Sanofi SA (SNY) 2009 Q2 法說會逐字稿

Ladies and gentlemen, welcome to the Sanofi-Aventis 2009 second quarter results conference call. I now hand over to Mr. Sebastien Martel. Sir, please go ahead.

Hello, everyone, and welcome to our conference call for Q2 2009 results. Before we start I'd like to remind you that our presentation slides are available on our website. As always I must advise you that our presentation today contains forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors which may cause actual results to be materially different. These factors are detailed in our form 20-F and also in the document de reference.

With us today in Paris are Chris Viehbacher, our CEO; Hanspeter Spek, Executive VP of Pharmaceutical Operations and Jerome Contamine, our Executive VP Chief Financial Officer.

Our call today will focus on our Q2 results and then on an update of our transforming program. I will now hand the call over to Chris.

Thank you, Sebastien. Good afternoon, good morning everybody. As Sebastien said I think we've got a lot to cover today. We're going to cover results first and then come back and as promised earlier in the year try to give you some of the financial impact of our transforming program. Probably say right up front that the numbers you're going to see are not necessarily forecasts or guidance for those years but are really trying to give you some quantitative measures around what comes out of those transformation measures as clearly other things on the go in the company.

So if I turn to the Q2. It was an extremely strong quarter. I'm very happy with this. Very good sales performance at 6.5% at constant exchange rates. I personally like to look at constant exchange rates because it tends to reflect more the underlying performance of the business. Clearly we had a stronger dollar in the first half of this year although it seemed to weaken with every month but that certainly generated a beneficial effect in the first half such that we report sales growth of 11.2%. Clearly very tight control over costs with obviously the traditional discipline around SG&A. As you know we've got pretty much the best SG&A ratio to sales in the industry.

The fact that we have been pruning our R&D portfolio means that we've been able to reduce our R&D costs. That's probably not completely reflected in the numbers given that we acquired Acambis and that added some numbers. But if you actually look at the pharma piece those costs were down about 9% in the quarter which is an indication that we're actually also starting to lower our R&D expenses in the absence of new projects. That one is going to be pretty much dependent however on whatever projects that we have and obviously if new projects come along we won't hesitate to invest.

Because we had very strong discipline over costs, good sales, that of course meant leverage on the bottom line and you can see even at constant exchange rates that led to an extremely robust and probably industry-leading and certainly consensus-beating number of 17.2% at constant exchange rate or almost a 30% increase on a reported basis.

So if we then look at, well, where's the rest of the year going to go, obviously with around 13% profit growth in the first half it won't be much of a surprise that we believe that we can do around 10% for the full year. The growth rate looks a little softer in the second half, only because obviously we're not still quite sure what's going to happen with Eloxatin and although that actually has worked out well having lost the summary judgment we have been able to get an injunction. How long that takes and whether or not the FDA continues to respect that injunction in preventing generics from coming off the market we can't say. And obviously there may be an effect of Plavix in Europe although I think with every day we get a little bit more confident even around that.

So we've got around 10%. We haven't really taken into account H1N1 flu sales, largely because you don't book sales until you really deliver the vaccine and in the case of the United States government you've had it accepted by the US government, a process that can at times take two to three weeks. So given that we're talking about the year-end, we're not sure about yields yet and everything else, we haven't really taken that into an account.

So -- and there may be then obviously some upside depending on what delivery timeframes are. So if I then move to major events for us this quarter was obviously the launch of Multaq. Approval was received on July 1 and we've been able to get this into the market within a few weeks' time. And you saw the press release yesterday where that is now available in pharmacy. So we've done the pipeline fill, the reps have all been trained. Hanspeter, Jerome and I were all at the launch meeting in the United States last week. I think we can attest to the enthusiasm of our teams.

Hanspeter will talk a little bit more obviously about the potential of this. What I think is particularly noteworthy is obviously that we've got the ATHENA mortality data in the PI and that cardiovascular hospitalization benefit is not only good for patients but also for payers and I think you've seen the ability to price this product accordingly in the US market.

Another major event obviously, while not a second quarter event, is something that we have been very much occupied with in the last few weeks, were these studies that were published in Diabetologia on one Friday evening. Obviously this was a major event in the financial market if not exactly in the medical community. Obviously once rumors circulate in the financial community we immediately contacted regulatory authorities who are not aware of any studies, nobody really was and then we saw these studies. And I think clearly when we saw them we wondered what the fuss was about.

But to make sure we actually had convened a group of 13, 14 of the world's top experts. We scoured the planet to get the best people in diabetes, in cancer and in epidemiology. And these folks came from all over. I spent personally five hours with them on the following Monday. And they clearly all agreed that these studies were poor quality. In fact I remember asking the epidemiology folks in the room if you had to score these studies on a scale of 1 to 10 in terms of their quality and impact, most gave it a 2 out of 5, I think the best score was a 5 out of 5 with one expert saying these are the type of studies that give epidemiology studies a bad name.

And the real issue here is that if you're going to talk about cancer you have to understood that cancer is multi-factorial and that if you want to identify an aspect in isolation you have to design a study that keeps all of these other factors constant. We had one expert in the room saying you just needed one group to drink one glass of wine more per day than the other group and you already had the same difference in cancer as some of these studies were claiming.

And I think what was interesting was that -- in my 20 years I've not quite seen this -- most of the medical community really had a sense of outrage. There have been significant questions for many, many years about possible links between diabetes and cancer, possibly between insulin and diabetes. But given the complexity of the subject it's been hard to study. And for someone to have taken such shortcut studies and drawn conclusions out of that would seem to actually be not paying the proper respect for the importance of the questions being raised.

And as a result, they suggested in that meeting that I had with them that they were going to issue a declaration to be signed by all 13 of them outlining the weaknesses of those studies and the fact that the conclusions that had been drawn in some quarters were inappropriate.

And obviously I think you saw then very swiftly and that was the result of our work right from the beginning. Over the weekend we had support from the European agency, the FDA, the American Diabetes Association. One of the top epidemiologists in the world, Stuart Pocock submitted independently of us an editorial in the Lancet noting that the available data do not provide a cause for concern and this was obviously then followed up as recently as last week by the CHMP in Europe who said that also that changes to the prescribing advice for Lantus are therefore not necessary.

So that all suggests that our own view, which is that we stand firmly behind the safety of Lantus, has been validated by the medical community and regulatory agencies.

That having been said, clearly our primary interest is in patient safety and we want to make sure that there are no lingering questions and want to take the scientific high road here. So we actually have engaged the medical community outside the company both in Europe and in the United States and we may work in both continents and in consultation with regulatory authorities to try to find what types of studies could perhaps shed more light on that. And we've had plenty of ideas and we are likely to begin some of these studies in the fourth quarter. It is highly unlikely that any of these will be actually clinical studies, largely because of the time necessary to get any answers out of them. You'd be talking about five-plus years type studies. So we're probably looking at much more sophisticated and larger databases of electronic medical records and under the supervision of some of the world's best experts in this area.

If you ask what's the bottom line of all of this. Certainly where we stand today I personally see nothing here today that causes us to change our outlook in the long term for Lantus. It is and continues to be a major source of growth for the company. When you look at prescription data and Hanspeter will show you some data in just a minute I think you can see that there's been no real significant impact of these studies.

So I'll just finish on that and come back and talk about transforming a little later on but I think before we do that let's continue on with the quarter. Hanspeter and his team I think have done an excellent job of delivering sales and profits for this quarter. So, Hanspeter, over to you.

Yes, thank you. Good morning and good afternoon. It's a pleasure to speak about this quarter. If you turn to page 12 of our presentation you see that pharma sales totaled EUR6.7b, growing 7.3%, slightly or one or two points above the worldwide market growth. Those sales have evidently to some extent been boosted by the recent acquisitions of Zentiva, Medley, Kendrick but they are mainly driven by a very strong performance of our key prescription brands. And you see them, Plavix with nearly 10% growth, EUR1.8b sales. Lantus plus 26%. Lovenox back to a two-digit growth this month in 13%. You remember that the first quarter was for technical reasons a little bit weaker. And also Taxotere, with a nice two-digit growth factor.

The other sideline results I think are being worth mentioning despite the fact that in absolute figures they are still small but nevertheless you see that our OTC sales are growing by 23%, totaling more than EUR300m. And also classic pure generics has close to EUR300m, this is a very strong growth rate, evidently driven by the recent acquisitions in this field.

On the next page then you see that, yes, we have as we believe a very good, perhaps an even ideal distribution of our geographical presence, approximately one-third of our sales in Western Europe, one-third in the United States and one-third outside. All those fields have nicely contributed to the first quarter. In the United States it rose by 5.4% or if we exclude the H5N1 effect even 11%, evidently above the US market growth. Europe, which became without any doubt the most difficult theater for performing in pharmaceutical, the growth nowadays is growing by 4.6% and outside the southern hemisphere all the other countries growing by 11.2%. So we have a good continued distribution of our sales growth and our geographical presence.

On the following page 14, this is once again underlining that we focus now on the emerging markets. You see there the growth is 20% and the absolute sales figure is getting close to EUR1.9b. And evidently in those countries it is strongly supported by the recent acquisitions and you'll see them on the page once again, Zentiva, Medley and Kendrick. And most recently Shantha Biotechnics in the field of vaccines and Chris will get back to Shantha during the later part of today's presentation. Our growth in the BRIC plus M countries is equally strong, plus 15.8%.

Now on the following page I believe the most important figure or the most important line evidently is the top line you see on the right side of the chart. This signals the daily prescriptions -- new prescriptions and those are the most current figures from July 24. You see that evidently after the event there was a certain slowdown, a slight slowdown, nothing really dramatic. But we have all reason to be confident from the last three or four data points where the least to say is that the contribution from new prescriptions is going back at least to the previous level, perhaps even if we remain to be optimistic even a little bit better than before those publications Chris just was commenting about.

Of course we follow the performance very closely. If I go outside the US I see literally no effect except Germany, which is not really a surprise because I believe it's fair to say that the origin of the whole campaign comes out of Germany and consequently if we see any disorientation of our prescriber business in Germany this is said and evidently we are working on it. But from an economic point of view we have to say that our presence in Germany is relatively low. We have sales in the magnitude of approximately EUR100m but we also have sales of approximately EUR100m with NPH in Germany for a product with the trade name Insuman. So there is no direct impact but of course we take care of it.

The following page shows you the performance of Plavix and Lovenox. As mentioned before, Plavix a growth of nearly 10% after more than 10 years of marketing, EUR1.8b. We do very well with the product also in the United States. What we continue to see from the new generics in Germany is nothing really in terms of change. We have a share of generics in value of approximately 24% and in terms of volume of approximately 33%. Over the last weeks or even months those shares remain more or less stable, largely due to the fact that there is a very strong debate in Germany if those generics are really substitutable due to the fact that they have a limited scope of indication. And we believe that this is a very serious discussion and of course we are of the point of view that drug safety has to go first. And it presents a potential risk if products are being substituted with a different scope of indication.

We have a number of important publications in front of us in the remaining lifecycle of the product. Perhaps the next is the most important, the publication of the study CURRENT. You will remember that a large study with nearly 20,000 patients which may present arguments in front of Prasugrel. Prasugrel has been meanwhile launched as you surely know. Naturally we see very, very little impact so far from Prasugrel which is partly the effect of time but especially in the European theater also an effect of a very limited indication and a very large maturity of Plavix.

Plavix's success story continues. You see that we have an excellent performance in Japan, that the performance is meanwhile absolutely in line with the performance we had with Plavix at the same point of time. And, yes, I think it is predictable that within a couple of years Plavix will become a Japanese blockbuster because we are trending exactly like that.

Lovenox, also very good results. 13% growth. We can state that during the year 2009 we have succeeded to get up with product supply in line with demand and consequently I'm absolutely confident that Lovenox will continue to grow at two digits. Also in the context of Lovenox we have new competitors and also with Lovenox we can say, and of course we are content to say so, that those new competitors, the orals, show very, very little impact so far in Europe.

Now on Multaq, I believe the most important has been mentioned by Chris. Yes, we have an excellent labeling. The labeling is perhaps even a little bit better than we had expected in our optimism. It is an excellent labeling because we can translate it directly into drug benefits and from this we took a relatively bold move in terms of pricing. We have a price which is, I believe, it's fair to say, above the expectations of the financial market. But we have decided to do so because we can bolster this price with clear benefit coming out of the labeling because hospitalization for cardiovascular reasons is a very important financial factor for the payers in the United States and later on also in Europe.

We have launched the product with the sales force last week. We have deployed about 400 sales representatives for the product. They work exclusively for Multaq, which is at least for the US market and for us a rather new approach, which means we have really established a team of Multaq specialists. They manage everything in their territories. The territories are small. They are therefore very familiar with those territories. They work on the hospital sector and they work on the office sector so we formed a very, very well-motivated sales force to promote this product on the basis of what I said just before, we consider as an excellent labeling. You see that the market is very well prepared, 87% of the US cardiologists are [as detailed] aware of the upcoming launch of Multaq and its database which is largely of course driven by ATHENA.

Last word on vaccines. We have this open question how much we will achieve with H5N1 sales. Chris has alluded to it. Besides of this which we consider as a potential upside for the remainder of the year we can say that we had a very good performance of vaccines this month, an 18% growth. And as you see then on page 19, this is more or less true for all segments of our existing vaccine business which continues to build a very important growth driver for the overall company.

On the following page you will learn then that we are very nicely on track with the production of the seasonal flu. We tried to make a kind of (spoken in German) here, which means we tried to fulfill of course our obligation in terms of what we have committed to in terms of seasonal flu production. We have very well advanced [this issue], you will remember that this is quite a good tradition of Sanofi Pasteur. We always historically have been the first to the market and as of now we will now more and more focus on the production of H1N1 influenza products and we will recover outstanding sales in the remaining six or five months of the year.

So if I may sum up this second quarter which shows a very solid, a very good performance. This is true for our flagship products which are all in two-digit growth. We have continued to further expand our position in emerging markets which now contribute 70% of our sales growth. We have launched under excellent circumstances Multaq in the United States. We have been extremely reassured by the strong support we have achieved from opinion leaders during this Lantus event during the last month. And yes, we continue to be extremely well supported also by the performance of our vaccine business. All of this makes us very optimistic for the rest of the year.

So far from operations and I pass now on to Jerome Contamine who will give you more insight into our financial performance. Jerome?

Thank you, Hanspeter. So good morning, good afternoon, everybody. So a few more words about the quarterly results, even if you have gone through it already widely. First of all, on sales, just to give you the details. The contribution of acquisitions is precisely 2.8%, EUR178m. This includes mainly Zentiva for EUR172m consolidated over the whole quarter. Medley contributed for just two months, it was consolidated as from May 1.

When it comes to the organic sales the 3.7% which is already strong includes the fact that in vaccine we are flat beside H1 -- H5N1 so clearly outside this element we were much above 4%, close to 5%. And you can see on this page 23 as well the impact of the currency situations which has been mainly the US dollar as you can see for EUR358m. The sterling has gone during the second quarter so in the first quarter it was somewhat depressing our sales trend and second quarter it's minimal.

On the P&L and the operating income, I think what is most striking here is that we have integrated Zentiva, we have integrated Medley which has a structure of course which is somewhat different because this is generics. More of a ratio of cost of sales to sales, a lower ratio of R&D to sales and at the end of the day slightly lower ratio of operating income to sales. Despite that fact we have been able clearly to increase significantly our operating income margin as well as the gross profit margin which has increased again during the second quarter which shows that the rest have performed very well, both in terms of cost of goods as well as R&D as well as SG&A.

Just a word on R&D, as Chris has mentioned already, we now start to see the benefits of the policy we have implemented in terms of selection of projects, on focusing on the main projects. Also starting to bring down our fixed cost base. So the minus 2.5% which you see here includes a minus 9% on the pharma R&D while we have somewhat increased the R&D for vaccines, particularly with the acquisition of Acambis and some developments which are linked to the preparation of the H1N1.

Onto the SG&A as well we have the integration of the extra costs coming from the new acquisitions which is normal. And despite of that the increase is very small, 1.5% while sales have increased by 6.5% which clearly shows the efforts which have been made by the rest of the organization including clearly on the sales and marketing spending as well as G&A.

If we turn to the next page then we have the financial expense which is kept stable which is normal because we have a low debt level. As you know the effective tax rate has been kept at 29% along with the guidance we have given for 2009. The whole 2008 was 29% as well. The share of profit from associates is mainly and the increase is coming from two main elements. The first one is the higher contribution of the BMS -- our share in the BMS venture in the US. But it is basically normal in line with the increase of Plavix sales but also the stronger US dollar.

When it comes to Merial, we have posted a higher contribution of Merial this year as compared to last year, even if, as you saw, the sales have been flat the profitability has increased, somewhat driven by a higher exchange rate of the dollar against the euro but also from good performance and good cost control. So all in all, once again we have posted this very strong EPS increase which has been already commented.

So again we are reaching a very high performance in terms of cost ratios. Cost of sales to sales has decreased slightly as compared to Q1, it's significantly lower than Q2 2008. So we are in line with our projections. And once again this includes the acquisition of Zentiva which is somewhat dilutive. The SG&A to sales ratio is slightly above the previous quarter. It was planned, as normal we tend to have a higher sales spending -- marketing spending during the second quarter as last year. We can confirm that we will aim to be at around 25% SG&A to sales ratio for the full year. Operating margin is reaching a record high at 41% and the net income to sales ratio I think also is somewhat a record or close to the previous record, above 30%, which I think is among the best in the industry.

A last word on cash flow. We have posted for the first half, I think it makes more sense to look at cash flow on a half-year because any fluctuation in the quarter can be more significant. So for the half-year we have posted a strong cash flow. The net cash flow from operating activities net of variation of working capital is EUR4.4b, close to EUR4.4b, with a strong increase compared to last year. On a constant exchange rate basis it's more than 10%. The CapEx includes the investment on new vaccine facility as well as the startup of a new facility for our biological projects in Vitry in France. And an acquisition includes, as we know of course, Zentiva, Medley, BiPar and Kendrick.

So all in all we have financed through the cash flow all CapEx, acquisitions and generated free cash flow. We pay a yearly dividend as we know we are paying dividend once a year so of course the dividend impacts the net debt for the second quarter. But we consider that if we were not to do any new acquisition by year-end which as a matter of fact is not true because we have started with Shantha, we would bring down the debt down to around EUR1b or even slightly below. So it shows how strong the capital generation of the company is and what is the margin of maneuver we have to invest into new projects.

To summarize, very solid Q2 sales performance, continued cost management, very strong EPS growth above sales growth, that's obvious and significant cash flow generation during the first half of 2009.

I'll pass the word back to Chris I think to speak about transforming.

Thank you, Jerome. We'll move to slide 31. This is now about eight months since I joined the company and when I arrived most of the focus on the company -- well, I think I remember saying at one point most people thought of Sanofi as saying it's Plavix and it's Acomplia. Plavix is going to go away and Acomplia was a failure. And I think what we've been trying to do over the last six to seven months is to say that there's a lot more to Sanofi-Aventis than either Plavix or Acomplia.

It is certainly true and we put that up front in my very first presentation to you back in February that we will lose sales as most pharmaceutical companies in our industry do when we lose patent exclusivity on Ambien CR, Eloxatin, Taxotere, Avapro, Lovenox potentially, we don't know, although I have to say when I look at more recent events in the United States I become increasingly skeptical about the possibility of a substitutable generic. But it is clearly an uncharted territory so we put it there. Obviously the world's second-biggest product, Plavix, coming off patent in the first half of 2012.

I think we were also very upfront in saying we don't have enough -- not to say we don't have any -- but we don't have enough new products to replace that. But then we said, well, all right, if you're going to lose 20% of your sales what can you do. And we came up with basically two different approaches here that we're operating in parallel. The first is I think most shareholders can reasonably expect that before you go spend a dime of their money that you're doing absolutely everything you can as a business to maximize the performance of what's there.

And one of the things that struck me as I looked into Sanofi was as much focus as there was around the 20% of Sanofi that is going to go away, the real interesting part for Sanofi is in the 80% that doesn't go away. Now if you're in another pharma company the rest of the business, the rest of that 80% is probably stuff that looks like the 20% that's going away, other than the patent timeframe is a little further out.

But when you look inside Sanofi-Aventis and that's a function of all the mergers we've done, we actually found we had a number of building blocks of businesses that offered an opportunity if we focused on them and if we position them correctly, not only offer an opportunity to potentially offset what we're going to lose but to actually diversify the company away from a dependency on small molecules, patent-protected in the US and Europe. Because that to me is what I really want to do. And I'm focused on 2013 and having a business that has a prospect of sustainable growth.

So when I talk about 2013 I don't talk about 2013 as an endpoint. I talk about 2013 as where we want to launch the period of growth. Because I think what's going to happen between now and 2015, everybody knows. Yes, we're going to lose Plavix and we're going to lose Taxotere, but when we actually look at the valuation of the business what we find is actually that most people -- let's face it, most people haven't done much analysis beyond 2012 to begin with. But if you look at valuation it implies a sharp drop-off in earnings per share from 2013 onwards, largely because most people don't know much about Sanofi beyond Plavix and Taxotere.

And so that's why we really have focused first and foremost on saying, well, let's take this business that we already have because these businesses offer you some protection against the devastating effect of the patent expiries. And they offer you protection either through the size of the capital investment and the degree of skills that you need to have to be in that business and vaccines is a great example of that. You could argue insulin is another one, we're probably not going to see a substitutable generic for Lantus one day.

Or you have a sustainable benefit because you can maintain brand loyalty and customer loyalty as you have with OTC businesses. Of you have businesses where you know what, you don't really have that much patent protection to begin with but where we have already figured out how to compete and are better than most companies in these markets. And they're unlikely to be disturbed much by patent expiries. Or you could take Japan where obviously we're just launching the fabulous products that have been major drivers of growth for Sanofi-Aventis over the last 10 years.

So if you just take those businesses, those growth platforms, they not only offer you growth but they offer you growth well beyond the 2013 period.

Now we also should remember that we -- although we've been very honest in saying hey, we don't have as much new products as we would like, we do have some. And you just heard about Multaq. It's certainly true to say that we do not want to bet the company on finding new blockbusters but as Hanspeter said at the launch meeting, if you've got one make the best out of it. And that's what we obviously intend to do with Multaq and I would submit to you that BSI-201 is going to be another one. And of course we have a number of other products that are developing.

So if you like there's been a first need to make sure that we can take these great businesses -- and I always come back and say remember Pfizer paid a boatload of money to buy Wyeth really to get to where Sanofi already has in its 80%.

Now the middle arrow is really where we come in on the transforming program because I'll show you in a slide or two that the organic growth is actually something that is bigger than most people have in mind. And it's largely because most people don't know how to value these non-traditional businesses if you like.

But it's also true to say that the company's not managed in this way. So we need to actually think about new skill sets, we need to think about reallocating of resource, we need to think about new structures, we need in some cases to have some new leadership. And we need to do that to be able to really capitalize on these growth drivers because you cannot go out and start buying companies unless you've got a good solid base at home. There's no point having -- going and buying an OTC business, for example, if you don't actually have someone who runs your OTC business that knows about OTC, who is in a position to judge which OTC acquisitions would be good.

So that's why we launched this program. It's first and foremost to be able to seize upon these opportunities. Clearly it is unsatisfactory to continue to be investing in research and development without results.

And finally, knowing that we're not going to have enough new products coming along, we obviously are pursuing external growth opportunities. So that is the program if you like, the two arrows, organic growth and transformation, that actually enable us to deal with the loss of patents between now and 2012.

So let's take them one at a time here. We'll go to the next slide. Now this slide is not meant to be a sales forecast. Right. And I've seen some notes out there that people are looking at that and saying that. That's not what this is intended to do. What this is intended to do is to say we've been talking about these growth platforms but people don't really have any idea of well, what can that really do in the 2013 timeframe. And we had a bit of an ah-ha when we did our emerging market seminar and said actually even without doing much we can double that business in five years just at the growth rate we're doing.

And when you actually look at all these businesses -- and you've heard me say that I don't see any impairment to the growth potential of Lantus for example -- or if you look at our vaccines business, you can see that we can double those businesses. And if you do, and there's not a single hockey stick in here, there are not -- there's not the hypothesis that we're going to go out and buy more businesses. And given that we've already done seven acquisitions in six months I don't think anybody can suggest that we're going to suddenly stop now.

But just doing that you can see that the cliff goes away. That basically doubling just the businesses we have, if you take that 80% and let it become 100% of the business it's as big as our 2008. The only reason we took 2008 was those are real numbers. And it's particularly important when you look at costs. I don't like looking at future cost numbers, I like to be able to go back and look at real numbers.

If you want to take 2009 I'll say the same thing about 2009. That's not really the point. The point is that these businesses have enough organic growth potential to really make a difference to the business is the first point.

The second point is, look at these businesses in terms of fundamentals. You've got businesses again that are not subject to patent expiry. So even if we didn't do anything else -- and I can tell you as CEO I'm not going to spend the next four years doing nothing -- but even if I were to go play golf, just letting those businesses grow would mean that you're going to be able to grow that business to a level that offsets that but fundamentally you also end up with businesses that have much different growth perspectives after 2013.

So for those of you who have kind of a black hole for Sanofi-Aventis in your models, this was meant to help you to at least evaluate the piece that we have.

Now clearly we have EUR4b of cash flow after dividends and tax and we're not going to let that lovely cash go to waste. We are also equally not going to waste that cash. We're going to make sure we continue to acquire businesses that bolt onto those. So in other words the acquisition strategy is not around having to fill a gap anymore. The acquisition strategy can be done intelligently and strategically to actually be able to drive value and in particular drive sales growth. And I want to go buy sales. I want to go buy something that can grow.

So we come back and say all right, we remember what our three priorities are. This is essentially what I spend my time doing. I spend a lot of time trying to drive innovation in research and development. I said I was going to spend 20% of my time on business development. I'm easily spending that, if not more. And we are trying to adapt our company to future challenges and I think in the first half we've made significant inroads on that. With the goal again though of not just filling a gap but transforming this business into sustainable profitable growth with an improved risk profile.

So now what's going on in R&D? Well, remember, we are a European company. So when we decide to do change we're going to go through full consultation processes with our social partners and we're in that process. We're in that process because already back in June we launched a program of early retirement and voluntary departures in France which is meant to basically to reduce our headcount in research and development and particularly in our head office.

The transformation project is not there really to save money per se. Money will come out of that but it's largely because we're trying to simplify the business and focus our resource around those things that will grow. In my R&D division today I have a typical pyramidal organization. I have 13,000 people and I've got 11 management levels. I don't think it takes a rocket scientist to figure out that you're not going to get a lot of innovation going on in that type of an environment.

So we've done a number of things. And the first thing you have to do is say let's make sure we've got a proper base to go forward with. Let's make sure we have a pipeline that we all believe in so that we can actually understand what kind of resources we actually need. So we did that in the first quarter. We came through, we cut a number of projects that we no longer believed in or which weren't going to go forward for other reasons such as technical risk or the return on investment wasn't there.

So -- and through that process we actually created much tighter governance over what we're going to invest in. Because quite honestly we had I think a situation where we didn't really have a good robust proof of concept before we advanced into development. And when you talk about risk, I think we as an industry are probably too risk averse prior to proof of concept. But I could certainly say as a company, and I won't speak for other companies on this, but certainly within Sanofi-Aventis, we were not risk averse enough before we went into development where you're going to spend a lot.

So that's what we did first. Then we came back and said, well, so what is the organization that is actually going to drive innovation? And I've been working with a number of people, most notably Elias Zerhouni, who obviously ran the $30b a year National Institute of Health and is credited by people all over the world as having transformed a giant, government-run organization. And we sat down and said just because you divide these things up into ever smaller teams doesn't necessarily say that they're going to be more innovative.

The fundamental factor behind innovation is the ability to create something disruptive, to challenge the status quo. And if you go read anything about innovation, you're quickly going to find that there's a great belief, and there's a number of studies that have shown that big companies cannot do that. Big companies are great at maximizing value, at refining things, at enhancing things, but the very size of the company means that the success of it means that it's very difficult to have people within it and structures within it that really do something disruptive. So if you want to have innovation you're really going to have to first and foremost think about the culture, the way of operating, the mindset and the very people that you have.

The second thing is that Elias Zerhouni will tell you that research fundamentally changed in the 1990s. Where we used to in the 1980s go through a process of screening everything we could find in the cupboard against known targets and hoping for a hit, now we're using the knowledge of genomics and proteomics and messenger RNA to really come up with ideas for targets. And so there's a creative genius, if you like, that's going on. And it's probably going on mostly within universities and public institutions. And there's also a part which is entrepreneurial genius, which is figuring out amongst the multitude of targets which would cost you about $20m a year to validate, which of those really merit development.

And then there's obviously a whole problem solving and process factor where nobody beats big pharma on this. There's nobody that's got better competence and rigor and discipline in really testing and stress-testing the science than big pharma.

And so you need structures where you're talking potentially about multi-year grant processes. You need to have an HR process that lets your people leave the organization and go work outside every now and then and come back in. You may need an exploratory structure where you can have people from outside the organization coming in and working with your people, to create a hotbed of thought process.

What you can't also do is have your people spread out all over the world. We merge and merge and merge, and I've been doing this for 20 years, and you suppose that because we've got email, because we've got video conferences, people will be able to work together as though they were together. Ladies and gentlemen, that ain't so. There is a huge value, we see this in Cambridge, Massachusetts, we see this in the Bay area, it's important for people to work collaboratively in teams. So we need to be bringing people back together again, we're doing this very quickly in oncology for example.

Today my oncology R&D teams are spread across ten different sites. We've chosen to create an integrated R&D and commercial operation structure which will be focused in Paris and in Cambridge Massachusetts where we can bring companies like BiPar and Exelixis and others into the fold and very quickly be able to move products in and out of Phase I, II, III and onto the marketplace. In diabetes, we're going to do this a little differently where we're looking at a horizontal type integration, and looking at the disease state and not just selling more insulin.

But there is a whole process that is around how do we make people more entrepreneurial, how do we make the organization more porous, how do we change our HR processes, our budgeting process? And I can tell you, in a big company, that is going to be a challenge, but I can also tell you that what I've seen in our industry is just tweaking the organization is not going to do it. And I'm not saying we can do this with the culture, but I do understand that I think unless we do this we haven't got a chance.

Now the other thing I told you was, the company was never very openly -- very open to the innovation of others, largely in the pharmaceutical industry, I think, big pharma thought it could do everything best, from soup to nuts, A to Z, research to development. And I think we're seeing evidence of culture change. The fact that we could buy BiPar and not integrate it, I can tell you it took a lot of work not to Sanofize BiPar, but we've been successful. Those are 18 people who brought this product to Phase II and they're now doing a demand driven integration, demand driven from their side, not from corporate.

Exelixis, fabulous partners, they have particular skills in really moving from pre-clinical into Phase I. I'm happy to work with them. Kyowa Kirin is a new pre-clinical monoclonal antibody. I could cite the Salk Institute. We have also developed a pipeline of contacts and partnerships so we are only just beginning on this path. Next.

We have had multiple acquisitions. And I think they've been consistent with the growth platforms that we've outlined. None of them have necessarily been big, but you've already seen that hey, there's EUR178m extra of sales in Q2 and that isn't even a full quarter of some of these. So you don't have to go buy the bigger stuff on the block to actually start to move the needle.

I think they've also been very consistent with where we want to go now. Now, if I take Shantha, for example, I'm extremely excited about that. It was not an easy one to win. Shantha is a company that's been founded in India. What really interested me were two things. The first is obviously there's a state of the art manufacturing facility in Hyderabad in India. This is extremely important because it is very difficult, if you want to go build this facility yourself, I can tell you -- I happened to be talking to Tachi Yamada when Bill Gates was visiting our Lyon facility, who happened to mention this facility because he had seen it, clearly attesting to the quality of that site.

But the other really interesting thing is if you want to be in vaccines in marketplaces, you have to have vaccines that are adapted to the diseases that are there. So Rotavirus is a disease against which we have no vaccine, not a big -- not a terribly nasty disease for children in Europe and the US, but deadly to children in other countries. And so by assuming Shantha we acquire a very interesting portfolio of vaccines that are completely adapted to those markets. Dr. Reddy, who founded that company, has agreed to continue to run it. Alain Merieux, who had the vision to spot this thing in the first place, has agreed to work with us in creating a strategic committee. So to me, this is very much consistent with the idea of building our vaccines business and building our position in emerging markets.

So that's -- I'll finish there, and I'll ask Jerome Contamine to continue on on the financial side.

Okay. So as Chris has mentioned, our transforming program is not per se aiming to cut costs, but more to transform the company is going to work. Less in silos, more entrepreneurial approach, more transversal organizations, so perhaps you already had the question, where is the savings going to come from? To a certain extent it will come from the ability to create bridges between the various entities on the Group instead of having just an organization by silo which is more traditional.

So just to put some figures on this transforming program. We have identified at least EUR2b of cost savings recurrent by 2013 as compared to 2008. Here again, as Chris has mentioned, we have taken 2008 as a base because this is where we knew the costs were. So it was clear to assess where we could go in 2013, so this is why we are using this base.

This will involve all the parts of the company. And it will involve R&D, it will involve the industrial division, it will involve the commercial operations and definitely also the support functions which we ask to be streamlined to review the process, to make them simpler, less heavy and to allow also people to work better. We have put us a way to go and we have the final first milestones. The first milestone is of course 2010. And as you can see from the slide, we aim to save 30% of the total, so let's say at least EUR600m by year 2010 as compared to 2008. This will be the first milestone on which we will of course report on a quarterly basis.

Just to give you some hints about how -- about what we are going to work on, when it comes to industrial affairs, one of the issues is -- which we are raising very frequently is how much do you produce from the north, how much do you produce from the south. It's clear that by now we are producing around 50% from the north where we are -- yes, 51% when we are selling actually only 40%. But just as a result of the acquisitions and some optimization of the production using all the plants we will have -- and we have available all over the world., we will be able to increase the share production which we produce from the emerging countries allowing for lower cost, but also quite efficient.

For instance, the acquisition of Zentiva allowed us to acquire a plant in Turkey which is a real state of the art plant which we are going to use for other products beyond the Zentiva product as well. Also above this period when we are going to grow and develop our business outside the Western world in the OECD countries, volumes will continue to grow. And therefore the productivity will increase just as we have increased volumes by cutting the -- let's say by dividing the fixed costs by higher volumes.

So we could say that at least if we do 10% more or maybe more than that of the actual production in 2013 which will come from emerging countries, or let's say low cost countries, also we'll benefit from the increased volumes in the interim, that's obvious. We are going to transform some of our platform from the chemical to biological platforms. Typically this is what we are doing now in Neuville where we are moving this chemical facility to produce a dengue vaccine, which will be produced as form 2013 to 2014. We are also bidding a plant in Vitry close to Paris, which used to be also a chemical site, which is going to be a biological site.

We are developing synergies between our pharma and our vaccines business. And we are going on with regular production of production. I think we are happy for Sanofi has not to say -- to make much noise about their effects and our effort to reduce year-after-year our cost base and to improve the productivity of our industrial division. Here we have put a figure of at least 2% real cost reduction per year over the five years to come, which is already something to be achieved.

On R&D a lot has been said already. In terms of figures on variation, as you know we have the plan to close down four research centers in France and to concentrate our forces on the main research centers. We are also going to close or to dispose of four others outside France, UK, US and Japan. We have this plan under discussion still but which has been put on the table of voluntary departures and early retirement. And all in all we think that we will be able, that to make our fixed costs variable, in other terms to be able to have our fixed costs going down along with what we need actually internally in terms of variable costs, meaning costs you spend on projects, on trials, either internal or external.

Over three years, we can say -- when I say three years, it's from 2008 to 2011, it's at least 20%. And if I just take the pharma part of the R&D, it's at least 30% of the overall cost which will be reduced or reallocated to new projects because as Chris has said clearly if we have the opportunity and we will have the opportunity, to invest in new projects, we'll do it. So all in all we are creating also from an organizational point of view a much more flexible R&D organization.

Commercial, we will take -- we will, of course, have to have our organization following the evolution of the demand of the sales and move more to emerging markets means developing new models as has been presented during the emerging markets seminar. And of course, also, we will at the same time reduce -- make more efficient our organization in Western Europe and in the US. On the support functions we will continue to develop what is obviously quite traditional or novel, to create shared platforms both in terms of accounting, IT, purchasing, HR, in order to have more efficient support functions and to have a lower cost gearing on the actual productive operations.

Which leads us to this second graph, which is consistent with the first we have seen in a few minutes ago. As Chris said, this is not a forecast, this is not a guidance, this is for you to understand where we go and how we can transform sales into profit. It's clear that when we are going to lose the exclusivity on some of our products we are going to lose sales but also profit. We are also going to lose the revenues which we are getting from our non-consolidated sales, in particular from Plavix. So it's a bit of a hit on our P&L, on our bottom line, which is coming from this loss of profit coming from the generification of some of our key products. So in order to fight against that, we have actually three levers.

The first one is the organic growth, which has been described on the implementation of the growth drivers, which will be main contributor to counteract the loss of profits which is coming from the loss of sales. But clearly also, if we go into other businesses such as generics, also vaccines, the level of margin is slightly lower as compared to what we can achieve in the ethical pharma even if as you have seen during the first quarter, we managed to integrate that. And this is where cost savings come. This is where the transforming program in terms of P&L, in terms of bottom line, will make the gap, and will fill the gap in terms of contribution between what we are losing and what we will gain.

So what we say quite simply is that at minimum if we don't take into consideration the significant acquisition, if we don't take into consideration any further improvement beyond stabilization of sales, we should be able to stabilize our margins on, let's say, our net income to sales margins basically, in global terms, and so that we can stabilize the profit. And I think we see the message with that, so not only we are able to go through the end of some of the patterns over the period up to 2013, but also we are going to compensate through both cost savings and contribution of growth drivers, to compensate at the level of the net income.

And of course this doesn't take into account the use of cash, the cash flow we'll generate. So here, it's a minimum case because if we do some acquisitions which will clearly contribute to further profit, here we can recoup with a continuous growth of our profit and earnings per share. So this is where we are. This is I would say a step in the process organizing the profit drivers of the value creators of Sanofi Aventis. It's not once again a forecast. It is a first step to make you confident that we are going to continue to create value in the future.

Thank you, Jerome. I'll echo that again. It's more of a roadmap than a forecast, largely because we don't think those numbers will ever come about, because we're obviously going to continue to transform the business even as we leave this meeting.

Let's go back just and review key achievements for Q2 and next milestones. Obviously strong Q2 results in 2009. We have given greater precision to our guidance, it was at least 7%. It wasn't capped to begin with. It's around 10% that might end up being conservative, depending on what happens with some generics and with H1N1 vaccine.

Obviously a big event for us in being able to launch Multaq with a good label and a good price. I think now three weeks, three and a half weeks after the event, I think we feel very confident in the long-term growth potential for Lantus. And Hanspeter showed you the prescription data which don't really show any major impact here.

I think we are -- we've been doing a very good job of bolt-on acquisitions. I think I said six months ago, these are not necessarily things that are on your radar screens. Everybody tends to look at the same thing. And we are taking a very systematic approach of screening everything across the globe, looking for things that fit with our business, asking the question, what could we do with this business that existing management's not doing, how does this provide us with top level growth?

We are changing the way we do business with our R&D partnerships. We've done probably more deals in the last six months than the last three years as a company. We've got a long way to go yet.

But I would say it's an indicator of something I have found within our company. It may be that we could have been doing more earlier. But I have found actually a very strong willingness and desire to see change. It's a company that was pretty proud of its past, a company that was -- is, very competitive and a company that hasn't been particularly happy about where it's been over the last four or five years. So yes, there's always nervousness in big organizations when you start talking about change. But I must say, if there's one thing that surprised me, it's actually the willingness of the company to mobilize around change. And I think some of the partnerships that we've been building is just a single indicator of that. But there are of course many others.

As part of that transformation, there are going to be some cost savings coming out. I'm not going to tell you that those are the maximum cost savings that could come out of it. On the other hand, having been through multiple cost restructuring programs in my career and seeing zero impact in terms of shareholder value, that's not the lever for growth. We need to streamline the organization. But it's as much as trying to make it go faster and redirect resource to growth than anything. Nobody's going to buy the stock in the company because we take another EUR200m of cost out of it.

I think we had a very good emerging markets investor seminar. I think it is clear that we are moving away from the traditional markets, traditional businesses. It is undoubtedly easier to value a product where you've got weekly prescriptions and known margins and known market conditions. We're moving into more challenging territories. We're talking about countries, not products. We're talking about different businesses where you can't always get reliable IMS data. And we're trying and have tried with the Emerging Markets Seminar really to provide more information and more transparency in an effort to help you all actually evaluate those businesses. But we appreciate that we've got some way to go on that yet. It is much more complicated than simply a blockbuster in the US and we also appreciate your feedback on what we could be doing more to help you with those.

But that is clearly where our industry is going. It's not just Sanofi-Aventis. So I think we all have an interest in working together on that. We are expecting an approval for Multaq in the second half of the year.

We'll be announcing Q3 results on October 30. And again, in the spirit of trying to help understand some of the core franchises of the business and in line with the spirit of our Emerging Markets Investor Seminar, we're going to do another one with our vaccines group. So we'll wrap up here and again just come back to the core objectives through 2013.

Again, I think there's no better profit comes out of maximizing organic growth. And so we have identified these growth platforms and want to make sure that we are maximizing those. But we do also recognize that that's not going to be enough. If we really want to show growth through 2013 and beyond, we're going to have to continue to seek external sources of growth and diversification. I think we're off to a very good start on that. We've been very active and you'll see even more very soon.

And finally, clearly innovation is at the core of the company. We have to show that we can transform R&D. And I actually think, and I look at BiPar, it's amazing what you can do with a few deals. You can actually put some real assets on the table. We may not have them launched by 2013, I think that wouldn't be realistic. But I think what is realistic is to expect a much more robust pipeline of products for Phase II and Phase III because if we're sitting there in 2012, people are going to be looking out at that point to 2014 and 2015. And that's where you're going to be looking also into what's in the pipeline.

So we're going to close with the official presentation and pass back over to you for questions.

So we're now ready to open the call to any questions you may have. Again, I will ask you to limit your questions to just one or two at a time to allow as many people as possible to participate in the discussion. You can always come back into the queue if you have a follow-up question. Operator?

(Operator Instructions). Thank you for holding, and do we have the first question? We have a first question from Mr. Graham Parry from Merrill Lynch. Please go ahead.

Hi, thanks for taking my questions. I'm just wondering, first of all, on your long-range target of 2013 profits matching 2008, what you're assuming for Lovenox within that, and also Lantus? Are we still assuming here a doubling in Lantus sales? And would it be upside if we didn't see a substitutable generic Lovenox emerge and you did see a doubling of Lantus to your expectations there?

And also, is it fair to say this is just an absolute base case even excluding further acquisitions, otherwise you wouldn't really be prepared to offer that up to the market right now?

Secondly, just on the restructuring charges, is the 2Q restructuring charge the total charge, or should we expect more? And can you give us a feel for what percentage of those are in cash?

And then thirdly on Multaq. I know it's fairly early days yet, but I'm just wondering what the response from payers to the pricing has been to date. Thanks.

All right. You were cutting in and out a little bit there, but I'll let Hanspeter take the Multaq question and Jerome the restructuring charge.

On the long-range forecast, on all these things you do the 50/50. I happen to think that certainly a substitutable generic is not that likely when I look at what's going on with Europe and their guidelines and having to do clinical studies for each indication. You really have to question whether the FDA's going to be more aggressive. When I look at what's going on with biosimilar legislation and some of the interactions we've had, listening to the new head of the FDA Commissioner, Peggy Hamburg, saying that decisions need to be based on science, I think a substitutable generic just doesn't really meet the risk benefit tradeoff.

At the same time, could somebody do the clinical trials and come with a non-substitutable generic? Possibly. So I would have to say that if there was no generic ever, either substitutable or non-substitutable, but certainly if there was no non-substitutable generic, that would represent an upside to that, those numbers. And again, the idea is not to do a forecast and say because I've also seen some straight lining going on. Well, if it's the same numbers in 2008 and 2009 is higher, what does that mean for '10/'11? That's not the objective of it.

The objective of it is really to say the businesses that are there have an opportunity to grow, and grow beyond that. And when we do the valuation, and I'll perhaps let Jerome comment on this, we see the biggest difference between how we internally value the company and how the outside world values the company in what happens after 2013. And therefore we're trying to give a little bit more perspective about what those businesses could be in terms of size and shape. But clearly I'm not going to go and spend the next four years of my life to come back to where we started in 2008.

So Jerome, you want to talk about restructuring? Maybe you want to add a comment around the (multiple speakers).

I think what you've said is you're right. What we have tried to show to you, to confirm to you, we have of course, you can take a lot of scenarios and assess what will be your effect on sales and profit in 2013. Once again it is clear that beyond some assumptions and some averages we can take on the generics and the competition, we are also not taking any acquisitions or let's say any significant acquisition in this assessment.

And also, what we end with by year 2013 is a much more diversified portfolio with very -- much less being exposed to generification. So clearly a growth -- a potential for growth beyond 2013 which will be as compared to what we have now, everything being equal will be definitely higher. Every one of you can make your own assessment about what could be the actual value of the company in 2013 only based on that. And once again not taking account the use of the cash we will generate in between. But you could reasonably assess, if you look at -- if I look at the value of, let's say, a generic company or an OTC company or a vaccine company, and it's listed or whatever, but you could assess some actual value in 2013 based on that which could justify for -- definitely for a price or value which could be higher than where we are today. But this is not my job to do that.

On the question of restructuring, Graham, so first, yes, the cost we have -- the provision we have taken covers the plans that we have which are present here under discussion either for -- mainly in France and to a lower extent to other places including the US. It's to a very large extent cash expenses, so it is -- a severance package which would be given, or early retirement package which would be given to employees which will leave the company. This cash out will come over years, specifically when it comes to early retirement, it will come over two or three years, definitely on average.

Third, will it be -- will there be other restructuring costs? Yes, there will be some. You know that accounting rule that you take restructuring costs only when the decision has been taken. But I can say that nothing of the same magnitude. So it will be probably a few hundred more over time. But less than the double of what we have taken for the first half, let's say, somewhere in between, depending upon exact conditions and the decision we'll take over a year or two to come.

On Multaq, we have the product approved in three weeks. So we have limited experience naturally. Nevertheless, we believe we have very good chances to get a strong access. Why? As I said before, we have a strong labeling. We have very good health outcome data. We are in a unique position from a competitive point of view. And so after the first three weeks, and I say this with all prudence necessary, we have a very friendly perception of the product from the payer's side.

That's great. Thank you very much.

We have a question from Mrs. Luisa Hector from Credit Suisse. Please go ahead.

Good afternoon. I have a question on Lantus. I'm just wondering whether in the ORIGIN study, the Data Safety Monitoring Board has been able to take a look at the cancer safety and whether there's anything, even if you're not able to share it with us, there's work that's been done there?

And then on the EMEA requirements, you mentioned that it's -- you're not going to need to do more clinical studies. Has the EMEA actually outlined what they need? And then with regard to the FDA, do you have a meeting lined up with them?

And then if I can, a couple of regulatory questions. Just Multaq Europe seems to be slightly delayed. Just wondered if there was any conversations you'd been having with the EMEA that led to that delay.

And Menactra, the US filing in the babies, that also looks to be slightly delayed. Just wondered if there was anything behind that as well.

We actually have Jean-Pierre Lehner, who is our Chief Medical Officer, so I'll ask him to perhaps address the Lantus questions first. Jean-Pierre?

Yes. Good afternoon. The question, the first question what would be -- which kind of information we could get from the ORIGIN study. The ORIGIN study is a study --

But also what -- and what we have got there in from the Safety Monitoring Board. The ORIGIN study is a study, the design, was not at all -- trying to find any cancer incidence. They, I mean the Data Monitoring Board, are knowing what we know from us because this is something which has been decided at the Monitoring Board. And we are not aware of the decisions they are taking. So far what we know is that we did not receive anything from them while they reviewed all the data which are available to them, we have not received any information about, let's say, any change in the continuation of the study. So this question is today very reassuring for the product.

The second point, we have got a long discussion with the CHMP about which kind of study, a technical discussion, which kind of study which could be set up in order to make -- or to clarify the situation on the Lantus. And as you know, to perform a clinical trial as such is something which is definitely ethically impossible and by the way, it would take from five to ten years to get an answer to this question. This is something the Company doesn't want. It doesn't want, I mean, to have -- to try to solve the pejorative issue on the Lantus, we do not believe so far to five to 10 years, because this is a risk the Company will never take for the patients.

There are other techniques which allow, such as a case control study, which could be performed either in Europe or in the United States. And also we can also have an access to databank, to data registries, but not on a [plain] database as it has been done in the past, particularly in the Swedish, Scottish and German registries, but on, let's say, electronic medical records database which are much more precise.

One of the major confusing points, we have got on the publication results, is the fact that a lot of information are missing today. Those information are, let's say, mainly epidemiological information about the duration of diabetes, concomitant medication, simply the weight of the body mass index, for instance, which are very, very important compounding factors, I mean, for the risk of cancer. So we will try to get this information in the next month.

And today we are contracting at the level of the United States with independent scientific societies in order to have the possibility to get this information as quickly as possible. And second, we are today designing a case control study all over Europe. Those are the main -- those are the main features. We will submit early September to the CHMP. We will complete, also in order to shed a light on the issue, pre-clinical studies in order to, at the end of the day, have a situation which will be as clear as possible on this topic.

Okay. And there's no possibility that the regulators would want to see any of the data that the Data Safety Monitoring Board has seen? For example, there've been no requests or that's not an option that you have?

I thought I had answered the question, but we did not get access to the data. What we know is that so far the Data Monitoring Committee of the ORIGIN study has not informed us of any change. And this is most of the case in studies which are, let's say, ongoing studies in order not to disclose any specific results which could bias, at the end of the day, the results or the interpretation of the study.

Okay. Thank you.

And with -- just on Menactra, it's just a small delay. Basically CDER has requested that we provide additional supportive data on the concomitant use of Menactra and Prevnar. And this data has actually been generated and we should be in a position to file before year end, which puts us in a good position competitively.

Okay. Thank you.

We have a question from Mr. Andrew Baum from Morgan Stanley. Please go ahead.

Hi. Good afternoon. You're sending a very, very strong message to value investors by committing to or giving guidance on a long-range target, underlining the sustainability of the new model that you're shifting to. What I suspect value investors would want to hear to feel absolutely comfortable with the thesis which you're putting out is that you're prepared to sit out the five years, invest in the strategic areas and the geographies you've outlined, and not be tempted by a high multiple US transaction, even if that is a business with rapidly growing assets. So perhaps you would like to comment on that, Chris.

I think, again, the objective really is to say let's put a floor under a little bit of things here, and say here's what the business can do on its own. If we have an opportunity to grow top line and add value, doesn't dilute margins, it's accretive acquisition, and there are those, we would do it. It depends on what you call a high multiple. Pretty much anything we buy is a high multiple, compared to where we are.

But I think we're not interested in diluting things. I think the other thing we'd say is we don't want anybody to sit out this thing for five years. We're just saying look at the 80%. One of the things I find when I look at things, and I'm not seeing, and I think in talking to a few others CEOs in other sectors, and it may be as a result of the financial crisis, is that we're not really seeing much fundamental analysis being done any more.

So if you actually go back to what is the business worth, just as it stands today, the terminal value numbers seem to be without any kind of real substance to them. So the objective here is really not so much to say this is what a value investor should look at, but here's some help in trying to figure out what a terminal value might look like.

What we're going to try to do is generate -- my ideal, if we can do it, and again this isn't a forecast, but if you said what am I actually trying to do, I'd like to -- this is a big company. I think trying to get to double-digit growth every year is not going to be realistic. But if I could get to a CAGR of a 4%, 5% on earnings per share over time, then I -- you're going to make a lot of people a lot happier than when they look at the Company today. And clearly the only way we're going to do that is by adding on businesses intelligently.

Maybe I could have just one follow-up question for Jerome. Could you give us any indication of -- you've given us some indication of revenue and net earnings, or at least a floor. Would you like to hazard some kind of guidance on the margin structure of the Group around that time, given how you anticipate the mix of the business panning out?

It depends on where you are -- when and where you are looking at. But basically what we say when we say we expect to have sales which would be equivalent to the 2008 sales, and we expect the net income to be equivalent to what we had in 2008, we clearly say that the net income to sales ratio should remain more or less stable.

It's clear, once again, that all over this period there will be shifts in our structure, of course. On one hand we will produce more in volumes which will, in absolute terms, increase our cost of goods and, to a certain extent, increase the cost of goods to sales ratio, quite simply, because at the other hand, we are going to sell products on the emerging markets, with somewhat lower margins of maybe OTC or generics.

But we are going to fight against that, so with the cost-savings program, which I tried to describe before. We are going to continue to shift our marketing and sales spending from a high-cost country to low-cost countries. Also if you are to develop vaccines, for instance, it's clear that the ratio of -- the level of sales and marketing spending you have to sell vaccine is lower than what you have to sell blockbusters in the US. So clearly as a result of this double shift, there will be a relative reduction of sales and marketing cost.

R&D, this -- I would say on one hand it's clear that there is no reason to spend R&D against sales generated from generics, or very little. But R&D, on the other hand, depends, to a certain extent, about the new potential products we could put on the pipe. So if we have can have more, we'll do more. But basically, everything would equal. Of course we are going to do that, as we have started to do and you've seen in the second quarter. And administrative costs, we aim to continue to reduce it to a certain extent.

So it doesn't give you -- so it's easier, to be very honest, to take the view on the net income than to take the view, the very precise view on the level of margins or intermediate level of the various margins. But basically we could say a slight increase of everything -- on this basis, let's say, once again, slight increase of the cost of sales -- of the cost of goods to sales, for the reason I've explained, but reduced -- a slight decrease of the R&D to sales spending -- to sales revenues.

But once again, everything being equal, a decrease of the SG&A to sales cost for the same basic reason. I think this is a trend where we go. And this is how the outlook of our own business will look like within five years from now, at least on this base of activity.

Yes. I would just think there is an element that Jerome alluded to, which is it's not just the level of margins, it's also the structure of the cost. So if you take R&D as an example, basically if we just take the portfolio as it is today, then given what we have in there, we can clearly reduce our cost and we are already moving to do that.

However, if we have projects, and to give you a concrete example, when we acquired BiPar, we suddenly had a product going into Phase 3. So that's going to increase your cost. But that becomes a variable cost at that point. That's not in someone's budget. We're taking a lot more of the fixed cost out. So if the BiPar product were to fall over or when it ends, that budget ends. If you say you're going to always spend 15%, then what happens is that budget starts looking for other projects.

So what we're trying to do is take some of the fixed cost out and associate it with projects. And if, for whatever reason, the project doesn't go ahead or the project finishes, then we can pull that cost back out of the structure. And obviously, as Jerome said, you're not going to continue to spend versus sales that don't need replacing through R&D, such as some of your sales in emerging markets or OTCs and the like.

So there is an element of cost structure and what it's doing in addition to the actual levels. But I think if you look at the -- what Jerome has presented on terms of profit, basically, as we look at the business, and remember we're already reasonably diversified. We already have 25% of our sales in the markets where everybody thinks the margins are lower. And I think as we said at the Emerging Market Seminar, we basically have operating margins pretty much everywhere between 40% and 45%. Well, as long as you don't spend 15% of your sales -- those sales on R&D, you don't dilute your bottom line margin. But it is true that the intermediate steps may move around a bit.

That's helpful. Thanks.

We have a question from Mrs. Alexandra Hauber from JP Morgan. Please go ahead.

Thank you for taking my question. I'm sorry if I move from the roadmap, which is great, by the way, to some number questions just to help me with my starting point for the terminal value. Jerome, you said when you talked about your goal to have a real reduction of production costs by 2% per year, you mentioned -- you said production cost, not COGS. So I'm wondering whether there is a difference. And if there is a difference, how much -- what is production cost as a percentage of COGS?

And in terms of R&D, after third quarter -- I hoped you would be able to tell us by the second quarter some more about your R&D budget. Can you say anything more other than that it depends on the project? Is it going to stay around that 15% level we have seen in the second quarter or can it go down from here in view of the terminations you have seen in the first quarter?

And then just a question on your licensing strategy for R&D. Looking at the deals you have done so far this year, you could -- it appears that you are repositioning your R&D efforts towards the more oncology/specialty kind of area. Now if you look at, there have been several primary care areas coming up for licensing so far this year which went to the competition, despite the fact they were in areas where you're currently in. Is it correct to assume that you are less interested in those primary care areas because that's where you want to diversify away from it?

Jerome, do you want to take the production costs?

If I took properly your question, because it was not -- the broadcast was not perfect. But I think that when it comes to industrial cost, we aim, as I mentioned and is presented in slide 41, we aim to reduce our production cost by 2% per year over five years. I think is basically what we can say.

And then, of course, everything being equal, meaning that if we are to produce another product that's compared to another one, this may create a sort of shift, but this is basically a key, maybe, element which you could put in, if I understood properly your question, which you could put in your model.

Then clearly you have --.

So production cost is -- sorry. So production cost is the same as COGS?

I'm sorry, Alexandra, but you have to speak closer to the mike. It's hard to understand you.

I'm trying to speak as close as possible. Is production cost the same as COGS, or is it not, because you use different --?

COGS. Yes, I'm referring to COGS, yes. This is what -- the COGS, the COGS includes mainly industrial cost, but some other costs such as some royalties which we are paying. So the overall, the actual industrial spending to sales is around 18%, the rest being either royalties we pay on some products or if it is your question.

When it comes to R&D in the third quarter, I think that is always difficult to say exactly quarter by quarter because we are in a process of looking for two, three, five years the outlook than just on a quarter-by-quarter basis. But it appears that the decisions we have taken, everything being equal, to A, stop some projects; B, start to implement a change of the organization will continue to lead to an R&D spending which would tend to be lower.

Also you remember that for the full year we gave the guidance at Q1 that all in all the R&D spending for the full year should decrease by, we said, a low single digit, I think we could say now, let's say, a few percent. This includes everything, including the increase of R&D spending we may have or we will have in vaccines.

When it comes to the restructuring, the impact of the restructuring as such in R&D, we will see the outcome of the impact of that more in 2010 than in 2009, quite simply because, as you have understood, by now we are still in the consulting period. So when it comes to closing the -- some of the facilities and moving the people, this will take place in 2010 and not in 2009. So you will see further reductions as a result of this process in 2010 but not in 2009.

Maybe on the licensing, I think, again, I think six months is kind of hard to judge a trend. We happened to have spotted some things and we're moving towards it, but I'll let maybe Hanspeter say a few words on the primary care. I don't know if you have a view on that?

No, I think it is -- within those it's mainly a question of chance, hazards and opportunity. Nevertheless, I believe it's fair to say that today there is more opportunity in specialty care than in primary care. But nevertheless, given our today's portfolio, we cannot at all confirm that we would abandon primary care if we find an opportunity to license in a primary care product. I believe that we are an excellent partner given our past and our presence in primary care. But, as always, it needs two to tango.

I agree with Hanspeter. I think we're -- if we find something in primary care, I still think -- I'm not prepared to say that we're abandoning primary care and moving to specialty. We, I think, have shown, especially as a Company, if you look at gold standard therapies that this Company's built over the years, this is something we know how to do. But, as Hanspeter says, you've got to have something.

(Operator Instructions). We have a question from Mr. Laurent Flamme from Cheuvreux. Please go ahead.

Yes. Good afternoon. Just a question on the top line for the roadmap 2013. Could you give us a sense of how conservative you have been in taking into account the output from R&D, including or excluding Multaq?

In the roadmap, we haven't really taken much into account, but -- except for Multaq. There's a little bit of -- might be a little bit of something or other that is in there. But it has no significant value. So anything that would come out of R&D would be supplemental to that.

Maybe an add-on to this first question, in terms of identification of cost savings, can we assume that you have already taken into account all of the acquisitions which have been announced so far?

We will have taken into account all of the acquisitions -- not Shantha, but pretty much all the other ones. Jerome?

Yes, we have taken into -- the answer is yes or no, if I can say so. Yes, we have taken the acquisitions we have done so far. But when I say this cost-saving program in particular, we have not taken into account the synergies that we expect to generate from the Zentiva acquisition or the Medley acquisition. So we use the 2008 baseline and the EUR2b is based on that. And in 2008 we had not yet acquired neither Zentiva nor Medley. So you can basically say that the synergies that we planned or used to plan to generate in these two acquisitions have not been taken into account in this EUR2b.

Thank you very much.

We have a question from Mr. Mark Dainty from Citi. Please go ahead.

Thanks. Just three quick questions. Firstly on Lantus. Can you just confirm whether you stand by your goal of doubling Lantus sales from '08 to '12?

And then on emerging markets growth, your target of doubling sales from 2008 to 2013, can you confirm how much of that comes from organic and how much comes from M&A?

And then lastly, of the investment in emerging markets, could you give some indication of how much of the cost savings you plan to reinvest or at least some idea of how much it is likely to feed through to the bottom line, and if that will continue over the next four, five years or whether that will tail off at some point. Thanks very much.

For Lantus, yes. For emerging markets, remember, if you're doubling in five years you're looking for a CAGR of around 13%, 14%, 15%. We did 20% in the second quarter. So to a degree, given where those markets are, you don't really need to do that much to double those. If you look at Lantus growing at 26%, even just doubling over the five years to just a slowdown, which is logical obviously because the base gets bigger. The dynamic doesn't change.

I don't think we took that much in terms of -- I don't think in any of these numbers we've taken any new acquisitions into account. We just started, here's what the numbers are and what can you do, because in acquisition you don't know what you're going to do. It's a little like fishing. You don't know when it's going to come into the boat for you and what size it is. So we really just try to take the business as it is and project that towards 2013 and really get motivated around some transformation that we really need to do. But for the most part, most of it is organic growth.

Definitely, Chris, you're right. We have taken no significant acquisition in these figures. And we have said that significant should be at maximum EUR1b investment. So clearly Zentiva would be considered in the definition of a significant acquisition. So there might be some bolt-on acquisitions to complete. If we do an acquisition of EUR40m in China or in Indonesia, this would go into what we plan. This is the degree of precision we can be. But basically we can say that this is 90% or 85% or 90% or 95% organic that with precision you can have by year 2013. And no acquisition of the Zentiva type, or whatever, taken into account in these figures.

Perhaps I can contribute and answer the question concerning Lantus. What you see on page 32 as a significant increase of our diabetes franchise is not only Lantus, of course. It includes what we do else. In terms of industrial development, I think it's an open secret that we try to expand our industrial base. It includes what we intend to do in the field of diagnostics in diabetes. It includes whatever can be done in terms of additional devices. So it is also connected to the overall concept that we have seen in another chart, that we will build up a worldwide franchise around diabetes and within also other existing products, like, just one example, Apidra.

But to be clear, again, the Lantus number, that doubles.

Okay. Thank you. And any comment on the investment in emerging markets?

Sorry. Could you repeat the question?

Yes. Sure. I was just wondering how much of the cost savings you've targeted would we expect to see the bottom line, or indeed if you can give us some indication about what investments you plan, or reinvestments, if you like, in emerging markets and how that may progress over time, whether it will fade away or will be consistent.

I think you can assume that there will be no cost saving in the emerging markets overall because in most, at least in the major markets, like Brazil or Mexico or China, we will have to invest. But we will show very well leveraged profit and losses for those markets in the sense that our cost base will be growing much slower than our sales price.

Yes. The only real cost, as you'll see, as Jerome pointed out, is the making sure that what we sell in emerging markets actually gets produced in emerging markets. Again, the Company's already a long way down that path. Roughly 47% of the volume, around 37%, 38% is actually produced there.

Our biggest single facility is Brazil which is running around the clock, seven days a week, as an example. And we have, I think, 27 factories in the southern hemisphere. So obviously if we can continue to manufacture, Shantha, for example, will help. It's obviously going to be not only a high-quality facility, but it's also a lower-cost facility. So those types of cost savings, although that one in particular obviously hasn't been taken into account.

Okay. Thanks.

We have a question from Mr. Philippe Lanone from Natixis. Please go ahead.

Hello. Good afternoon, gentlemen. Two questions about vaccines. First of all, from the slide you give in appendix, slide 64, I can see that there is a decline by 2 percentage points of the margin in vaccines in the Q2. I wonder whether there was a specific reason and also what kind of margin increase, if any, you have taken in your 2013 plan for vaccine.

And also in the same area, I understand that for H1N1 flu vaccine, nobody knows what the yield will be exactly and what will be delivered. But apparently already in terms of contracts, Sanofi has said a little less than its usual market share. For instance, Novartis has announced about $1b in contracts with the US. And you have about a quarter of that, if I understand well. Is there any reason, or will there be more to come? Can you comment on that?

Yes. Let me take the second question first. Look, I'm not thinking about market share here. First, let's be clear, the demand is outstripping supply for the entire industry. So we will all pretty much sell every dose we make of whatever it is, whether it's H1N1, seasonal flu for the north or seasonal flu for the south. It's more a question of where you're going to allocate this and where it's going to go. There is some price difference between whether you're selling a seasonal flu in the south or an H1N1 in the north. But everybody is talking to everybody.

What's not clear is really what are the yields, what is the dose, and how hard is it going to be to make, and when is it really going to come off the line. And the other problem is that we don't know how long the pandemic season is going to be, if you like. Most people are excited about getting the vaccine, but they all want it before Christmas. So it's pretty clear we can't manufacture in this industry 6b doses of H1N1 before Christmas.

So mostly what we're trying to do is not have a first come first served basis. I think this is a major public health issue. We are working very closely with the WHO and with national health authorities to say where should we be doing this. We made a donation of 100m doses, but also said we'll allocate 10% of the production right from the first week to the WHO because clearly some countries are not rich enough to stockpile. And you're starting to see anxiety levels increase.

And I think as a company we do not want to get into a question of should it only be rich northern countries that get H1N1 or what happens to other countries who can't. Or what happens if some countries have stockpiled everything and other countries don't. So, if you like, we're trying to work with countries and say there's only so much vaccine to go around between now and Christmas, how do we make sure everybody gets that.

We are going to have a question ourselves because we are the global leader in vaccines and in particular seasonal flu, with the greatest capacity. And, as a result, for example, we are pretty much the only people that provide any meaningful doses of seasonal flu vaccine to the southern hemisphere. If we want to make that, we can't make H1N1. And so there's going to have to be a decision made. Do we make H1N1 and we sacrifice the seasonal flu vaccine production for the south? Do we try to arbitrate that and keep H1N1 going a little longer and delay the seasonal flu? These are the actual real questions that we're dealing with.

If the pandemic goes much beyond January, February, that's a time when we would normally start the campaign of seasonal flu for 2010. Nobody's going to be taking that decision any time soon, but you would have to say, well, does H1N1 continue beyond February or do you go back to making seasonal flu.

So these are the real questions. I am not in the slightest bit interested in the market share and everything else because, as I say, what we've seen is everybody's looking for more flu vaccine here, and yes, we will have additional sales. We're just not sure exactly when and how much and where. But I don't think you have to worry about any of us really going without orders here.

Okay. And about margins?

Okay, so the question is -- the answer is rather simple. I -- this is totally linked to H5N1, where we had revenues last year, which we have not this year. So this makes the total -- I mean, the overall difference between the margin in Q2 at '08 and Q2 '09. I can add also that there is some increase in R&D expenses, which is linked to the spending we are now having on the dengue vaccine, which will continue, because clearly we're embarking on a large trial, which of course will increase at this stage slightly beyond the spending or at least beyond the spending report -- down, I mean, divided by sales.

Going forward, what we have taken in our plans is that we have taken into account around, on the one hand, the increase of sales, of course. We have also taken into account the new facility we are presently building, which at the beginning is impacting our costs -- COGS, sorry, as long as we are not fully used. You know that we are just starting the new flu facility in the US. We are going to build one in China. But looking forward in 2013, on the contrary, we have full use these facilities and we will benefit from more optimal on the state-of-the-art facilities and also from higher volumes, not to speak about Shantha which has not been taken in our forecast so far.

So looking forward, you can say globally that at EBIT level, we aim to be 30% EBIT to sales ratio in vaccines. Of course, with the conditions that I mentioned before.

Okay. Thank you.

The next question is from Mrs. Veronika Dubajova from Goldman Sachs. Please go ahead.

It's Dani Saurymper from Goldman Sachs. I just wanted to ask, with regards to Japan, now coming up as a growth opportunity, are you satisfied with your local sales presence in that market? I think it's only 6% of your group sales, I was just wondering if you could comment on that.

Secondly, could you comment on the GLP-1? I believe you started, Phase III in the first quarter of 2008. Are we to expect an update on that in the second half of the year?

And just lastly, just a point of clarification, if I may, but have you assumed or any revenues in your '09 guidance related to the H1N1 vaccine? Have you already made an assumption on what revenues you might receive or left some on the table for potential more, if that makes sense?

I start with Japan, I have to differentiate. We -- I am content with the growth we have in Japan. I continue not to be content with our presence. We have a relatively small market share in Japan, which is smaller than in the rest of the world. But once again, we are on a very, very good trend.

We have a high three-digit growth in Japan. This will be a little bit low in 2010, because in 2010 will be, once again, a year with a obligation to reduce our prices. But the underlying growth for the years to come, I believe, will be in the high three digits, mainly because, mainly, but not only, because we are really benefiting from those projects, which have driven the growth in the years before in Europe and the United States. Which means, in short, if we see an opportunity to strengthen our market share by external growth, we definitely continue to look to it, but also there it depends on opportunity.

Maybe to add on to that, Dani, just to remind you that this quarter, sales growth in Japan was somewhat subdued by the fact that the Q2 2008 comparative quarter included sales of the active ingredient of Aprovel to our local partner. And I'm sure that if you look at Q1 growth, this was indeed as just referred to, a double-digit rate.

And just maybe on the GLP-1 program, basically the program is progressing well. We expect the first results of the monotherapy trial to be available in Q3 2010, with additional results from other studies to be generated by the end of 2010.

Did you have a third question? What was your third question, again?

Yes. It was about H1N1. I mean, we have taken a very limited contribution of H1N1 sales in 2009, for the precise reason, which I think Chris has developed already, which is that we don't know, A, exactly what would be the timing of when we will deliver and also have acceptance of the products, in particular, in the States. This may influence, partly the sales which will be booked in 2009, which will be booked in 2010. For the second reason, which is that at certain times, there is an arbitrage to be taken between seasonal flu and the H1N1 pandemic flu vaccines. But clearly, you could say that we are -- have been conservative, all in all, on the assumption that's taken in guidance in 2009 in that respect.

Thank you.

The next question from Ms. Marietta Miemietz from Societe Generale.

Yes. Good afternoon. Two questions, please. The first one, just to clarify on your long term guidance. Does your floor case of flat net income actually assume reinvestment of a significant portion of the cost savings into the business outside of acquisitions? I'm just asking the question because it wasn't quite clear to me whether you need the cost savings that you expect out in order to close the profit gap between the top products that are going generic and the new growth drivers or whether you're actually looking to reinvest quite a bit of the cost savings into the business in order to generate the growth drivers in the first place.

And my second question, just again, coming back to Lantus and the case control database analyses that you're going to be doing, how long should we plan in terms of the time line for getting results there? Are we more likely to get the results in early 2010 and late 2010? Would you communicate it all in one go? Or how should we think about that? Thank you.

Do you want to take the reinvestment and cost savings?

Oh, the reinvestment of cost savings, it -- I mean, it's clear that, I mean, here I will differentiate my answer. When it comes to reinvestment into development of organic sales, typically reinvestment on marketing efforts, in emerging countries, yes, we have here a net element, which includes a reinvestment of the gross cost savings we will generate from lower spending, let's say, in markets where we are going to lose patent, typically.

So in that respect, yes. We are taking into account investment -- the reinvestment. That EUR2b is a net impact. So if we were to think about the gross impact is, it would be much higher than that. But we are reinvesting part of it, in order to get further development, sales and growth typically in emerging market, possibly in vaccines, to take examples.

But if you think about investing into acquisitions, then the answer is no. It is clear that beyond that, we will generate a lot of free cash flow, which we have not assumed at this stage, that we invest into acquisitions. So clearly this will come on top.

Okay. But just to clarify --.

If I could just add onto that, I don't -- I caution you on using the word guide -- long-range guidance. It is the guidance, if you like, on the existing business, from 2008. It's just a projection of that existing business. It's not necessarily what we're going to do in 2013. Because obviously we've got three or four years of management effort here and would expect to have a different result. But that's just an extension, an extrapolation of 2008 as an existing business, given also the impact of what we want to do on cost reduction and transformation.

Yes. And I fully understand that chart 44 is just for illustrative purposes, but I was just trying to make sure that I read it correctly. So the way to read this chart is basically to say that the growth drivers that are going to be picking up from the products that are going to generic are, at the end of the day, substantially less profitable. So on a net basis, you need that EUR2b cost savings to keep net income flat. And then whatever the management team might be looking at over the next five years could then start generating additional net income growth beyond that. Is that right?

(multiple speakers) There is something I'd like to add, I think I have mentioned it already, is that you need to keep in mind that we are not booking the sales generated by BMS in the US. So here we are getting what is called in our P&L other revenues that we are going to lose.

So we are going to -- we need to compensate for that if we want to get the same net income, having the same sales, as you can understand. So that's the reason for that. I mean, the cost savings is also going to contribute to this compensation, but we -- but what you said on top is right, technically.

Okay. Great. Thank you.

And you had a question on Lantus studies and when you think -- I'll turn that back over to Jean-Pierre.

So we do think that the database results, we could be obtained within a range of nine to 12 months.

Okay. Thank you.

The next question is from Mr. Eric Le Berrigaud from Raymond James. Please go ahead.

Eric?

Mr. Le Berrigaud, you have the floor.

Yes. Can you hear me?

Yes.

Okay. Sorry. So some very quick questions. First of all, to extrapolate a little bit more on the diabetes franchise, that just Hanspeter touched on for the 2013 time frame, when do you think you will be in a position to tell us more about your plans for next generation insulins or to look beyond Lantus and see where we are versus competition?

And second, is it far to say that with flat net income, that will translate, probably, into positive cash flow in 2013 with CapEx and working capital management?

Thirdly, when do you expect your discussions with Merck about Merial to complete? Or is it anything new to tell us about?

And lastly, for -- again, for this 2013 guidance, did you assume a flat 29% tax rate? Thank you.

Jerome?

I can take the question -- I can take the final four question. Yes, of course, we are going to generate positive free cash flow on this, let's say, base case or floor case. All of those are here, but only into sorting, but including 2013.

When it comes to the tax rate, we have assumed, we have taken into account, the fact that we are going to lose some patents, so we will lose some low-tax revenues, or low-tax revenues coming from royalties being fed through to the parent company as well. So we have taken that into account. But we know the terms. Everything being equal on this base, we have assumed some increase in average tax rate. But I will placekick, because to assess what would be the exact tax rate is definitely an art, which needs time, but I can say that we have taken that into account.

On the diabetes question, we will report on the progress of our various projects in the field of diabetes, like long-acting insulin, within our regular reporting on progress within research overall. Nevertheless, we always hoped that by the creation of this new division or business unit, the progress will be a little accelerated as compared to the past, but precise I have nothing to announce today.

Chris, you want to take Merial?

Yes, on Merial, I'd refer you to our partners over at Merck. I think I've said before, we like the animal health business. If there was an opportunity to extend our participation in that market, we would welcome it. But you really would have to ask Merck about the timing of decisions.

Maybe just a point on R&D. Obviously we haven't given a lot of detail around the structure that we're talking about, although because there is a structure that follows the mindset, we will probably come back in the second half and tell you more about that. We would just prefer to go through our consultation processes at the moment before we put a lot of flesh on that. So I am conscious that we haven't you a lot of detail on that at the moment. And we will do that at one point in time.

Thank you.

We have a question from Mr. Tim Anderson from Sanford Bernstein. Please go ahead.

Yes. Can you hear me okay?

Yes.

Yes.

Yes, I have a -- I'm sorry, I was having a problem dialing in. On the 2013 guidance you've given, I know you benchmark it against 2008. If I benchmark it against the current year, essentially 2009 -- it essentially showed that revenues could be 7% lower in 2013 and net income could be almost 10% lower, relative to 2009. So kind of negative across the four years, if I take those two data points. My question is the trajectory of those financials along the way from 2009 to 2013. So for example, my model says that 2009 could be the high and that from here to 2013 (technical difficulty) years could all be lower in terms of revenue and net income. So any comment on their trajectory from 2009 to 2013?

And then just a quick question on Lantus, can you just tell us what the next important safety data point that we're likely to hear about, is likely to be?

The more you go down the path of transparency, the more everybody else wants obviously. The whole idea again is flat sales with 2008, let me repeat, is not my forecast for where I think 2013 sales or flat profit with 2008, is not my forecast where I think profit actually is going to be.

All I'm saying is that if you look at the business that existed in 2008 I think there has been a significant under-appreciation of what is in the rest of the business because it's so much more difficult to value and it's really management's view of how that business could evolve.

So if you're going to try to draw a straight line between where you think 2009 is, Tim, and that number, that's not the way we're going to see it. I mean I think we know between now and 2012 really where you guys are and if we don't do anything there hasn't been a significant difference between our own internal forecast and your forecasts. The big difference is between our internal forecast post 2013 and where the market was.

Now, that doesn't say that we're just going to sit on our hands and say, we're going to wait for the transformation to occur and all will be good in 2013, we're going to the beach for the next three years and we'll see you then.

Clearly, we're going to lose products and we're going to be trying to boost that. My view is that if I were to say to you, "Hey, 2011 looks suddenly EUR200m better because we did a little extra cost cutting," nobody is interested in that in terms of a share price.

However, we do know that if we don't do much that there isn't an awful lot of growth between now and 2012 given that we've got some dynamic franchises and some patent losses. So that's why we're already active in trying to find these bolt-on acquisitions and build a delta every year that looks out.

And that's why, that's why to me the 2013 number is not a forecast because we intend to different things between now and 2012. However, it doesn't help us much and again, if I look at the last ten years just driving up better numbers on a year-by-year basis is not what interests shareholders. I mean I can't tell you how many years in my old company where we delivered double-digit growth and nothing happened on the share price because everybody was worried post a certain year.

And our discussion with actual shareholders is you can do all you want, I mean if I came up with increased guidance for 2009 it isn't going to encourage anybody to buy the shares because people want to know do you have a plan that goes after 2012 that it all doesn't fall apart.

And I think our message here really today is that even if you don't allow for acquisitions because the acquisitions you don't really know what I'm going to buy and when it's going to come. But even if you don't count that the business doesn't fall off a cliff in 2012, basically. The cliff is not a cliff anymore.

So now we're in a situation of saying I want to actually take the business as from today and wherever the jumping off point is at the end of '09, we need to try to do things so that we show growth in '10, '11, '12 and '13. And on that basis you would expect the '13 numbers to look higher.

But none of that helps you in terms of shareholder value if you don't actually say there is a base of business there that is actually going to carry you through and that it doesn't all go pear-shaped after 2013.

So please don't draw those numbers, those straight lines, from your forecast down there, that's not really the spirit in which it was intended. It was always a risk I guess to put it out there like that because people assume it's just, well, that's what your forecast is. No, it's just because of all of the discussions we've had with investors we realize that we actually had to help people to kind of at least give management's perspective of some of the parts of the business that nobody has really every looked at over the last couple of years.

But clearly, we don't want to go backwards, sideways or anything like that over the next few years. But that is going to take more of these external growth opportunities and that obviously is a little bit opportunistic, although we're taking a very systematic approach to looking for those things.

Don't know whether that helps you, Tim.

Yes, that does. Thank you. And then, on Lantus?

Well, so far we are not expecting today, any particular point before the results of the study and particularly that data registry we are [seeing] so far.

The safety of Lantus is permanently controlled within the company, of course. And if there is not unexpected events, which we believe, I mean we are not expecting any specific safety next point as you say, before the end of the results of the study.

I think I'll just finish -- I mean we've been through Lantus and I understand the prudence of the investment community, however I think you should understand the only people asking these questions these days on safety are the investor community. I mean you talk to the regulators, I mean I think the CHMP was extremely clear in its point, that the data that we were presented in Diabetologia don't show any link there is no need to change recommendations.

We are doing it from the point of view of taking the scientific high road to look at what are the studies we can do, and also in the interest that should something else come up. Because let's face it, the next group of experts they say, well, we've known for a long time that there appears to be some link between diabetes and say colorectal cancer. So if someone were to suddenly pop out a study saying that we have seen higher incidents of colorectal cancer with Lantus, as an example. Well, who knows whether that's Lantus or that's diabetes, and -- or insulin, even. So that's why in the event that -- because there is a lot of people who are trying to gain media exposure by doing some of these studies, and certainly at some point I think there needs to be a call for saying, if you've got studies and there is information on safety we shouldn't be the only ones who have to share that with regulatory authorities.

I mean if people have serious safety concerns about products they should be at least ringing up the regulatory agency. But that's not what happens. You have people who are looking to be media stars and they hold this information back and try to pop it out in some scientific journal somewhere. So that's kind of a fact of life that we have to deal with.

We are not aware of any other studies ongoing. But I also want to make sure that should something come up that at least we are doing the studies and we can be protected. But I would emphasis again that the regulatory agencies, all of the experts that we talk to, regulatory agencies on both sides of the Atlantic, nobody is looking at this as a safety issue.

So all the questions that you guys are posing, I mean they're good questions and we're trying to deal with them, but you're the only ones posing them.

Well, I guess there's two data points that have me a little worried on Lantus, which is that a predecessor molecule, that ASPB10 which was an insulin analogue and that was terminated in preclinical development because it did show higher tumor rates. So that's kind of one data point.

And then the second data point is that when you guys actually did your animal studies with Lantus there was a cancer signal and FDA reviewers noted that and it's actually in your label as possibly being a signal. So I understand like there's -- muddy to analyze all the data on this sort of thing because of -- we're talking about discreet events with a low event rate. But the history here does at least give something, I don't know, it gives me a little bit of pause, especially with that predecessor molecule.

The whole pre-clinical package of Lantus has been reviewed, and very recently by the way, and the conclusion which were drawn, I mean in 2000 and 2001 are absolutely identical. Meaning that today there is no carcinogenic risk as it has been described, I mean, for the products you precisely said.

Second point, for the pre-clinical issues, I mean the doses which are used, I mean the pre-clinical work in animal models have nothing to do with what is used in patients, diabetic patients Type I, Type 2, and are receiving the product. So no conclusion can be drawn as far as the risk of cancer is concerned, for any insulin-induced model.

Last but least I would like to add one point, when we are talking about data registry -- registries, we are not only focusing on Lantus. We are, let's say, having a look to all the insulins. Because this is a debate, and this is why we have decided to embark on that. Not because we are fearing something for Lantus, simply because we do think that at the end of the day we have to figure out if there is a risk for patients, not in vitro, not pre-clinical studies, in patients, if there is any risk of using insulin at large in these diabetic patients.

And ASPB10?

Well, this product has been given up as far as I know.

No, I know, okay. I was just wondering if there is any color to add onto that molecule.

Sorry?

Any color, there's nothing else different? There's no real --.

There is no, nothing to comment about this one. I mean this product has been stopped, this development has been stopped a long time ago by the way. And always, I mean people try to by (inaudible) with this product but due to the affinity to IGF. But I mean, once more I do repeat the affinity to IGF receptors is something which is true for all the insulin and there is no relevance as far as the development of any cancer in any patients receiving insulin.

And by the way this product had a very, much more higher affinity than our product.

Thank you very much.

Okay. We are going to take one last question, Operator?

The last question is from Sebastien Berthon, from BNP Paribas, please go ahead.

Yes, hello, gentlemen. Two quick questions please. One on Multaq, could you walk us through any difference in terms of the market dynamics that would lead to you -- for you to have a different pricing strategy in the US?

And secondly, more on the short term for what's your US Plavix scenarios in Europe following the number of new generic approvals versus the scenario we have seen in Germany? And probably could you comment on some of the specific countries because we understand that some countries have had broader approvals than the ones we have seen in Germany so far.

So I start with Multaq. Well, we developed similar to our prior, strictly in line with the economic clinical outcome in function of the local labeling. So I think everything is set, this is -- so far we have no labeling outside the US so it's impossible to say what will be our worldwide strategy. But true is that our request for labeling is everywhere is the same, it's everywhere built on the same clinical outcome. And therefore I am convinced that we will have everywhere a very interesting price especially to the existing competition which is nearly 100% generic but has nothing in comparison in terms of health outcome as compared to Multaq. I have been working today, for example, on the Multaq pricing for Australia which is relatively close. And I can tell you that once again we have a very, very good set of data which is supportive for a very interesting price.

Now, on Plavix in Europe or in outgoing -- from the situation in Germany, as I said earlier we have a limited penetration of generics in Germany equal to approximately 24% in terms of value of sales. This is largely due to two factors. First, we have a limited substitutability as there is a very strong debate today going on in Germany, also on the legal level. Should the pharmacist have the right or not to substitute two products which have not the identical label, we believe that this is a very valuable debate. It's a debate which is also animated by the association of pharmacists because the pharmacists feel that they are exposed in terms of liabilities and we believe there is good reason.

The second effect, limiting penetration in generics in Germany, as we said we are flexible with our commercial policy and built from this experience we are not too nervous about future developments around Plavix and its generic competition. We believe that we are not in a classical case where there's a 100% substitution and consequently a very rapid penetration within months and weeks.

More, I cannot say because de facto we today have no generic competition except in Germany. There is a product available in the UK but it hardly doesn't sell anything as of today, as we speak.

Thank you.

Okay, well maybe just before closing I would like to remind you that we will participate in a number of conferences and roadshows in the upcoming days and months. Both in the US as well as in Europe and we will have our Q3 results announcements on October 30th.

That's it. I would like to thank you for your participation and wish everybody a great evening.

Ladies and gentleman, this concludes the conference call. We thank you all for your participation. You may now disconnect.