Sanofi SA (SNY) 2006 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to today’s Sanofi-Aventis 2006 half year results conference call. [OPERATOR INSTRUCTIONS]. At this time, I would like to turn the call over to your host today, Mr. Sanjay Gupta, Head of Investor Relations. Please go ahead sir.

Good morning everybody. Thank you for attending our conference call this morning. I would like to begin by taking care of the legal requirements. During this conference call we may make projections and forward looking statements that are based on management’s current expectations, but actual results may differ materially due to various factors. For additional information about the factors that affect our business, kindly refer to our forward looking statements in our 20-F and our reference documents.

The format of today’s call will be a short presentation, followed by a Q&A session. Mr. Spek, Head of Operations, will now comment on business during Q1 -- Q2, sorry.

Yes, good morning. As Sanjay indicated, I will try to guide you through the performance very well, understanding that your excitement probably is directed into the increase of our guidance, and you definitely may have a number of questions on the economic situation but we’ll get to this. Please understand that first of all I would like to share with you the performance of the second quarter and the first half of 2006.

I suppose we are working together on the slide pack which has been sent to you, and then let’s start on page number three. Well, the first half, and more specifically, the second quarter of 2006, I would summarize as seing two less positive events, the healthcare reforms in France and Germany, and the continued impact of the loss of products that occurred during the second half of 2005 from [inaudible]. And the subsequent generification still leaves its mark on our sales figures and now our sales growth.

On the positive side, there was the launch of Plavix in Japan and very, very recently, the launch of Acomplia in the United Kingdom. How did that translate? Well, you see that for the first half, we have an overall sales growth of 4.5% and you evidently see that vaccines, as communicated and announced previously, have significantly contributed to this growth. It is more than 44% of sales growth.

Relatively modest the growth of Pharma, with 2.1%, respectively 1%. Why? Largely for those two events I mentioned, generification during the second half of 2005, and healthcare reforms in Europe. So you also see this impact when you go to the geographical split. You see then that during we had in the first half a growth of 2.7% in Europe, the growth went to close to zero for the second quarter, and again, this is now the impact of what we have seen and suffered. First of all from a chronological standpoint in France, where a number of measures have been taken at the beginning of the year, such as the increase on tax on drug sales, such as targeted price decreases, such as de-reimbursement and other measures which had a significant impact, not only on our French subsidiary but overall in Europe.

What happened in the first quarter in France happened more or less in the same manner during the second quarter in Germany. You are probably aware that there has been announced a price freeze for a number of years. There have been changes in the rebate system. Those products which have identical activities increased into other products are subject to a 10% rebate and the already existing 6% rebate for patented [data] products have been confirmed, and there have been sharp cuts in a number of [inaudible] prices and we have been touched by this. The consequence, especially in Germany and the 7% loss in the first quarter in France, we have seen de-stocking of wholesalers in anticipation of those measures which were especially true for the month of July.

Now, on the U.S., you see a growth of 3% for the first half year, and 6.6% for the second quarter, and you see then this double digit growth for the rest of the world.

If I may ask you to switch now to page four, there we have illustrated the generic impact in the United States. And as it becomes quite clear from the chart, you see that if you extract the impact of those products being subject to generification at the end of 2005, which are Allegra, Amaryl, Arava and DDAVP, you see that we still had a two digit growth rate, and a very strong one even of 23 respectively, 30% and this is in front of a market which is today at around 6.57%, so it’s in value in the United States.

During the last conferences I have stressed our opportunities and our strong market positions in the so-called rest of the world, which is Asia Pacific, Africa and Latin America. And if you now to page number five you will see that this translates, meanwhile, and very significant contributions to growth in very simplistic terms. You see that the growth coming from the so-called rest of the world nearly reaches the magnitude of the United States, an element which makes us very positive and optimistic for the future. Always keeping in mind that also the growth for the United States will come back by the end of this year when we have gone through the negative impact of generification.

On page six, then, again, the portfolio of the leading 15 products in simplistic terms, you see that despite Depakine and Nasacort, and the two generic products, Allegra and Amaryl, you see a high 2 digit growth, and once again, this exercise, if you take Allegra and Amaryl out, you see a growth rate of this part of the portfolio of approximately 15%, which is perfectly in line with the growth we have shown in the first quarter, and by the way, overall, it’s very much in line with the growth we have shown for 2004/2005 which has been already between 15% and 20% growth for the leading 15 products.

Now some comments on Allegra first -- no, on Acomplia first. On page seven, you will see the indication, and in fact, we are very much content with this indication as obtained by the European authorities. It is what we have hoped to obtain. And in essence, it is so because a third confirmation of an independent effect of Acomplia on the metabolic parameters, independent of loss of weight, and in essence, we understand the effect on -- of our reimbursement strategy.

On page eight, we have put up some figures which strongly illustrate our confidence in the success of this launch. You see that the market, the key markets are U.K., where we have launched three weeks ago, Germany, where we will launch in three weeks from today, and the U.S., where we are still hopeful and confident to launch before the end of 2006. Those are the three major markets and are very well prepared. There is a high degree of awareness, and there is also already today a high degree of credibility for our product positioning.

You see further on the bottom of the page that the patient types are already today very well identified. This is of course is of major interest for us in order to guide this brand in the good directions there where the product will have the biggest impact on public health.

Now, we have no direct figures for the launch of the United Kingdom, so I have to remain vague. I can just indicate that we have a very, very positive first response from the doctors which have been visited during the last three weeks. You will understand that we of course benchmark with our previous major launches in the U.K. and what we see so far is doing better than those major launches. So we are very, very confident in terms of those reactions, but please understand that precise results, we can only deliver them during the next quarter.

On page nine, the situation of Ambien, we had the obligation during recent quarters to talk about less favorable results for Ambien, and we are glad and proud to report that the product has come back to a very good trend. You see that on the left side that in new prescriptions, we have taken over the growth of the market.

I may also add that we have taken over quite recently [Lonesa], once again in terms of new prescriptions. And so what we see overall for the family is very, very positive, in total prescriptions a growth of more than 10% and you will see them on the right side, that we have meanwhile increased our conversion to more than 24%. So you put this in context, it means our very large confidence that it will be a prolonged protection of the product due to the [inaudible] extension. We are still very positive in the sense that by the end of the protection we will get very close to those approximately 50% of conversions which we have issued across maybe one and a half years ago.

Lovenox had an important growth driver product, growing by margin 14%. Basically, nothing really new. Of course, the U.S. market remains absolutely key. And you see on the right side of page number ten that we have very positive trends in medical patients, which are by far the most important, but also in DVT and in NSTEMI patients.

Plavix, also in Plavix on page 11, we are back to very good trends. The second half of 2005 there had been some concern. We have reported that we have adjusted our marketing measures, especially for hospitals. And as you see there, we came back from growth rates of below 10% to growth rates now close to 15% and this [inaudible] extension led to an overall worldwide growth rate of nearly 18%. And we have seen a little bit less of a performance in the second quarter and in the first half in Europe than in the U.S. which is a, so to say, collateral damage of the various interventions from public healthcare providers in France and in Germany. But if you look outside those countries, you see a picture which is perfectly in line with our nearly 20% growth on a worldwide basis. Nevertheless, we remain very, very positive on the future for Plavix, as you see on page 12.

We have obtained a fabulous penetration in PCI of more than 90%. This is a lead indication of course, but the number of patients is relatively small -- a small indication too. And you see that [inaudible] ACS we have obtained nearly 50% of the theoretical potential and in other indications, even less than 25%. So there is a lot of room to grow and together with [inaudible], we need to further exploit this also through ongoing clinical trials.

Then on page 13, Lantus, growing by nearly 40%. It’s good to have the weekend reports that are due in June. We have taken over the lead in the U.S. insulin market, the overall insulin market, and we see that the overall growth of this product has a nearly linear manner. So also in terms of Lantus we remain extremely confident concerning future growth. And if you look at the bottom of the chart on the right side, you will see that a competitive introduction continues to significantly really penetrate this market.

Looking at the oncology portfolio, Eloxatin on page 14, a growth of more than 17% worldwide is not too much different in terms of growth between Europe and the United States. I’m sure you will ask questions on the upcoming generification of Eloxatin in Europe and I am of course ready to answer to this. In terms of penetration you will see that the Adjuvant Stage III is the lead indication but we also continue to grow in metastatic colon-rectal cancer.

Taxotere, Taxotere has been another subject of discussions amongst us. We see the signs of recovery as outlined on the right side. This is very early data, so it’s patient data. We don’t necessarily see this so far in the [sales] -- in the performance of the product in the United States, but we believe that this will translate during the third and the fourth quarter, also with a stronger sales increase. We have a lot of new data around Taxotere. The recent [congresses] have been very positive for this product, new indications, and fast track provisions by the American Health Authority. So all of this together results in early signs in first line metastatic breast cancer and Adjuvant breast cancer, and makes us very optimistic for the accelerated sales growth to be then reported hopefully during the third and fourth quarter. Overall, nevertheless, the product was also in two digit growth so that growth was 11%.

Well, I have commented on the significant impact, meanwhile, the Vaccines business has on our overall performance. You see on page 16, it is once again illustrated which are the important events. You will see that there has been an impact of $150m coming from the contract fulfillment that was the American government. Which is to a certain extent, an exceptional event during the first half, but only to a certain extent because we continue to supply the U.S. and other governments with this huge products.

You see that further [sets], especially Menactra, continues in a spectacular way to contribute that to this growth. And we had some [inaudible] indications that we have quite recently, together with [inaudible], have received a positive opinion on Gardasil. The product is now imminent for launch and I hope that the European member states have to recognize the positive opinions, so traditionally it takes a couple of weeks but we are absolutely confident that the product will be actively promoted by the sales forces of Merck and Sanofi-Aventis during the remainder of this ongoing year 2006 and the sales expectation from this portfolio are significant.

So far on sales, and I must pass the ball onto Jean-Claude Leroy, our CFO, who will go into the figures in the profit and loss and balance sheet.

Good morning, everybody. Thank you Hanspeter. Yes, I will go and begin to go through the P&L on page 17 and 18 and I will skip the following pages and come to this schedule. Well, first I guess top-line is to be translated into reported basis, so as you have seen at the reported basis, it’s +5.9 on the second quarter and +7.7 on the full first half.

If we give a look to the gross margin ratio, you can see that this ratio is a little bit lower than last year, at 78.4, to be compared to 78.8%, but now I guess the better comparison is to be made between the first quarter of this year and the second quarter, just because of the fact that these two quarters were impacted in the same manner by the generification of our four products in the U.S. And as you can see, the cost of goods is in line, and I’d say the cost of goods which is only part of that gross margin ratio. The other revenues, which are, I remind you, mainly the royalties on Plavix and Avapro in the U.S. are increasing in line with the performance of other products in this territory.

As far as the H1 is concerned, you see the same label of gross margin ratio as compared to last year, which in turn means at the same time that increases in other revenue, in royalty from the U.S. in Plavix and Avapro which offsets a more burdensome cost of goods because of the generification by half a percentage point.

R&D expense, actually no news from the quarter. I mean by that that we had EBIT program which was, and which is under development because of the success of last year in Phase IIB, so we are increasing our expense by up to 12% in Q2. And that has been a 12.7% increase in the first half of the year, nothing to add, and that’s something which we already forecast.

Selling and general, a little bit [inaudible] but as you can see that we are down 0.9% in Q2. And we are also up 2.8 for the full first half. Definitely we thought that the promotional effort, as you could have imagined behind the four genericized products, so that is the main reason and I can confirm to you that on the other side, we are encountering now a stability in the G&A area that does translate for the first half in a reduction of G&A. But in increasing selling expenses, you can imagine that when we see increase, it’s no increase -- no support at all from behind the generic product and the necessary support behind the other products and that’s including the products which were lately launched as Hanspeter mentioned a little bit before.

That is the operating income current which, as you can see, is another improvement, and we can measure that, that the ratio to sales and other improvements at 0.9%. We are up to now 34.5% on sales, despite this generification and the fact that we support the R&D expense increasing this year.

Nothing to mention special from operating current to operating income on this quarter, and I am sure you will remember that the rest we had in the first quarter were mainly disposal of assets. Exubera being the most important, and as a second in importance being the remaining stake in the Animal Nutrition business. So operating income, at €5.4b.

Down, if we hit the page. On the financial expense side, it’s a little bit heavier in the second quarter than it was in the first quarter. Now, this is not at all due to the interest charge of the company, but to the contrary. During the first quarter, we had a positive impact on financial instrument. I am talking of that financial derivative we had on the share of this company, the Australian company, CSL, following the sale of the Aventis [bearing] business. But so very positive impact during the first quarter and no impact during the second quarter. That explains to you the difference which you can see in the net financial expense during Q2 and H1. Nothing special to add to say on the tax rate.

And as far as these order line items, which is a share of profit and loss from associates, and minority interests, as you know, the most important components of these two line items are our association, alliance with Bristol-Myers Squibb on Plavix and Avapro and Aprovel. So this is increasing just because the products are increasing as already mentioned. In addition to that I have to mention as a substantial growth of that and net result of our 50% in Merial and we have 50% in that joint venture with Merck.

As we do usually, we give you some information on the impact of selected items during the period in order to better understand the level of preventability achieved during the period. Again, as you can see in this quarter, there is not much to mention, a negative impact of €6m, so I’d say already almost zero. So what we can read directly is that that second quarter came up with an adjusted EPS increase by 14.7% at €1.33, which translates, excluding selected items, at €1.34, up to 13.6% [sic – see press release].

If we now have the same kind of look at the end of the first half, well, as already mentioned, we had important positive selected items during the first quarter, mainly the disposal of assets, so there are two ways of reading the performance of the first quarter. The first one is to repeat the bottom line of the P&L, and that ends up with close to €4b of net profit, or €2.95 per share, up 33%. And if we look at that as usual, look at that excluding selected items, then we come up to €3.5b, €2.60 per share, up 16.1%.

As I’m sure you’ve seen from the press release, we’ve decided to upgrade our guidance following these good results as of the first half of the year. Instead of saying that for the full year we would achieve around 10% increase at the EPS level, barring any unforeseen major acquisition, despite the full year [at one], despite the generification, even that the launch costs of Plavix in Japan and Rimonabant. Assuming that this is a technical one, which is very important, assuming €300m after tax level of selected items against €168m in 2005, and based on an exchange rate of $1.25 per euro. Now, we are raising from around 10 to around 12.

I will probably develop, probably at that level, a little more understanding of how we could reap together. If I were to first come back to the original guidance, around 10 which is what I mentioned all year, we could also post it, as we did it together, saying that without selected items, that came up to around +8%. So what we are saying today again, without selected items, is around +10% at the EPS level.

You have seen that on the same basis, we’ve realized +16% at the end of the first half, I mean, without selected items. Now, in order to have a better reading, probably, of the first half performance, I have to remind you that first, as Hanspeter mentioned, the contract with the U.S. government in the sale of H5N1 was fully fulfilled during the first half, I mean $150m or €120m. That won’t happen again in the second half in addition to that.

Coming back on the synergies derived on the operational [side], you will remember that it’s already said that we would have finished to deliver the synergies at the end of the first half of 2006, which is exactly the case. Again, you will remember that we said by the end of ’05 that we will achieve on a cumulative basis, €1.4b before tax. We are now at 1.6 once again, an additional €200m before tax, which won’t happen again during the second half. So I guess that these two items helped in decoding the performance of the first half, and in turn to understand what I’ve just tried to explain about the full year guidance.

If we go now to the statement of cash-flows, you can see that we had another reduction in the net debt position of the Group. We were at €9.9b net debt, December 31, ’05. We are at 8.8. A good operating cash-flow before change in working capital, as compared to the first half of ’05, and a little bit more burden on the side of the change in working capital, and I will give you probably two pieces of information in order for you to better understand why is it negative.

I guess that first, we have to compare these two periods for understanding this move. As you can see, it was almost flat last year, +€0.1b, and this is probably -- this is certainly this period in which there were some, I will not say, exceptional, but things to be noticed.

There are two items. The first one is the restructuring cost. As you will remember, we accumulated restructuring costs since August 20, 2004, and at the same time, we began to pay for this restructuring cost. During the first half of 2006, we only had a few [tens] of millions of additional restructuring cost, which by the way, drove us to a global, total accumulative amount, which is a little bit below €1.7b, which is to be compared to the original €2b that we guided you.

So we cannot accumulate very large restructuring costs, but at the same time, we paid a lot of restructuring costs. So you can see that last year, we had help in the -- if I may put it this way, in the change in working capital, because of this phenomenon, this first half and probably it’s true for the rest of the world -- the year. We will have to pay for this restructuring, so a difference in balancing these two periods. In addition to that, you also know that for practical and technical reasons, you don’t pay your income tax the year you book for it. You generally pay a year after. Well, we just have recently increased our net returns of the company which you have seen I posted in 2004 and 2005. We are now, with one year delay, paying much more income tax than the previous year, and again, that explains something to you which is the difference in parent. Now, what I am saying to you, what I am trying to convey, is that -1.1 is certainly not something which is reproducible during the second half of the year at that level.

For the rest, acquisition of property, plant and equipment, 0.6, and intangibles, just to mention that there is a little something inside that 0.6 which is relating to the buyback of our write-off, Plavix and Rimonabant in Japan. The acquisition of consolidated investments, [Venteva], our 25% stake in that Czech company accounts for more than €430m, the rest being held by [Bacup]. The remaining 50% in a Japanese JV, which is selling a product whose name is [Ankaral]. This is [Aneodora].

Asset disposals, you know everything. It’s mainly Exubera and [inaudible], the remaining stake disposal. Dividend, you knew that it was to be €2b, which was paid in June. So that does give you an explanation for free cash-flow of 1.1 during the first half, more or less, and 1.4 during the first half of last year. And well, I guess that we are around through for the presentation of the financial performance of the first half.

Thank you. Natalie, we can pass on to the question and answer session please.

[OPERATOR INSTRUCTIONS]. Our first question is coming from Tim Anderson with Prudential Securities. Please go ahead.

Thank you, I have a couple of questions on Plavix and a couple on Acomplia. Plavix, can you theoretically submit a new revised settlement deal to the FTC or the State Attorney General, or is that not at all an option?

And then the second question on Plavix is, any sense for when you might go back to trials, seeing as discovery was wrapped up previously?

And then on Acomplia, I’m hoping you can say whether you’ve submitted a response to the approvable letter with FDA, and should we expect an advisory committee on this drug before the end of the year?

First I start with the Acomplia question. We have no information at all on an advisory committee. My understanding is that an advisory committee always could appear but to date we have not the slightest indication that the FDA does so.

Now, the second part of your question, we don’t understand the ongoing process with the FDA, in the way that the FDA has written us a letter and we write a letter in return and then the file is settled. It is a permanent dialogue between the agency and us, where we submit information. The FDA may ask additional questions on the basis of what has been submitted. And this is a process which is going on in a very intense and regular manner, but this is not a, let’s say, one time event. We send data and then we get an answer.

As far as the Plavix question is concerned, it’s done very well. Your interest surrounding the Plavix matter, that’s the reason for which I will try to answer, or not to answer questions, but to give you the company’s position on this Plavix matter so that we can afterwards pass on to any other questions.

As far as the litigation is concerned, to begin with. As we have previously disclosed our patent litigation in the U.S., against Apotex, was suspended due to the propel settlement. And as a result of propel settlements failure to obtain the clearance upon which it was conditioned, this U.S. patent litigation will resume. A new trial date has not yet been established. This will be done by the judge when he decides to do so. And in light of the current circumstances, I’m sure you will understand that we’re not prepared to provide additional information at this time regarding these matters.

Now, I want to also give a word on the Department of Justice investigation, also in order to answer the question before I got it. We’ve learned that the anti-trust division of the United States Department of Justice is conducting a criminal investigation regarding the proposed settlement of the Plavix patent litigation with Apotex, and the Group has received Grand Jury subpoenas seeking the production of documents. Sanofi-Aventis intends to provide all the information required in response to this investigation. It is not possible at this time reasonably to assess the outcome of the investigation, or its impact on Sanofi-Aventis, and again, we will not comment any more pending the investigation. Sorry to be blunt on that subject, but I’d prefer to make a statement so that we can pass on something different. Any other question on any other matter.

Okay, thank you.

Okay, next question please?

Thank you. Our next question is coming from Eric [Le Berigu] with Raymond James. Please go ahead.

Yes, good morning, two questions on products. The first one on Ambien in the U.S. In the second quarter there is a very high growth of 58% in the U.S., which would seem to be significantly ahead of the prescription trends in the U.S. Could you say whether there is any stock effect there, or if the comparison basis was de-stocking in some extent last year?

The second question about your comment on Plavix in France and Germany, could you elaborate a little bit more about what is happening in France and Germany, and whether it’s sustainable or perhaps a run-off in the second quarter?

Well, on Ambien first, there are no changes in the stocks there. The stock of Ambien is stable for quarters and it is around 0.5, 0.6 per month. There are in fact some price increases in the U.S. We have followed overall a price policy very much in line with our competition.

The competition has been priced very much ahead of us, and we have launched Ambien CR [at equal price with] Ambien [IR], so what we did in both quarters, 2006, we have increased prices of IR to a level that we are today nearly equally priced with [Lunessa]. I believe that they are now 2% or 3% only ahead of us. So you see this, but this is to my understanding the only effect which is worth to be mentioned.

On Plavix, what I tried to say was that we have today an environment especially in Germany where the total market and the prescribers are very much de-stabilized by those interventions, and we have seen more or less in the first quarter the same situation in France. And this has overshadowed, so to say, also the prescription of products which are not directly subject to those interventions, such as Plavix, which are relatively costly treatments, of course, and consequently always suffer. But in the underlying, how should I say, additives to the product and their prescriptions at the same time, there are no changes. They are just suffering, as Plavix has been suffering, to some extent, in both European markets by the restructurization of healthcare.

Are you doing another price increase? You mentioned in the U.S. during the quarter?

Yes, there are a number of price increases in the first quarter. We have made price adjustments in context with Allegra and Allegra [D]. There has been a price increase on Avapro, which is +4% which is net, substantially less because of the situation of the managed care and the competitive situation. And we have had a 4% price increase on Plavix in January and a further price increase also on [Actimel], [inaudible].

Okay.

Thank you. We now move to [Amit Roy] with Citigroup. Please go ahead.

Hello, yes. Just three questions. Firstly, any update on the Dronedarone filing?

Secondly, regarding Lovenox, I recently heard that the Judge for the Lovenox trial has been changed, and clearly that’s going to cause some delay. Any idea when we might be getting some sort of trial date coming on that?

And lastly, regarding Acomplia, the CV data you presented on the slide of focusing your promotional efforts on the cardiovascular coronary heart disease aspect of Acomplia, will you be promoting it for pure obesity, BMO of 30 any time soon? Thank you.

Excuse me, I did phonetically not understand the end of your last question?

Sorry. Regarding Acomplia, we can see that clearly, there’s a high awareness for doctors to prescribe Acomplia in the U.K. and in Europe for the cardiovascular diabetic indication. Will you be promoting it heavily for the just pure obesity, no cardiovascular, no diabetic indication?

We start with the last question first, the answer is clearly no. We are strongly convinced that we don’t have an obesity drug in front of us. And promotion for these patients would be frankly also not in line with the indication approved.

I indicated before that we are very happy with this indication because it perfectly reflects what has been undertaken in terms of clinical trial programs and which is the subject of our continued clinical research in this respect. So this clearly is the product for obese people, but having additional problems in the cardiovascular and in the metabolic field.

On Lovenox trial, I’m really regretful, but I cannot speculate on the trial date. We have an unfortunate experience that nothing is predictable in this respect. And the change of judges may have impacted in one or the other direction. But I think it would be useless to speculate on this.

Dronedarone, yes, the so-called action date is long behind us. We have received no substantial information at all from the FDA. Whenever we go back to the FDA you get relatively right answers, in the sense you will hear this in short. But this doesn’t change anything. In essence, the action date has passed by and we haven’t heard anything on this file which is regretful but, to a certain extent, reflecting the current situation of this agent.

Thank you.

Thank you. We now move to Jo Walton with Lehman Brothers. Please go ahead.

Good morning. Three quick questions please. Firstly, can you tell us, excuse me, a little bit more about what you expect to happen to the base business, the tail? You’ve seen a -7% decline in the second quarter. Can that all be explained by the, perhaps, one-time issues in France and Germany? And what do you think the outlook for that base business is?

Could you also tell us what the stocking level, what the one-time bolus sales into Japan were, if they were significant surrounding the launch?

And you’ve talked about the generecization of Eloxatine in Europe. You said you’d tell us a little bit more about that.

If I can chance my arm of a longer-term marketing question, you’ve managed to keep your marketing costs flat in the second quarter over the second quarter. What sort of rise in the overall marketing expense do you think we should expect to see in the second half as you ramp up your launch expenses for Acomplia?

Yes, so to start with the base business, yes, good observation. Of course, minus 7.7% in the second quarter. What are the elements? First of all, there is a strong seasonal effect because this part of the portfolio contains the antibiotics. And it has been a very weak season, so to say, in Europe, but also abroad for antibiotics. So the first quarter has been weak.

Second, there is Ketek in this field. And, of course, there have been negative events you are aware of, which means that Ketek sales are depressed and did contribute.

If I take those effects out, and I take further out that there has been some generification effects, because [Avarine DDABP] are also subject to this definition of our portfolio, we have a net decrease between 2 and 3%, instead of those at 7 to 8%, which already is much more acceptable, so to say.

Nevertheless, I believe there is no alternative. And we have to continue to fight for this part of our portfolio which is about -- still about the state of our overall sales. And we will continue to do so for reasons which, I believe, are evident.

Nevertheless, you asked for a guidance. I believe that, to make a choice, that by the end this will remain to be a difficult year because this part of the portfolio has been struck by the interventions, especially in France.

And, well, it’s very difficult to predict this part. We are confident that this has been a one-time event. In any case, it has been an event of a magnitude we have not seen in the French market before. And we very much hope that we will not see it again. But this is nothing but hope.

So I cannot give you much more of a precise guidance how this part of the portfolio will develop. But I am confident that the 7.7% you see in the second quarter will not be repeated. But this is paradox as it is. It is a very vulnerable part of the portfolio for interventions in terms of price reductions, the reimbursements and so on and so forth.

Now, on marketing costs, I would not say that we see a significant change in marketing costs in the remaining part of the year. There may be some impact from an Acomplia launch in the United States. But this would be largely variable marketing costs and much less from fixed costs in marketing coming from people, because whatever is eventually needed in this respect is in place. So I don’t see a significant change. Whatever may happen is perhaps about a percentage point or something like that.

On Eloxatine. Eloxatine, yes, we have indications that generic competition is coming up. There are notifications going on in Germany and in France and in the U.K. What we see so far is that those products are not ready-to-use formulations. They are the traditional powder forms which, of course, give us a certain advantage.

It is difficult to give you an exact date. But if something happens, it will happen towards the end of the year, in the fourth quarter, then eventually.

Is that satisfactory, Jo?

The final question was just Plavix in Japan, whether there was a stocking effect?

The stocking, very insignificant. Really insignificant.

Thank you.

We now move to Jerome Berthon with Aurel Leven Securities. Please go ahead.

Yes. Good morning gentlemen. Just a few questions, if I may. With regards to the vaccine contract you talked about in Q2, have you got an idea about what could be the EPS growth related from this contract?

And also, just regarding an R&D update. Could we expect one before the end of the year?

And last but not least, with regards to this criminal investigation regarding Plavix, obviously, are you aware about a precedent in this kind of case and about the risk, just in theory, about the risk that you could face in terms of maybe negotiation with the government or fines? If you could elaborate a little bit.

Okay. So first, I already answer everything that concerned Plavix. I already delivered that, sorry. But I will stick to what I already said and I won’t be able to answer to your question related to the criminal investigation.

As for us, the R&D update. Your question is we intend to do something during the second half of the year. No, we don’t intend to do so just because of the fact that the result of the studies which are under current development won’t be known, I think for some of them before the end of the year, or the very beginning of next year. And so, as we usually do each February, we intend to develop an update on the R&D portfolio situation at the same time we deliver the full-year results next mid February. That’s the reason for which we won’t -- we don’t have the material to do so during the second part of the year.

On H5N1, Jerome, we don’t disclose profitability by product. But you can imagine that this is a commercial contract from the U.S. government, and we don’t have a lot of promotional expenses behind this type of contract.

Thank you.

The next question is coming from Michael Leacock with ABN Amro. Please go ahead.

Hi. I wonder if you can answer just a couple of questions. On the Eloxatine issue, could you be helpful and just give us some guidance as to the proportion of European sales in Eloxatine in those three countries of France, Germany and the U.K.?

On the H5N1 vaccine contract, could you give us perhaps some comment about the future contracts in terms of timing and scale for booking revenues from those?

And just briefly on -- the tax rate seemed quite low to me on the Q2. I may have missed it earlier on. But perhaps you could just comment on that for the full year ’06 and going forward?

Well, on the Eloxatine question, we don’t give split of sales per product for, I think, understandable reasons. If I say those three markets, I can give you quite usual rate of share of those markets. It gives you a certain orientation.

I can nevertheless indicate that sense of Eloxatine in the United Kingdom are relatively small due to the effect that the product has been introduced relatively lately and has obtained reimbursement from NICE only recently.

On H5N1, we have contracts pending in France, Italy and Australia. But it’s not possible to predict the exact quarter in which the product will be applied and booked. Yes, it’s also not of the same magnitude of the contracts that we had in the U.S.

Okay. Thank you.

Can we have the next question, Nathalie, please?

Of course. From Merrill Lynch, we will take our next question from Graham Perry. Please go ahead.

Good morning. Thanks for taking my questions. I just wonder if you could give a little bit more detail on the Plavix slowdown in the second quarter of your consolidated sales. To what extent is that just pricing reforms and to what extent is that actually an impact on the volume growth. And can we expect the kind of growth rates that we saw in the second quarter to be what we should be looking for for the remainder of the year?

Then secondly, on Ambien, in the U.S., I think it looks as if the actual net price increase or list price increase is around 35% year on year. I was just wondering how much of that is actually coming to you net after rebates. Are you managing to capitalize on most of that?

Thirdly, just an update on where you are with reimbursement discussions with Acomplia in the European territories you’re intending to launch in.

And if I could ask you to repeat the comment, sorry, on the base business and your expectations for growth going forward in light of the European reforms. I’m sorry, you were breaking up at that point.

And then finally, just a straight-forward question on margins, if you assume Acomplia does get to the market and is being launched late this year, early next year, do you still think you could hold down your pharma margins at the kind of level that you’re looking for this year? Thanks.

I think the last one is the easiest one. The answer is yes. It is the usual pictures that you have the largest investment for such a launch up front. So I would not expect any significant change in this respect for 2007 or later. We will launch this product over the next 24 months. And the major European countries will come this in the next nine months. And, as indicated before, hopefully also the U.S.

Well, you say then to repeat what I said on the base business. In simple terms, I said that this business is extremely vulnerable to government interventions, especially in Europe. I think I cannot go much further. I further added that we haven’t seen this kind of traumatic intervention in France before. And therefore we are hopeful that this will not be repeated in the near future. But besides, I cannot make a lot of comments.

Finally, you have a business which is highly profitable and is representing a third of your sales. So you have to defend it. I admit this is all a little bit general. But I cannot be more specific for reasons which I hope are understandable.

Acomplia, the situation really varies from country to country. In the U.K., the reimbursement of Acomplia is today [suspended] until a revision by NICE. This revision will come. I cannot be precise when. But I would estimate it in the next 12 to 24 months.

In Germany, the reimbursement of Acomplia is [inaudible]. But without any doubt, Acomplia will become subject to the recently founded [ICVIC] Institution, which has a similar function as NICE. We believe that given the clinical importance of the product, ICVIC also will pick up Acomplia relatively fast. To give an estimate is impossible. This institution has just started to make the first revision.

In France, reimbursement is, so to say, up front. We have to negotiate this reimbursement before the launch, which means it is something which will happen during the next, let’s say, six to nine months. And, of course, we believe that we have very good data to show the clinical benefit of the product and go ahead.

And so the situation varies really from market to market. I could add that in the Scandinavian markets which are subject to launch also in the next eight weeks, this product will be reimbursed from the very beginning. But as things are today in the pharmaceutical industry, you have to deliver first of all the necessary data to show the interest for public health service in Europe to continue to reimburse this and any other products.

Now, on Ambien. Frankly I am not prepared to give you the total price effect over the last 12 months. I believe it was lower than the figures you have indicated. But I think the real facts behind your question is what do we give to the healthcare providers in the U.S. Yes, we made concessions. In some respects that we made concessions to accelerate substitution of Ambien IR with Ambien CR. This is a process which is accelerating. And the strong boost that we have in our favor comes from the fact that we have six months more of protection from this product. So the healthcare providers, of course, have been a little bit reluctant to treat Ambien CR the same way as they have been handling Ambien IR before. We have put the necessary strategies in place. And what we see in terms of accelerated switch in the last weeks is largely due to this. We are approaching a situation where Ambien CR is more or less treated the same way than Ambien IR has been treated. And this has the desired effect. But I cannot give you much more as a general indication. You will understand that we are not ready to discover our rebate strategy in more detail.

And on Plavix?

Just wants to know guidance on Plavix [inaudible].

Well, the guidance in Europe, 20. I cannot go much further than what I have said before. Yes, there is a difference of approximately 5 points in terms of growth between the second and the first quarter because in the first -- in the first half the growth has been about 14%, and in the second quarter the growth has been between 8 and 9%. Except before because that this is due to the overall climate in France and in Germany. Besides, we see a linear growth in the other European markets, like Italy and Spain. We have to see how the third quarter develops. But on the other side, you see you always have fluctuations between one quarter and the other. The second quarter has been relatively short in calendar days. Let’s also keep in mind that this is a product of a size, that more and more the absolute growth becomes important than the relative growth. We feel there is nothing really of concern in Europe in terms of performance of Plavix, despite what we have commented so far for Germany.

I guess the underlying basis of my question is are you seeing a slowdown in volume growth at all, or is this just pricing impact from the reforms? Or are the reforms actually affecting the volume?

No, we don’t see a slowdown in volume growth.

Okay. Thanks.

Thank you. [Ryan Bordeaux] with UBS has the next question.

Morning. A question -- or couple of questions related to seasonal influenza vaccine. You must have a reasonably good idea to find how about how many doses you’ll deliver the season.

Excuse me, sir, we hear you very poorly.

I’m sorry, repeat please. You can’t hear me very well? Is this better?

It’s a little bit better, yes.

Okay. I’ll try and speak up. Just a couple of questions relating to seasonal influenza vaccine. You must have, by now, a reasonable idea of the number of doses you’ll ship this season. Just wondering if anything -- if you see anything that might affect this. We have seen a couple of reports that one of the strains was lower yielding this season. Also you received a letter in the U.S. from the FDA. Is there any update on that and will that impact your deliveries this season? Do you have anything to say on this? Thank you.

Yes, Ryan, thank you. Essentially, the [inaudible] issue which were noted in the FDA letter were at a very early stage. It was at the mono [inaudible] strain stage, so the strains had not yet been combined to make the trial [impacting]. Because of which it is not going to impact the production for this year. So we are pretty confident of supplying our commitment of around 50m doses of influenza vaccine for the U.S. market in the 2006/2007 stage.

Thank you.

We now move to Peter Dullmann with Oppenheim. Please go ahead.

Yes. Peter Dullmann, Sal Oppenheim. Good morning to you. One question, coming back to Germany. I assume that you’re also not willing to comment on German Plavix figures. Maybe you can give us a general comment on what’s going within the already-mentioned ICVIC Institute which is currently reviewing the reimbursement status of Plavix.

And the second question, selected items for the first half. You mentioned 460m, if I remember that correctly. For the full year, you’re going for 300m within your guidance. Which kind of negative selected item impact are you expecting to occur in the second half? Thank you very much.

So, on ICVIC first. The overall activity so far as ICVIC is concerned, and is concerned for the total industry. And the industry has expressed itself, the industry feels that ICVIC, in contrary to, for example, NICE, is not working independently. We feel that ICVIC is evaluating information in a highly selective way which we and other major companies continue to criticize.

And this criticism became very, very obvious during the recently published position of ICVIC on the short-acting insulin. And there we are totally in line with the criticism expressed by Lilly and Novo Nordisk. And we are evaluating our positions in this respect, including legal opportunities or options we may follow.

It is correct what you mentioned that ICVIC currently is working on an evaluation of Plavix. This is the use of Plavix in the field of PAD, in comparison with Aspirin. We are contributing to this evaluation. The evaluation is pending. I am not aware of when this evaluation will come to an end. We look to assist this. There is some scepticism of course coming from the recent publication of the short-acting insulin. But it’s too early to say. We don’t know what is coming out.

As far as your question on the selected items is concerned, and as for the guidance. You are right in saying that at the end of the first half we have a net impact of 460m of selected items. I have several comments to try and answer your question.

As I already mentioned in our conference call, these kind of items are mainly unpredictable. I mean by that that we don’t have the agenda, as you understand. This was all of a sense making either capital gain or capital loss. So we cannot predict. At the same token, we are not capable of predicting the impact and the variation of the stock exchange on some participation which we do have on some listed companies. I am talking of Biotec. I cannot either predict about the impact of the financial instrument type, like I said earlier in the year on the [CSL] matter.

So the exact answer to what is the predictable evolution of that 460m for the end of the year? We don’t know. That’s the reason for which when we posted the first guidance of the year and when we are posting today our revised guidance, we are saying -- we are expressing the potential evolution of the EPS, given certain definite number in euros of selected items.

In other words, this is purely a help for you to make the calculations. And that’s the reason for which also I try to give another help to the reading by saying that, yes, at the beginning of the year we anticipated a growth, without selected items, by 8%. Today, we are raising our guidance at a 10% level without selected items.

In other words, what I am trying to convey is that when we said that we anticipate around 10% without selected items, I guess that you have the information which is necessary to anticipate from the bottom line. Except for selected items which, this is true, are adding up to 460m at the end of the first half. I cannot predict exactly what they could be, what they are going to be plus or less.

At the end of the year, when you have the results of a litigation, and you had a reserve by [inaudible], you will discover that it’s going to be plus to your P&L or minus to the P&L. It’s very unpredictable. And that’s the reason for which we offer you to try and think without selected items. Even so, this process exist. But we are not capable of giving you any reasonable prediction on this item for the rest of the year.

Thank you very much.

Nathalie, maybe we have time for one last question.

Okay. Our last question is coming from Kiyoshi Ando from the company Nikkei.

Good morning. This is Kiyoshi Ando of Nikkei Newspaper. I have a question concerning Japanese market. You said Plavix is very insignificant in Japan. But does this mean that it’s well below your expectation? How is it doing if you compare it with what you have expected?

And secondly, about Rimbonabant, you have taken back your license now from [inaudible] Sanofi-Aventis, I believe. How much are you willing to invest for the marketing of this drug in Japan? And will you need additional sales forces for that? Thank you.

Yes, thank you for those questions, also because I think I have not been precise enough on Plavix. I understood the question from Jo Walton in the sense that if these so-called wholesaler stocking would have been significant in Japan, and in this respect my answer was no, not significant.

The way the Japanese market works makes it that wholesalers’ stock up in front of introductions are not very important because you have to get approval hospital by hospital. So the entry into market is relatively slow. So I didn’t want at all to indicate that Plavix overall would be insignificant. It is, in fact, too short in terms of launch to make a clear statement on the sell out, which means the reaction to the product in terms of real demand. But once again, my comment was just on the wholesaler building up stock effect.

So your goal of selling this year;s objective remains the same?

Yes. It’s totally unchanged, of course. Totally unchanged.

Now, on Rimbonabant, you see, it’s a little bit early to make a prediction how much we will invest in terms of launch because the launch of Rimbonabant in Japan is some years away. We have taken back this product in order to better manage the clinical development of the compound in Japan, which is ongoing.

But we are, as you say, at the end of phase II B. And we will enter 2007 in phase III. So we have to continue to invest in the clinical development. And then we will do whatever is needed to make this product a success in terms of the adequate marketing investment, as you are right, in let’s say, 2009 or 2010.

Thank you.

Okay. With that, we come to the end of the conference call. Thank you for assisting. And if you have any further questions, please don’t hesitate to call Media Relations or Investor Relations. Thank you.

Ladies and gentlemen, that will conclude today’s conference call. We thank you for your participation. You may now disconnect.