% to just a just little over EUR 1b. And the EBITDA margin rose 0.8% to 26% from 25.2% in Q1 of last year. Income from discontinued operations or rather loss from discontinued operations was EUR 4m and this relates to the former therapeutic protein business called Aventis Behring. You might recall that the divestment of Aventis Behring to CSL was completed on March 31st of 2004. Net earnings almost 15% up 14.6% EUR 556m in Q1 as compared to EUR 485m in Q1 of last year, and earnings per share were EUR 0.71 in Q1 of this year, which was an increase of 16.5% compared to the EUR 0.61 in Q1 of 2003. Defense costs related to the Sanofi offer impacted EPS negatively by EUR 0.04 per share. Obviously, had we not incurred these defense expenses, earnings per share would have risen by 23.5%.

Let me give you a quick update on some of our key products. First of all on Ketek, I think you are well aware of the fact the Ketek was approved at the beginning of the month in the US for each of three indications that we were seeking, including multi-drug resistant strain. Pre-marketing activities have commenced, and are ongoing with managed care to secure quick formulary approval, so we can get a quick sales ramp up. We are also working with opinion leaders as well as infectious disease specialist. We will announce the price, as we get closer to launch in time for the 2004 antibiotic season. We are going to put our entire respiratory sales force which is around 2,100 sales representatives behind Ketek, and this is going to be a part of four primary care sales forces and one-specialty sales force to support the launch of this product.

Our rapid acting insulin Apidra, was approved this month. This particular product is an insulin analog for the treatment of diabetes. We have also submitted marketing applications in Europe and the United States for the new OptiClik reusable pen for administering Lantus. The OptiClik will be used with Lantus as well as Apidra.

Quick update on Taxotere, our anticancer product was approved for esophageal cancer in Japan during the quarter. And we also submitted applications in the US, as well Europe for Taxotere in adjuvant treatment of blood cancer. This submission follows by the way an earlier submission for metastatic hormone refractory prostatic cancer and a filing for gastric cancer is planned in the second half of this year. Aventis and Genta also announced during the quarter that FDA has accepted the NDA Genasense for its use in combination with dacarbazine for treatment of patients with advanced melanoma. The FDA has granted a priority review status to the application, and an advisory committee is scheduled for May 3rd of this year . Let me stop here and ask Patrick to make a few comments about the outlook for the remainder of the year. Patrick?

Okay. Thank you Arvind. good morning and good afternoon. On the full year objective and looking at the performance of the first quarter we can say that all reserves in the first quarter in terms of product performances, in terms of economic performances in line with the targets and guidance we gave February 5th of the year. 2004. So again those objectives - We have objectives to generate topline sales holds up about 6% to 7% in term of activity business excluding the currency aspects and I am talking about sales and not total revenue and in terms of earnings per share as we said before objectives -- of course we meant to generate about earnings per share. Of course this is reported by the same assumption that your guidance when you look at the key products performance for the full year significant deviation for what we see for the full year versus what we had in early February. In terms of currency assumption, those targets for 2004 has been set up based on the EUR1.25 euro to the dollar, and so we have kept this assumption for the full year 2004.

So this is what I wanted to tell you to reconfirm this full year objective. Let me make some comments about the Sanofi, Aventis transaction and try to precise a little bit more set of reasons for the recommendation from our supervisory board last Sunday to accept this transaction and started to make some comments for the future. So we have decided on Sunday, the Supervisory Board to recommend the Sanofi offer. You know that we have been campaigning since the launch of this unsolicited offer from Sanofi at the end of January to try to obtain the share value for shareholders. And we feel with the revised offer particularly given the fact that the increase in revised offer is entirely in cash. The Supervisory Board felt that this provides fair value for Aventis shares.

The revisal price represents an increase of almost EUR7b over the original terms, which shows a premium of 31%, versus the and affected one month share price of Aventis. Another aspect that was also highlighted during our recent campaign was the need to get greater disclosure on the Plavix patent risk. During the weekend Sanofi represented the disclosure regarding Plavix is too incorrect in all material respect, and so there is no material omission from the disclosure. We feel that considering that our main concern as always been the lack of disclosure information of Plavix, we feel today that this risk can be appropriately assessed by Aventis shareholders at the time they are going to tender their shares. Another key element we highlighted in our defense with this offer was the execution risk, which is of course linked in such combination, especially increased with the hostile nature of the Sanofi initial deed.

Now that it has been agreed that in term of governance, either of the board of directors as well as the management committee, that the governance is going to be balanced with equal presentation on Aventis and Sanofi, given that the advisory board felt that the execution has lessen significantly. And we feel that is and it should be for shareholders specific implication for successful integration for the new company, and provide us for the realization of the synergies, which have been announced by Sanofi. Many of you have voiced the question as to why the bid from Novartis didn't surfaced despite their announcement last Thursday from Novartis that they were going to start the formal discussion with us following the indication from the Supervisory Board from Aventis and you know that we also in negotiation with Novartis on all the aspects of course except the price. And we tried, of course, to get the two proposals at the same time to be reviewed by the Supervisory Board on Sunday. There was on Sunday only one offer being made by Sanofi, and given the significance we revised conditions in the new bid. It was the board and subsequently to recommend the proposal from Sanofi. So, this is a little bit the story of what happened during the last part of the week, last week, last week and during the weekend. I think all of this is the past, and I think it is important that everyone focus on the reality and what is going to the future, because we are now on the verge of forming a new company, which is going to be called Sanofi-Aventis. And it is important to emphasize that the objective is not to create a national champion, even if it has been the way it has been portrayed that way in the media. You know that the pharmaceutical business is a global business, and Aventis has been a global company. All of this with Sanofi-Aventis is to create a new European company that will have significant critical mass on the global scale in all the markets in term of sales, in term of marketing, and in terms of R&D. Of course the three are critical areas for success for this new company. You know that Sanofi-Aventis, which is going to be about EUR25b in term of sales, which is going to have an R&D budget of over EUR4b, which is going to have more than 30,000 sales reps worldwide and about 6600 sales reps in the US. We feel that this is going to provide significant marketing and development, and research and development method to compete against the major players in the pharmaceutical industry like Pfizer and Glaxo Wellcome. Over the next few weeks, the management team, when the management team is going to be formed, the management team will come back with a more concrete and comprehensive version of the equity story of the new company. So, it is not the time, let us say to get into this, but it has to be done. We understand that it is key for the shareholders to get a better understanding of what is the makeup of the new company and what is going to be the gross potential of this new company. Again the management team will have to come back with a more complete and comprehensive equity story for Sanofi. Let me remind everyone what is the agenda and the timetable for the weeks to come related to this offer. Last Monday, the revised offer from Sanofi has been filed with EMS. On May the 5th, we could expect FTC clearance. We know that the finding has been made on April the 5th. And if this is confirmed and this is obtained, we should get to the closing of the offer by the end of June, meaning that the settlement and the delivery of the new shares happening in the first half of July 2004. Again the purpose of these comments was not to obtain the future potential for Sanofi-Aventis. It would be done later on by the appropriate team. What I would like to do is to appeal to our shareholders, employees to recommend that we at Aventis are able to secure for them this appropriate values of shareholder value. But I think it is much more important that if we want stock to focus and to think about the value and the value creation of this new company Sanofi-Aventis can deliver to shareholders and to employees. So those are the few comments. So those are the few comments I wanted to make on this transaction, and now we can turn to Q&A.

Okay Patrick. Thanks for your comments. Diana would you please review the procedure for asking questions, and then we can open it up for Q&A.

Certainly sir. Ladies and gentlemen at this time we will begin the question and answer session. If you have a question please press star followed by the one on your telephone keypad. If you wish cancel your request please press star followed by zero. If you are using a speakerphone today, before making your selection. One moment please for the first question. The first question comes from Mr. Ken Araki. Please state your full name and company name followed by your question sir.

Thank you for taking my questions. I have a couple of questions. First of all, I hope to confirm one-time like items in your income statement. Initially, offer-related defense costs, where you book? And then, Aventis Behring-related gain included was in your first quarter income statement, or will it be included in the second quarter? And also, regarding Rhodia mark-to-market adjusted, that is a positive effect to your income statement or negative? And the second question is regarding initial rejection from USPTO regarding Lovenox patent, according to your statement today that is not necessary for negative signal. Could you please explain in a little more detail, in terms of the past example, which case, in spite of initial rejection from USPTO, but that finally got a favorable comment from USPTO? Thank you.

Let me address your second question first, in terms of the USPTO rejection. First of all, you are right, and they have posted a non-final rejection notice on their website regarding our application for the reissuance of this particular patent, this patent 618. I think it is important to keep in mind and, as you have rightfully indicated, that the agency's response is not final, and certainly it is not unexpected. This is strictly office action, advising Aventis of the initial rejection of the application, and indicating as to why this application was not approved. I think if I could use the analogy of an approvable letter that is probably an appropriate analogy, because, through this, we can take action in terms of the request of information that they have made, and resubmit that information. These forms of office actions are not unusual in these types of proceedings, and, as a matter of fact, they could include a number of these so-called office actions and responses before an application is ultimately approved or denied. As a matter of fact, a vast majority of patent applications, including those for reissuance, are rejected by the USPTO in the first round. The number is over 85%. So again, we are very optimistic that we can submit the amended version, and that we can get the patent reissued prior to the end of 2004. Let's speak to you on our Investor .

Yes. On the restructuring expense we have in 1Q, which is related to what we have many times commented about productivity initiatives at Aventis that's starting in 2003. We had some initiatives related to the Research and Development or some other infrastructure areas. So, we have been continuing on this, in fact, caused the negative impact of 53m in the first quarter of 2004 compared to 19m the year before. As far as the defense costs, the defense cost is booked on the miscellaneous line, non-operating income and expenses. As far as Aventis Behring, Aventis Behring was treated at the time we signed the binding commitment agreement contract, which was in fourth quarter of 2003, which led to a loss -- an important loss in the fourth 2003. Rhodia mark-to-market is because of the evolution of the share prices, a negative 46m impact, negative impact in the first quarter.

Thank you.

Ladies and gentlemen, if you would like to ask a question please press star followed by one on your push button phone at any time. As a reminder, if you're using speaker equipment, please lift the handset before making your selection. Ladies and gentlemen, as a reminder, if you would like to ask a question, please press star followed by one on your push button phone. Excuse me, Mr. Sood, there are no further questions at this time.

Okay Diana. Well, let me thank everybody once again for their participation. If you do have follow-on questions or comments, please contact the Investor Relations team and we'll be happy to get back to you. Thanks again.