Sanofi SA (SNY) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Sanofi-Aventis first half 2007 sales and results conference call. For your information, this conference is being recorded. At this time, I would like to turn the call over to your host today, Mr. Sanjay Gupta. Please go ahead, sir.

Good morning, everybody. Thank you for joining us for our Q2 results. I would like to begin by taking care of our legal requirements. During this conference call, we may make projections and forward-looking statements that are based on management's current expectations. Actual results may differ materially due to various factors. For additional information about factors that affect our business, I invite you to refer to our 20-F.

Joining me today are Hanspeter Spek, Head of Operations, Jean-Claude Leroy, Executive Vice President in charge of Finance & Legal, and Laurence Debroux, our CFO. We'll make a short presentation followed by a Q&A session. Hanspeter will now begin our comments on the Q2 performance.

Yes, thank you, Sanjay, and good morning to all of you and thank you also for joining us so early today. I propose that I guide you through our slide deck and that we start on page number three, where you'll find the comparison of our results for the first half of 2007 and the second quarter 2007. This second quarter is, to a certain extent, atypical for the whole year and it is highly marked by events coming from the appearance of generics for Ambien, of Eloxatin in Europe and, to a much lesser extent, also Tritace in Canada.

So if you agree, let's compare the two percentage columns. So evidently, you see that the sales growth has dropped from 6.4% for the first half to 2.5% for the leading 15 products, and I will get back to this in a little moment. The base business remains stable, with a slight minus of 1.4% respectively 1.6%, which means that our continued efforts to stabilize this part of our portfolio have been successful.

So total sales of pharma, then, decreased from 3.7% to 1.2%. And why? You'll find this evidently in the next column, because if you subtract, from the total pharma sales, sales of Ambien IR - which means the form of Ambien which lost its patent protection during May 2007 - and the Eloxatin sales, you see that the very important, of course, rest of the portfolio remains absolutely stable in terms of growth, 6.7% respectively 6.4%, which means a growth which is pretty much in line with the overall growth of the pharmaceutical world market.

Our Vaccines business, no change at all. Very good, very high two-digit growth, 14.4% (sic - see presentation) and 14.8% in the second quarter, which adds, then, up to a growth of 4.6% for the first half for the total Group, respectively 2.3% for the second quarter.

From a geographical angle, you see what you of course expect, which means a little negative growth rate for Europe, also caused by Eloxatin, but overall caused also by the slowdown of the European market subsequent to all those events you are aware of - the intervention of government in Germany especially and also in France.

In the U.S., you see the full impact of the Ambien event - growth rate, which has been 9.2% for the total first six months and only 2.4% for the second quarter. Why, it's evident, because if you subtract once again Ambien you see that our overall growth in the U.S. remains around 15% for the first half and for the second trimester, which is a very, very good and very strong performance, which means, in simple terms, about twice the growth of the market.

And then overall, again, the rest of the world situation, 9.7% compared to 8.5%, which means clearly that those parts of the world - Africa, Latin America and Asia - have not been impacted by the events of Eloxatin and Ambien. And therefore you see that our growth has been largely maintained.

Now, on page number four, the leading products. First of all, Lovenox, still the most important product in terms of sales of the Group and we are confident that this will remain as such. You see that the growth has further accelerated from 11.8% to 15.5%. You see also the strong comeback of Plavix from only 5.7% to 12.7%. Of course, I'll get into more information on Plavix in a little moment again. Lantus maintains its strong growth, around 26%. This is also true for Taxotere, 9.5% to 9%.

And then the two negative events of the second trimester, Stilnox, which fell very short in its sales. I think there is a certain overestimation also the consensus. When we analyzed this further, it's quite evident that the impact on Ambien IR in reality has been even harsher than anticipated by the financial market. In contrary, Ambien CR is doing very well and I get back to this in an instant.

Copaxone maintains its growth rate. This is equally true for Aprovel. And then I mentioned before Tritace, where you see that we are now having the full impact of the generification of the product in Canada, where it came a little bit earlier to generics than anticipated. We had anticipated that the generics would only appear in the second half, but in fact we had them in the second trimester already. Overall, you see the same figures, then - the top 15 6.4% to 2.5%. And, in extracting Ambien IR and Eloxatin, you see that the growth rate theoretically would remain around 11%.

Now, more in detail from a product and from a geographical perspective. First, this time, a look on the Vaccines business on page five. You see why our Vaccines continue to do very well. They do very well in our own consolidated growth, our own sales, and I've cited for you here Menactra. On the right side, you see that in the first half 2007 Menactra sales are even a little bit superior to total year sales in 2005. Menactra is growing in the neighborhood of 50% and is on a very good way to become a blockbuster.

What we have in terms of consolidated sales is exactly mirrored in our joint venture with Merck. You see the growth curve of Gardasil, which does extremely well in Europe. It has been recommended now for the prevention in nine countries and is funded or reimbursed in five European countries. And of course there is a direct function between reimbursement and sales. And the joint venture is also, here, on a very, very good track record.

Now, on page six, the overall picture of our consolidated Vaccines business. You see here year to date sales of nearly EUR1.2b, which are growing by 15%. And you see on the right side of the chart that this is due to all essential elements of our Vaccines portfolio, with the exception of the influenza, the flu vaccines. There, we have a seasonal difference as compared to last year, but this will be compensated by later stockings this year in the second half of 2007. So overall, Vaccines continue to be a very, very strong contributor to our overall Company growth and we are confident that this will remain as such also in the future.

Now, on Acomplia, which of course has been a very important element of our overall performance in the second quarter, as you know. A first look on the sales performance in 2007, you see that we have continuously increased access for this product in European and in international markets. And you see a strong acceleration of growth in the second quarter 2007, which is largely driven by France, where the product does very well. We have even increased the access for the patients [since very short], during July.

100% of all patients who are within the indications, the approved indication for reimbursement in France, have now 100% coverage, which did of course help to improve the performance of the product even further. And once again, what I said before on Vaccines is equally true, of course - there is a direct function between access and reimbursement and commercial performance of this product.

We continue to manage this product very carefully, for reasons you know. We feel that it is absolutely essential that the product is well-positioned. And that we succeed you find, then, on page number eight, where you see that between 84% in Denmark and 99% in Ireland all patients are exactly inside the patient profile, which means those patients showing the best benefit risk, which of course is absolutely key for the long-term success of this product. And we are very content to be able to report such a good compliance between the patient profile and the medical reality.

Now, from the regulatory side, two comments. The first one, page nine, you see in summary what EMEA has confirmed. In essence, EMEA has confirmed the positive benefit risk profile in appropriate patients. Of course, we are very satisfied with this decision of EMEA here in Europe after the events around the FDA in the United States.

This has caused, more precisely will cause, labeling changes. Those are exactly in line with what I have said before. The so-called appropriate patients, we will have a contraindication for major depressive illness, which we can entirely confirm. We feel that this is totally in line with the clinical profile of this product and of course we fully support it. It needs confirmation by the European Commission for those labeling changes, which we expect for September 2007. And we are underway to put the necessary measures in place to communicate on this label.

Now, off the presentation, a little comment on the FDA situation. Of course, you know that there was a negative vote by the Advisory Committee. We have since received confirmation from the FDA that the FDA is ready to talk to us once again. The FDA has formally acknowledged that we have (inaudible) the file, but has given us notice that they are absolutely ready to see us once again with this file as soon as it can be completed by additional data confirming the benefit risk profile of Zimulti in the United States.

And of course, we are ready to so and this will be then data driven within the ongoing clinical program behind Zimulti and Acomplia. And you know that there are significant trials underway to -- one aspect to further confirm the clinical profile of Zimulti Acomplia in the field of diabetes and, on the other side, to confirm [morbid] mortality advantages of this product. So as soon as those data will become available and suppose that they are positive, we will redeposit then the file also in the United States of America.

On page 10, Lantus continues its very, very successful way. Lantus is now the leading insulin product. I think that the curve on the right side of the chart speak for themselves. On the left side, you see that this is really a worldwide success driven by very strong growth rates - all the international part of the growth is more than 50%.

We believe that, on page 11, we can further accelerate this growth by modern practical devices and we have started to launch an insulin injection device under the trade name SoloStar. The product has been launched in Europe, mainly in France and in Germany, and, whilst we speak, we are launching it also in the United States. We have significantly invested into this project. The aim has been to make an even better device than the competitive device on the market. And as you see from the chart, in the perception of physicians, we have succeeded to do so. And this is also what we hear as first feedback from the market in Germany and in France, where we have very, very positive feedback, not only from physicians, but also from patients and customers.

Now, on page 12, how does Ambien do? Well, I think in our earlier conversations I had indicated that for us a key element, first, is to see how will Ambien react, Ambien CR, more importantly, will react when Ambien IR generics become available. And you see that the market share of Ambien CR more or less is stable, so we can conclude from this first part of the mission is accomplished. Now, of course, we have to stabilize this market share in the weeks and months to come. We do the necessary. We continue to invest massively into Ambien CR, not only by [field force], but also by direct to consumer advertising.

The second aim in this critical phase, of course, is to maintain the same high degree of market access with managed care organizations for Ambien CR than previously for Ambien IR. And also there again, we see reports that we do very, very well. We are approximately of the same level of access for Ambien CR after the generics of Ambien IR became available, which makes us overall very optimistic [that] Ambien as a family will become or maintain to be a blockbuster. And as you see, with sales growth of $400m in the first half for Ambien CR alone with a very strong growth rate, we are on a very, very good way to it.

On page 13, data which underlines our optimism as well. You see in very recent investigations as well as physicians and patients expressed a high degree of satisfaction with Ambien CR. So we really seem to have the superior [chart here] and this is good to be confirmed by customers and prescribers.

Other important events, then, on page 14. To come back of Plavix in the United States, I think this is also very important - and I'm sure that Jean-Claude Leroy will make additional comments on it - when you look to our guidance to the rest of the year, because the big difference, of course, in the second half of 2007 will be this comeback of non-consolidated sales, but very, very important contribution to our profit. And if you look to the left side, you see then that the second quarter achieved sales which were perfectly in line with the second quarter sales of 2006. Yes, the product is back and is doing extremely well. You see on the right side that evidently there is no more generic product in the market available and consequently Plavix the trade mark went back to 100% of new prescriptions.

Now, on the prescription status, there has been some, as IMS called it, glitch in recent weeks. We've redressed this. We have contacted, during the second quarter, IMS saying that we are amazed to see reports with prescription growth above 20%, because this is not what we feel from the demand side. We acknowledge that IMS has been in a very difficult situation to manage this exceptional event of an appearance of a generic.

Today, IMS is reporting a prescription growth of approximately 12%, which, to us, sounds much more reasonable, not only but also because we had about a 12% prescription growth before the generic appeared. So we feel that the product also in this respect is perfectly back to a normal (inaudible) prescription growth for a product of this size without any doubt. It is very reasonable data.

Very reasonable as well - next page then please - on page 15, the performance of Lovenox. The product does extremely well, with nearly 16% growth. You see that this is true for the U.S., where the growth is even stronger with 21%, and 17% outside the U.S. and Europe. During our last call, I had indicated that the first quarter was a little bit weak for technical reasons. We had one large supplier where the orders had been delayed. And you see now that, in the U.S., those orders came as predicted in the second quarter. And yes, behind, we have a continuously very strong growth of the product in medical patients, especially in the U.S., where we have gained about 100,000 new patients within the last 12 months and where the market still is not fully leveraged.

We believe that, on page 16, we have excellent new data to further accelerate the growth of the product. You see impressive risk reduction data, 43%, as compared to unfractionate heparin, which still is the major competitor in the United States. [This] product significantly is now superior also in acute ischemic stroke. And you see a risk reduction of 44% or even 70% depending on the duration of treatment, which means that we have excellent data to expand the market in two dimensions for Lovenox. And so we remain extremely confident about the future of this product.

Talking about the future, on page 17, a little summary what has motivated us to get into a cooperation with UCB. UCB has very, very good performance with Xyzal, an anti-histamine product in Europe and outside Europe. And UCB have been interested to work with us on the marketing of Xyzal in the U.S. for evident reasons - our franchise in this market. We believe that there is a strong market need as a consequence of the underlying disease for new anti-histamine products. Xyzal is such a product. It has a very strong profile in terms of efficacy. And we will be launching this product, together with UCB, during the fourth quarter in the United States and are very much looking forward to expand our franchise in this market segment.

Two last angles to our performance now, on the base business. First, on page 18, you see more details on the performance of the base business. You see that business is really stable, which we continue to consider as a success. It is further confirmed on the left side of the chart that this business is extremely important for the international part. And on the right side, you see that, in the major markets of the developing world, the so-called BRIC markets plus Mexico, that there the base business growth is very strong. If you look to markets like Mexico or China, which are definitely the markets of tomorrow, you see that our base business is growing in the good two digit and we see this as a result of our continued efforts.

On page 19, some comments on how to adapt to market changes. We have repeatedly said that we adjust to local conditions and we are not supporting overall statements for our worldwide market, which does not exist in this sense. As an example of such an adaptation, you see on page 19 what we have done in the United States. Since 2005, we have reduced our field force, for example, by 11%, downsizing it by approximately 1,000 people. We have shifted our resources in a situated manner to the opportunities.

Of course, we had to make adjustments [during] the Plavix [expense]. Of course, we had to adjust to Lantus in terms of new competitors. Of course, we had the opportunity to support stronger Ambien CR. And you see, then, on the right side that basically the flexibility, this approach according to the individual situation of a given country in the United States has caused that the performance of our business in the United States always has been superior to market, also during the time of relative crisis.

On page 20, now, a short summary of Japan. We are extremely bullish on our future in Japan, where we expect a two-digit growth for the years to come. How did we do that? First of all, in 2005, 2006 we have invested into our local development capabilities (inaudible) to speed up and to get closer to the deadlines we realize in the [other markets].

We have launched new products, such as Plavix. We will be launching, in the first trimester of 2008, Clexane and we have expanded Taxotere indications. You see that we have taken back part of our portfolio which had been licensed out to companies like Daiichi, Taisho and also Chugai-Roche. And we have significantly reorganized and expanded our field force by approximately 10%. And we maintain committed to make also external moves and are working actively also in this direction.

Now, how does this do? In the example of Plavix in Japan, on page 21, you see that the product now has really accelerated its growth. We are achieving now approximately 5m of sales by month. And yes, as discussed earlier, this is largely due to the fact that, during April, May, prescription limitations which are standard in the Japanese market have been lifted. And the product is on a very, very strong growth pattern, supported without any doubt also by our decision to take back the management of [triclopidine]. And we expect further acceleration of growth by the ongoing registration or expansion of indications for Plavix in Japan for the acute coronary syndrome, which we expect within the next six to nine months from today.

So you see then on page 22, in very short once again, what I said before. We have invested in the field force and into our marketing structure. We obtained today leading share of voice, for example, for Plavix. We have a growth rate which is largely superior to the market and consequently are prominently increasing our market share. And we intend to do so for the years to come.

To close, on page 23, a last word on our investment strategy concerning the so-called BRIC - and now I put together BRIC and M for Mexico - markets. You may have seen recently a prediction coming from IMS, which says that by 2020 those markets will contribute about a fourth of the world pharmaceutical market growth, taking over the United States in terms of contribution to growth, achieving about 20% -- about 15% market share. We feel that we are extremely well-prepared to participate in this development. We have a market-leading position and we continue to invest. As you see, we have increased our field force presence in those markets by nearly 50%, equal to 2,000 people.

Which means, to sum it up, yes, we had a not so easy second trimester in 2007 for the events I have described. We believe that this is not at all predictive for the rest of the year, because mainly Plavix is being (inaudible) and largely because we believe that our adapted allocation of resources to problems where we reduce and investment where we see opportunity is the right way of doing things. And we intend to continue to do so for the rest of the year. And therefore I pass now on to Jean-Claude to comment on the financials. Thank you.

Thank you, Hanspeter, and good morning, everybody. Before going through the figures in more detail, I'd like to give a few words on the highlights of this first part of the year. As Hanspeter just mentioned and you can see through the figures, we've continued to control tightly the expenses in face of the generic impact.

Now, we've chosen a ratio which, in our mind, expressed perfectly the kind of adaptation measure that we've been talking about for a lot of periods now, and this is the SG&A ratio to sales. What we're showing here is a ratio which amounts to close to 27% of sales, but which is down 1.9% over the first half of last year.

Now, if I go a little bit larger this item and if I were to make a comparison with our peers I would say that not only we are probably -- we are certainly one of the lowest ratios in the major -- among the major pharmaceutical companies. But in addition to that, if we look at the pace of decrease which had been ours, we are also in the -- close to the best position. I mean by that we've gone from more than 30% not even two years ago down to this 27%, which is the quickest pace of decrease that we can observe among our peers.

So it's -- you know that we don't like very much to announce big restructuring plans. We prefer to talk about continuous adaptation, as Hanspeter mentioned. This is a direct demonstration and translation through the figures that we've been able to achieve that. And we will continue to adapt, as well as we will continue to support the growth in these areas where there is a need to reinforce our efforts.

On the global profitability now, we've given some selected figures like the operating income current, which also is a very high profitable level - 36% of sales. Once again, when I'm saying that, I'm in essence making comparison with our peers. And it is also true on the adjusted net income, obviously excluding selected items, which is 26% in sales and which also compares not so bad with the rest of our peers.

Now, as you've seen this quarter, we've expressed the growth at the EPS level in U.S. dollars. Well, it is obvious that the U.S. dollar has not been comparing favorably to the euro during the year '07. But then, it's fair to say that when it comes to comparison, simply because our peers are -- close to 100% of them are reporting in U.S. dollars, it's not fair to make a comparison directly between euros and dollars. Reason for which we've made the comparison between the growth in the first half of the year, which shows close to 4% at the EPS level in euros and does translate above 12% in U.S. dollars. And it would be worth mentioning that, even if the performance as highlighted by Hanspeter in Q2 was lower than in Q1, it would even show up a positive growth in U.S. dollars for the second quarter.

Once again, I would follow up on what Hanspeter said about the consensus and about Ambien IR. We've looked [up -- at] a consensus of the street and we've seen that the main differences were, I would say, sales and results that is shown is directly related to the sales of Ambien IR during quarter number two. The difference is roughly EUR80m - EUR84m to be precise - of difference, which simply shows that the generally -- the generification of this product in the States has been weaker than anticipated. And fair to say that at the end of the quarter 90% of the original sales of Ambien IR are out now.

I would say that this difference, which, if you would translate that at the EPS level at the second quarter, makes exactly the difference with the consensus, between what we report and the consensus, it's a one-off, clearly. Ambien IR I'm not going to say is totally out of the market, but at a [sales] level is close to 90% out of the market. So the difference is mainly a one-off and I wanted to emphasize the explanation about this difference.

Now, once again, we've seen that this quarter was a little particular because of the generification. This is no surprise at all to us. This was fully anticipated. And that's the reason for which we feel comfortable in saying that this result, at the end of the second quarter and the first half, drives us to confirm the full year guidance, which now I'm sure you know, which is that plus 9% at the EPS level, when calculated with a parity U.S. dollar to euro of 1.25. And I could also give that with the parity which was the actual parity of the second half of the first half of the year - 1.329 to the U.S. dollar. That would mean a growth for the year of plus 4.3%.

Now, the news of the period is that, after having made the little share buyback a couple of weeks before the period where we cannot make any buyback before releasing the results of the first half, it has been now decided to implement a share buyback program of a maximum amount of EUR3b in the nine coming months, I mean up to the next AGM. It is definitely because we consider that the share price of Sanofi-Aventis is cheap. And we've seen that, after the setback on the share price after the Zimulti news coming from the U.S., the shares went sharply down and did not recoup at all after the Plavix (inaudible) victory. And that's the reason for which it has been decided to implement that share buyback program again within the next nine months.

Now, if I go to the figures and the P&L of the period, the Q2 and the first half, I will propose that we flip the pages, commencing -- beginning at page 28. The currency exchange impact, which you have on this page 28 - which is over 4% and which is up to three-fourths of that derived directly from the parity of the -- [assumption] of the parity of the U.S. dollar to euro - unfortunately translates into a negative figure for the second quarter - minus 2% - and comes back to zero for the first half.

The gross margin ratio, what to comment? Simply that, for the time being, we've not yet recouped the level of royalty derived from Plavix. But as Hanspeter mentioned, that we have now recouped at the end of the first half the level of sales that was reached in 2006 and second quarter should show -- will show an increase as compared, obviously, to the year before, especially because we had that setback as of August 8, 2006.

The cost -- As far as the cost of sales is concerned, you see that there is a little plus as compared to the corresponding period of last year, despite the generification of Ambien IR. And this is due, as you've seen through the sales, to a favorable product mix. R&D expenses, they are stable on the second quarter. We've given globally the impact of the currency. It's fair to report that, on the first half, our R&D expenses increased by 5% at constant exchange rate.

SG&A I already mentioned, to show the continuous effect of these cost adaptation initiatives in 2006, which further brings down the figures and the ratio. And I think that I'm not going to comment any more on that. So going down to the operating income current, I would add up from the slide number 30 that, once again, if you were to look at that in U.S. dollars - I would mean given constant exchange rate, but once again I said that the dollar is [majority] in this calculation - this would show positive figures both for the quarter and for the first half of the year and it is fair to make this comparison once again when looking at the competition.

Then, not much to mention in 2007 when it comes to going from operating current to operating income, but I have to remember, and you see that clearly in page 31, that we had a very positive, exceptional I would say, gain on disposal of assets and you would remember it was mainly the disposal of Exubera.

Net financial expense is decreasing, obviously, because the cash position is improving, and despite the slight increase in the interest rates which we have observed during the first half as compared to last year. Nothing special to report on the tax rate. This is still the effective tax rate of 30.7% which is driving this line item.

And when it comes to the share of profit and loss from associates, well, I guess that everything which is related to BMS is directly the translation of the evolution of the profitability itself and profitability of Plavix in the U.S. So things are going to improve in H2, definitely. Minority interests, to the contrary, do not diminish, simply because the management of territory A with Plavix and Aprovel is going very well.

Page 34, now. Impact, as usual, of selected items on adjusted net income. A few events on this Q2 '07 - some additional restructuring cost in France and a one-off, which is a provision for insurance harmonization costs for retirees, reason for which it shows up directly in the P&L. Obviously, it is a selected item which we're going to take out of the bottom line in order to report on a fully comparable basis. And last year, this important gain and loss on divestments, which drive to page 35 where you can see that the adjusted net income for Q2 is down 3.2% and translate into EPS down 3.7%.

But once again - I won't insist any more - it shows up a positive figure when it comes to the translation in U.S. dollars. Exactly the same with a larger impact and magnitude when it comes to the first half, since, as you can see from this adjusted EPS level just here before, excluding selected items, it translates from 4% to 12% growth when making the difference between euros and USD.

On the statement of cash flow, I could simplify the reading of it saying that, when we make a global comparison between the two first halves '06 and '07, there is, as you can see, a generation of free cash flow of EUR200m in '07 when there were EUR1.1b in 2006. I would sum up the difference in two line items. When I make the net of acquisitions and divestiture, you will see -- you see on the schedule that we made EUR600m positive more in '06, once again mainly because of Exubera, than we did this year. In addition to that, as you all know, we increased the dividend by EUR300m. And that makes up for all the difference between the two halves. Therefore, we finished the first half with a gearing which is at the same level as it was at the end of 2006 - I mean 12%.

I won't comment about the balance sheet, but be ready to answer any questions. I have said on the adjusted net EPS guidance that we do not change, because there are no reasons to change, once again because quarter number two was exactly in line with our expectations. So I think, now, that we can leave you the floor for the session of Q&A.

Thank you. Nadine, we will start taking questions now.

Thank you very much. The question and answer session will be conducted electronically. (OPERATOR INSTRUCTIONS). We will now take our first question from Andrew Baum from Morgan Stanley. Please go ahead, sir.

Good morning. It's Andrew Baum. Four questions, if I may, but I might stop at three if time stops me. First, on your cost of goods sold line, you compare less well with your peer group than on SG&A. You seem to remain very committed to maintaining capacity, integrated manufacturing in-house, which is in stark contrast to some of your peers. Perhaps you could outline whether that policy remains [intact], whether you're looking to increase outsourcing or whether this is a scope for further adaptation. Second, along the same theme, perhaps Mr. Leroy could give us some sense of SG&A and R&D trends, be it growth, be it in margin, over the next one to two years.

And then finally, in Japan, why I was listening very carefully to your comments and in light of the recent Chugai announcements yesterday, could you perhaps give us some kind of timelines for the corporate activity that you seem to be indicating and just remind us of the scale of assets that you're looking at and whether that fits into why the magnitude of your share buyback is somewhat less impressive than some of your peers? I'll stop there.

So best I start with the Japanese part of your questions, Andrew. We have indicated before that we are looking for a mid-sized opportunity in Japan, perhaps less for -- definitely not for lacking resources, but definitely for lacking opportunity. We believe that the Japanese market, at least as of today, is not right for international large-size acquisitions.

So coming from this, I allow me to say that our share buyback program has absolutely no impact on what we intend to do in Japan in terms of external growth. If there is any impact from the share buyback for our overall strategy, I leave this part to Jean-Claude.

Now, the second part of your Japanese question was the timeline. Yes, things in Japan take a little bit longer than anywhere else in the world and this is also true for this project. But I think we have to see something materialize in the next six to 12 months from today, to give an approximate timeline.

Thank you.

To complement on Hanspeter's answer, remember that we were always already [seen] together. We've discussed the level of debt, is there a fair amount of debt for the Company, and we've always said that we were not frightened to have debt. And this has been our [figuration] since the operation. Now, we are in the range, I would say, of the [EUR6.5b] and this is nothing which is frightening us.

We are still generating cash. And, as Hanspeter mentioned, there is no contraindication of making growth, external growth I am talking about, in Japan or in other countries. And having this debt level even reinforced or maintained, I would say -- I should say, maintained through the share buyback program in the next coming months.

Coming to your question about the cost of goods. Let me remind you -- And I have not made comparison with the rest of our peers, but let me remind you that, since 2004, in the merger between Sanofi and Aventis, we've closed over 10 plants, 10 factories in the world. We don't report very much on that, but this is the only [part] so we just give the information when it's done. It is certainly adaptation to the situation. So when and if we need to do things, we will do, as we are doing, have been doing in the SG&A. There is no doubt about that, but I won't be more specific, simply because we -- as you know, we don't like to be specific on these line items.

Sorry to -- for the next question, but I'm not going to give any indication of what is going to be the level of our SG&A or the ratio for -- in the next two years. We stick to what we usually do, which is to give the guidance for the next year at the beginning of the year. And just to say that, once again, figures show, and especially in 2006 and in this first half of 2007, we adapt when necessary. At least, we'd like you to remember this message, which is shown by figures, because that's what we're committed to do and that's what we've been doing.

Thank you.

Can we have the next question please?

We will now take our next question from Matthew Weston from Lehman Brothers. Please go ahead, sir.

Hello. It's Jo Walton here. I've got a few questions, please. Could you tell us what you think the Plavix -- your realized price on Plavix is? Have you been able to put up the prices now that there are no generics?

Could you also tell us a little bit about how long you plan to continue putting this huge level of promotion behind Ambien CR? I think most of us are assuming that you will see generics in 2009 for Ambien CR, so how long is it sensible to keep this going?

Could you give us a little bit of an idea on the flexibility of your costs? I know a number of investors are concerned that there may be generic Lovenox introductions at some point. You've obviously been able to be quite flexible and I assume that you've got rid of some contract sales forces. You've shown us your U.S. rep forces going down. Just how flexible is it for you to take that further?

And a final financial one, if I may. Can you tell us which line item the EUR42m of harmonization charges after tax comes out in? Can you give us the pre-tax number and which line item it comes in?

Jo, I propose -- Thank you for your questions, first of all. So I propose I start first on Plavix prices. There are at least two elements in this question.

One is the rack price, where I have to report that we did not increase those prices since 2006, January 2006, because of the appearance of generics and the ongoing litigation on the basic patent. For the time being, we have not increased the prices on the rack level, in accordance with Bristol-Myers, which means evidently there is a lot of opportunity, because the usual price pattern would be to increase at least once every two -- every 12 months in the United States. You will understand that I'm not ready to tell when we will increase, but, as a matter of fact, we just have increased August 1 the prices for Acomplia and Avapro in the United States, but once again we did not increase for Plavix.

So this leads to the second part of the answer. We have a continued sensitivity on prices from the managed care situation, where we fight, where we try to make as little concessions as possible. And yes, I dare to say that, for the time being, we do pretty well. We do pretty well. But I would feel more comfortable if you asked me once again the question by the end of the year, because then the smoke really will have -- be gone and I can answer more profoundly on this question. For the time being, we get away relatively well without making too many concessions. But yes, since 18 months, there has been no basic increase.

Ambien CR investment. I could try to get away easily saying as long as needed. We still see very, very massive investments in this market segment coming, for example, from Lunesta. And we feel as long as this continues, we have also to continue. Nevertheless, I think a first benchmark will be at end of the year, where we necessarily will look once again what is really needed. We also have then, of course, a little bit more of experience how CR is doing and continues to perform. But I think, by the end of [the year], there is definitely a point of time where we will look to what is necessary.

Third question on flexibility, I believe that the flexibility is commonly underestimated, for two reasons. First, in very general terms, we try to have about 10% external sales force all over the world to have a basic flexibility. Second, unfortunately or fortunately, we have all over in the world fluctuation, which means people leaving the Company - depending on the market, between 5% and 15% in field forces. In the U.S., the turnover is close to 10%. So if you take both elements together, you get up to 20% in the U.S. Without doing really something brutal, over 12 months you can reduce your field force by 20%, which is, of course, a considerable amount of flexibility, I believe.

And perhaps in conclusion to what Jean-Claude said on the previous question from Andrew, yes, of course, also we are aware that there are significant changes underway in the pharmaceutical world as far as productivity, efficacy of pharmaceutical sales forces are concerned. And yes, of course, we also look to this and we understand this is a very dynamic field, where changes are going on, where the effectiveness of the individual sales reps definitely is decreasing, at least in the more developed parts of the world, and which we, of course, take into account.

I don't believe that overall our sales force figures will increase. I believe that there will be inside restructuring, because there are new patents which demands that we make adjustments, first of all, instructions, the way we work in the sales force, but yes, overall, also in terms of headcount.

And coming to the welfare and healthcare plans for retirees question, this -- First, the amount before tax is EUR61m and it does show up in the other current operating and expenses, which is the -- within the operating income current. So it is -- I would say it is included in the plus EUR5m figure of the second quarter.

Thank you very much.

Can we have the next question, Nadine?

We take our next question is from Graham Parry from Merrill Lynch. Please go ahead, sir.

Good morning. Thanks for taking my questions. First question is on guidance. We've got no multi-launch costs in the second half of the year. You've announced the share buyback, which should be, back of the envelope, maybe about 2% [depreciative] just to this year alone. Good operating cost control, 12% first half underlying EPS growth. And I understand that you want to reinvest some of the lack of the multi-launch costs into new franchises, but why is there no ability to increase your guidance? Is there something else in the business which is going worse than you'd anticipated at the beginning of this year which is offsetting those other factors?

And then my second question is on the share buyback. Is there any intention to continue share buybacks beyond next May? Could you give us a feel of whether this marks a more sustained shift in your use of cash or, beyond May, would it be your expectation that you may want to preserve cash for more strategic options?

Okay, on the guidance, to begin with. Two (inaudible) in the answer. First, if you were to make a quick calculation, applying even the maximum, the EUR3b share buyback, that being done on a regular basis from now on up until the month of May, you would uncover that the effect on the EPS for 2007 full year is going to be in the range of 0.3% of appreciation of the EPS. So this is positive one, obviously, but this is not something in itself which is sufficient to change the full year guidance.

Now, on the second part of the question, you were mentioning the [not launch in the multi. I would insert that the multi was forecast in our figures to be launched rather by the end of the year. Not at the end of the year, but by the end of the year. Since that, as you've seen, we've -- and Hanspeter mentioned we've had this authorization to market in the United States for Xyzal, so we will do what it needs to be done for the season -- allergic season for this product in the fall.

So all in all, it doesn't change very much the picture, especially, once again, because it's worth to mention that [medicine] products need more efforts on the market to keep the -- or to increase their market share. So all in all, these are the reasons for which we didn't feel it was necessary and worth changing the guidance.

As far as the share buyback program is concerned, worth to say that, for the time being, the Board has decided that it would be up to EUR3b, up to EUR5b of the nine months period I mentioned before. So no decision for the future has been taken at all. I said that it's not a difficulty when it comes to the level of debt of the Company. Does that prevent us to buy things to make (inaudible)? The reality is no and we give an explanation when you heard there was a question about Japan. Now for the rest, I don't see no -- what kind of difficulty it would bring to the Company. Remember, I showed you that year on -- as of the end of June, the gearing ratio is 12% and only 12%.

Next question, please.

(Inaudible).

I'm sorry? Nadine --

We will now take our next question from John Murphy from Goldman Sachs. Please go ahead, sir.

Yes, good morning. A few questions, please. Firstly, Jean-Claude, back to the buyback, just to be clear, is the EUR3b a definitive number? I'm just wondering why the comment is 'up to'. What are some of the things that might change your mind as to -- or what might drive that buyback apart from the level of the share price itself?

Second, on Acomplia, just to be clear. What data do you feel needs to be available and therefore the potential timing there for a U.S. re-filing? And just a bit of clarification on Xyzal on accounting. Should we assume that you consolidate all the U.S. Xyzal revenues?

First, to be more precise on why up to EUR3b. Well, you just get the answer - simply because, once again, considering the share price today is cheap, everybody considered -- the Board considered that is was worth to engage us in this share buyback. Now, if there were changes in the situation,6 we would adapt it. So [clearly the] translation of up to, it's not saying we are not going to make it or we are going to interrupt or whatever. So it's simply an expression that we cannot certify that we're going to make the EUR3b whatever the situation is. That doesn't mean anything else.

On your question, Xyzal, it's us. It's Sanofi-Aventis who will consolidate the sales in the United States.

On Acomplia, I -- what I said was that it is -- it will be data-driven. So data-driven, first of all, means of course whatever may come out of the regular reporting of side effects. Of course, we will share with the FDA. And whenever something positive or negative will come out, this will change the situation concerning the filing in the United States.

I think more likely are two steps. The results -- The expected results of the ongoing studies in diabetes, which will become available end 2008 and beginning 2009. And then the second wave of very, very important results coming out of the so-called Crescendo study, which is basically a confirmation of the long-term benefits of the product in terms of morbid mortality, which is being expected for 2010.

That's very clear. Thanks very much.

We'll now take our next question from Sebastien Berthon from Exane.

Yes, hello. One further Acomplia question, please, and two quick financial ones. On the Serenade data that you filed in Europe, did the recent review of Acomplia include Serenade or was it a separate look by the EMEA? What should we hear from the EMEA on that?

And secondly on financials. The [post] German tax rate reform that takes place on January 1, 2008 you say brings down your tax rate to 30 -- by 1%. Should we assume that your ongoing guidance for tax rate is now 30% or are there any other changes from the tax rate that would change that? And lastly, could you please tell us what was the amount of royalty income on an annualized basis for Merial fipronil that you used to book, for example in 2006 for instance? Thank you.

Okay. On Acomplia, which is an easy one, what the EMEA recently did was evaluating the situation post the U.S. position of the Advisory Board. I really cannot answer did they look in this respect also to the Serenade data. Potentially they did. If they did, they saw nothing different to the overall profile of the product. So I think that the Serenade data for the recent positioning concerning the labeling has been eventually comforting the EMEA, but was not really significant.

Having said so, the overall review of Serenade in respect to the usage of the product in diabetes patients is still ongoing and we cannot report anything else that the EMEA is reviewing the data. We don't know what comes out of it. And we don't know when the EMEA will express how they see Serenade in respect to a potential enlargement of the indication of the product here in Europe.

Coming to the German tax reform, which you've seen through our press release. You're right that, as of the beginning of 2008 there will -- there is a major change, since the German tax rates, which we've paid for, which was 40%, is going to be brought down around 30%. Now, from a Group perspective, that means that the effective tax rate is expected to be lowered by around 1%. That means that, for the next year, [the remain is in new], which I don't know today. It should be less than 30% for the full Group. I remind you that the effective tax rate for this year is 30.7%.

Coming to the fipronil royalty question, the -- I can give you the amount of fipronil royalties for the full year 2006 - it was EUR100m. And as you know, per agreement, we don't get any more -- any royalty into -- as of the beginning of 2007, so this is a difference by EUR100m on this line item. I just remind you that consolidating 50% of Merial will recoup - I could say that this way - half of it through this other line item.

Thank you.

We will now take our next question from Michael Leacock from ABN Amro. Please go ahead, sir.

Thank you for taking my question. Hi, can you hear me? Thank you for taking my question. I just wondered if you could let me know what the insulin market is doing around the world. I think we've seen some slowing in prescription growth in the U.S insulin market. I'd welcome your comments on the underlying growth in volume and in value in those marketplaces.

Well, I think overall we can only confirm that the insulin market is growing. And I personally believe that there will be very substantial growth to come from the so-called BRIC markets, because the underlying disease became pandemic and there are still insufficient resources in terms of insulin availability in huge markets like China, Brazil, India, to name just a few.

As far as the U.S. market is concerned, yes, we have seen some new concepts going into this market. But, talking to our people here in medical and in research and, of course, talking permanently in this field to opinion leaders, we don't believe that there will be a real substitution to insulin from the alternative treatments which are available as of today. And this is at least what we see for the time being. Also in the market performance of those products, in one of my charts you have seen how those products do so far. We see no negative impact at all, so we are strong believers that insulins continue to have a bright future, because we just see no other way of treating.

Of course, there are a number of elements inside this growing demand for insulin. One, perhaps the most important, besides the overall enlargement of insulin users, is the continued trend to early insulization, where we still have a long way to go. Another one is the question of dose, where we believe that - I said also today - many, many insulin patients are insufficiently dosed, so already those two elements will continue to drive this market.

Thank you very much.

We will now take our next question from Amit Roy from Citigroup. Please go ahead, sir.

Hello. It's Amit Roy from Citigroup. Just one question on -- again on the share buybacks. When -- Am I correct in understanding from the 20-F that you have currently a pre-authorized share buyback program of up to EUR14b, or 10% of market cap, and that that expires in November 2007? And if that is correct, what is your level of commitment on that share buyback program? Is it similar to the EUR3b you've announced today, or is it different? Thank you.

Sorry, I didn't answer the end of the question or second part of that question.

Sorry, I was just trying to understand about if the EUR14b share buyback that was authorized on May 31, 2006 -- what your level of commitment to that share buyback is, or should we just ignore that and focus on these EUR3b?

Okay. Clear. According to the French law, we have to get an authorization from the AGM every 18 months. Well, that doesn't work, actually, this way. You all know that we have one AGM per year, so each and every year, and we ask for an authorization for a share buyback. We didn't use that for such a number of years, as you know, so we get the new authorization this last May, May 31, up to what is the limit per the French law, which is 10% of the share capital.

This is purely, I'd say, technical and theoretical, just to have the possibility, if the Board elects, so to repurchase up to 10%. But now this is purely technical. That doesn't give you any information as to what we would do or not. That's the reason for which, once again, when it comes to going and making it, the Board elected yesterday to -- for a EUR3b share buyback program. That doesn't say [anything to] what we would do, would be doing in the future.

Let me just say that, next year, at the next AGM, I mean at the mid-May, we will once again ask for authorization from the AGM for a share buyback, simply, as I said, because, from a legal perspective, we have to do that every year.

This is not two different programs. It's a decision taken by the Board to implement the authorization that was granted by the general assembly of shareholders. It's not two different programs.

I see. Thank you very much.

Nadine, we have time for one more question (inaudible). Can we have the last question, please?

We now take one last question from Alexandra Hauber from Bear Stearns. Please go ahead, madam.

Right. Thank you for fitting me in. Couple of questions. Just coming back to the cost, to the major cost lines, on the cost of goods, you were pointing to positive product mix effects, which is a bit surprising given the Ambien effect. Could you just point us to which products we should actually focus on to -- for us to assess where your product mix effects are going to take you? And also, you mentioned the 10 plants closed in the last two years. Can you just remind us how many you still have, to put that into perspective?

And, on SG&A, I know you don't -- you can't give us any sort of numbers, but I struggle to understand, really, how you manage and plan the continuous adaptation. For a major restructuring, I would imagine you would assign a major task force to basically check how things can be done differently, more efficiently. But continuous adaptation is probably something you can't even capture in an annual budgeting process. So can you just tell us how you go about this so that we can [ensure] that this is not a constant end of the pipe kind of measurement?

Also, a quick question. Can you just tell us what led France to revisit the level of reimbursement? Has it -- Was there any additional data which gave it a different kind of innovation attribute? And then just can you also clarify, in your cash flow statement, what the EUR300m cash flow from asset disposal was for?

Let me start with the Acomplia part first. It's the easiest one. So no, there was no additional data. It was part of the normal process of reviewing a decree of reimbursement in France. There are different institutions sitting on the question, and so the final committee came to this decision that the product justifies 100% reimbursement. So of course it was data-driven, but there was no new data triggering this extended reimbursement.

First, I would begin with the question on the asset disposal in this first half of the year [at the end] for this EUR300m. Now, everything is related to the sale which was made by Aventis in the fact of Aventis Behring to the Australian company CSL. There was a potential supplement in price if some items, some elements were met, and mainly this was -- all of that was related to the abolition of the CSL share price over a period of time.

And since I have to say that they had a very good increase in their share price over the period, we came to a point where we've been negotiating something which originally was an option and which became 100% definitive. So we've now gone through all the monies which were possibly to be recouped out of the sale of Aventis Behring to CSL and this is the explanation of this EUR300m disposal of assets in this quarter.

And there were no P&L effects from that.

No.

Okay.

No. Well, there was no P&L effect at all, because it is -- it was an option, so it was marked to market every quarter. So we were already at the ceiling, simply, as I said before, because the share price reached by CSL was well above the ceiling which was in the contract.

Okay. Thank you.

When it comes to cost of goods, well, I think you mention everything, but I could also tell you that there are also some positives. Now, remember, we said that Eloxatin has been genericized in Europe since the beginning of this year. You may know that we are paying and we are still paying royalties to [Pediopharm] on the royalty -- on the sales of Eloxatin. Now, this is comprised in the cost of goods, so we have seen a decrease in this part of the cost of goods, which in other words translates into a better comparison to last year. So product mix and also this effect, that would be the answer I would give.

Now, as far as the number of the plants which we have in the Company, I would say that it's around 70, if I'm not wrong, that we have in the worldwide base -- on a worldwide basis in the industrial [area].

Now, on the question of the number of factories, that's really a difficult one. So it's not the easiest to comment the factories, because the question is what is a factory? So if our definition is that we include chemical plants and pharmaceutical plants, we have approximately 80 as of today.

Now, we have to distinguish, of course, major plants - that's the plant in, let's say, Frankfurt, with a couple of thousands of people - and really minor plants, as we have, let's say, in Thailand in a joint venture on the vaccine production. So I think the [sheer] approach by counting the number of plants is not adequate. It's not adequate. Nevertheless, yes, we develop our industrial landscape strictly in line with demand and [in size] with the products and as they compare. If we see - and evidently this is what has to be anticipated - that there is a decrease in volume, we will react over our industrial policy and we have done so in the past and we will continue to do so.

This is one side. The other side is that, in a pharmaceutical industrial plant, you also have to consider political elements. You have to consider, too, strategic elements and we will continue to do so. And yes, I just gave you the example of Thailand, where we have a very difficult time. If I look to the protection of the intellectual property of Plavix, I think we have not discussed it so far, but, coming from Plavix, this would be a very foolish decision to get out of the joint venture in [Vectin]. So once again, what I would like to indicate is that whenever we have an opportunity, we go for it and when we see that there are mid and long-term trends which are unfavorable, we make the necessary reductions.

And there I'm a little bit of a different opinion. This is something you can very well do in a budget process. Our subsidiaries are doing the budgets for 2008, '09 and '10 right now. We will sit and we will look to those budgets in the months of October and November and there we will continue to make the necessary adjustments.

I think we are at the end of those questions. Thank you so much for your interest. We tried to present you our results. We tried to share with you our confidence for the remainder of this year, which, without the definitive disappointment on Zimulti in the United States, is so far a year which goes really exactly in line with our anticipations and with our expectations.

We are very much confident that this will continue until the end of the year and it's in line with this that we have announced today. We believe that the share buyback program is the right thing to do, because our share price is adequate. And we have maintained our guidance, because we don't expect any further surprises until the end of the year. We are going to launch Xyzal within the next weeks, so to say, and we will largely allocate what was reserved for the launch of Zimulti in the United States with Xyzal.

So overall, we believe that we will finish this difficult year exactly in line with our expectations. And it's in this respect that we appreciate your continued confidence in our share and in our performance. Thank you so much for this early morning session. I'll see you again and, yes, I think I have to remind you on the upcoming R&D day here in Paris, where we hope to welcome you to share more news on our research. Thank you so much, once again, and bye-bye.

Bye-bye.

Thank you very much. Ladies and gentlemen, that will conclude today's conference call. Thank you for your participation and please have a good day.