Sanofi SA (SNY) 2010 Q2 法說會逐字稿

Ladies and gentlemen, welcome to the sanofi-aventis 2010 second quarter and half year results conference call. I now hand over to Mr. Sebastien Martel, Head of Investor Relations. Sir, the floor is yours.

Thank you. Hi, everyone, and welcome to the sanofi-aventis Q2 2010 conference call. As you know, our slides are available for download on our website. As always, I must advise you that the information presented in today's conference call contains forward-looking statements that involve known and unknown risks, uncertainties and other factors. These may cause actual results to differ materially, so please refer to our Form 20-F on file with the SEC and also our Document de Reference for a description of some of these factors. The Company undertakes no obligations to update forward-looking statements.

Now, before I turn the call over to Chris, I would like to highlight that we have enhanced our regional revenue disclosure this quarter. We are now providing product sales breakdown for the following four regional headings; Western Europe, the US, Emerging Markets and Rest of the World, which we are defining as Japan, Canada, Australia and New Zealand.

And so we have also posted on our website today quarterly historical consolidated sales data, by geographic region, as of Q1 2008.

Now with us today on the call are our CEO, Chris Viehbacher; our President, Global Operations, Hanspeter Spek; our Senior Vice President, Vaccines, Wayne Pisano; and our Executive VP, Chief Financial Officer, Jerome Contamine.

So with that let me turn the call over to Chris.

Thank you, Sebastien. Good afternoon, good morning, everybody. I understand that the Bayer call starts at 3.30 so we are going to try and get this call wrapped up so that everybody can get all the calls in today.

I'm going to start with the first slide, which really shows the evolution of sales and business earnings per share for the first half. And you can see that sales increased at a constant exchange rate of 2.2% and earnings per share at 10.1%. Now, and obviously in the second quarter, sales were slightly down at 1.2% at a constant exchange rate and profits were still up 4.5%.

The second quarter is actually something that we are actually quite satisfied about. It is not necessarily the highest profit growth this Company has ever shown but, as you'll see later, given how much money we have actually seen lost due to generic competition, I think to be able to show profit growth despite that significant sales erosion to generics, really demonstrates the resilience of the underlying business.

And to a great degree -- I'm starting to describe an, if you like, older sanofi-aventis and a new Sanofi-Aventis. Where the older sanofi-aventis was really the Plavix, Taxotere, Ambien, Eloxatin, Avapro, and of course we know that those sales will decline significantly in Europe and the US, over the next two to three years.

But if you then look at slide six, you are seeing a very strong growth of our growth platforms. So emerging markets up 25.9% on a reported basis, 12.5% on a constant exchange rate basis. Those sales represent 30% of the Group sales today. Nobody in this industry has more sales in emerging markets than we do.

The 12.5% was drawn down a little bit by Turkey and the result of the price cut but, if you actually look at the BRIC-M countries, they were growing at close to 30%. This is a huge opportunity. I think this is probably the single biggest area of under-evaluation by the investor community. When I talk to CEOs in other industries, everybody wants to talk about emerging markets.

But our industry is still one where you are going to get more questions about a product than a market. And we had our Executive Committee in China last week and it was just again a reminder of the significant opportunity that we have in emerging markets. The world population outside of US, Europe and Japan is over 5b people and today, folks, that's where the economic growth is occurring and the more there is economic growth, the more people spend on healthcare.

Diabetes, huge opportunity for us and you know when -- if you had looked at slides last year we would have talked about Lantus. Last year Lantus was one of a number of products, Hanspeter will talk a little bit more about this, but I think we now look at that as a Diabetes business. Over 280m people around the world suffer from this disease and it's a market that is essentially going to be dominated by two players going forward.

Vaccines, very strong performance due to H1N1. Other vaccine sales and Wayne will comment on that, partly affected by the fact that packaging and filling capacity was needed for H1N1, which has caused some displacement of sales of other vaccines.

Consumer Healthcare, for a company that didn't even really think of itself as being in the Consumer Healthcare business 18 months ago, here we have EUR1b in the first six months, growing at 53.6%, obviously helped by acquisitions. But even the underlying growth rate, when you strip out the acquisitions, of 15.5% is very significant.

And you just add those numbers up and you can see that the growth platforms are already over 50% of the Company's sales. Of course, we have also seen the successful launch of new products. MULTAQ is doing extremely well. We have presence in a number of markets and we are very happy to see support from reimbursement authorities in UK, France, Germany, Italy, Spain.

I have seen a lot of launches of products in Europe. It's fairly rare to get that kind of level of endorsement from reimbursement authorities in such a concentrated period of time and I think underscores the value proposition of MULTAQ.

Jevtana, also out of the blue here we have a drug that was one of the fastest drugs ever approved by the FDA on oncology. That's really based on the significant benefit that you get on advanced prostate cancer, so we were able to not only get that approved but turned around and launched in the US market and we will be filing in, obviously, other markets shortly as well.

Animal Health continues to progress. This is really our sixth growth platform. It doesn't always get described as a growth platform because we don't consolidate sales. But this is a business, when you combine it with Intervet has, before divestments anyway, sales of over $5.3b. If you take the implied value of Merial of $8b and the implied value of Intervet at the time of the announcement of the merger, you've got a business that would have, on a stand-alone basis, a value of something between $16b and $17b. An extremely interesting business, certainly not the type of business that I knew when I was first involved with Animal Health 20 years ago.

So if I turn to page seven, you can see again the hit really that we have taken -- we have -- the patent cliff is here. And this has become part of day-to-day business. We have lost over EUR500m of sales of Eloxatin in the United States. Now we have an agreement with generic companies that they will cease selling in the US as of June 30. It will, of course, be some time before we see any benefit from that because they will have filled the pipeline for supply. So we need to see stock levels burn off before we benefit from that and we estimate that to be sometime in early 2011.

Plavix in Europe, obviously generics are now a force to be reckoned with in Europe and we lost EUR428m as a result of generic competition. But we have had over EUR100m of growth in Japan and China and you can see that actually Japan and China are almost getting to be the same size sales as Plavix in Europe. Except that one is decreasing by 50% and the other is increasing by almost 50%.

Allegra continues to decline by EUR100m but we have, of course, filed our OTC switch file, back in March, and all of that is progressing well.

If I go to the next slide, I am not going to take you through everything, but one development that we have is that we actually now have a pipeline chart. We have not always had one, not certainly one we always believed in and I think we are starting to actually see significant signs of progress, particularly in the oncology area and diabetes area.

All of that licensing and partnering activity that we have been engaged in has been very helpful to rebuilding our pipeline. And we have a number of headline data that come along and I'll show you that in a minute. If I go to the next slide we also have a very strong pipeline in Vaccines, with the Japanese encephalitis vaccine coming along. We also have an intradermal micro-injection for the US to come along.

We will be filing Menactra in markets outside of the US, but more importantly we have just filed on the Infant/Toddler in the US. And you can see that we actually have quite a robust pipeline there.

Now, if I move to the next slide, we will have some milestones coming up in really the next six months. We have a number of Phase III data coming out, particularly for Lixisenatide, our GLP-1, which we will develop as a stand-alone but also in combination with Lantus. I think when I look at what's happened in the competitive landscape, that Lixisenatide just even on a stand-alone basis has suddenly seen its profile enhanced.

At the time we questioned really developing the stand-alone, given that we thought they would be once weekly products. Now that that doesn't look so likely, the once weeklies are going to be strong and I think a product that combines a GLP-1 and allows you to have a titratable dose on insulin, is one of the most interesting products in diabetes today.

On our VEGF Trap, Aflibercept, we will see data in second-line colorectal cancer. We have the VELOUR interim analysis coming along. We have a product called Temusi, which will be one of the very first gene therapies in lower limb ischemia. We have Teriflunomide Phase III data coming along in multiple sclerosis. And of course we will start the Phase III with that combination of Lantus and Lixisenatide that we talked about.

So we are starting to see some progress, to give us a little bit more of an opportunity to talk about, not so much the pipeline, but how we see research and development evolving, given that we are spending still significant amounts of shareholder money on that. We will be doing an Investor Seminar at the end of September, initially focusing on diabetes and oncology and we would welcome all of you to attend that.

Going along to page 11, last year we did 33 partnerships, licenses and acquisitions. We spent EUR6.5b last year, 2009. In the last 18 months we have spent close to EUR9b. You can see from this slide that we continue to maintain the same level of pace of deal making that we did last year.

As I think I mentioned at the end of the first quarter, one of the advantages we actually have is that having done a proper cleanout of our R&D portfolio, this has given us the capacity, both in terms of people and budget really, to be able to use the infrastructure we have to bring in promising products from outside and then to look at -- and then to develop those.

So, and that's what starting to rebuild the portfolio. What you can also see is that we are still very disciplined about this because R&D expenditures are very tightly under control. We have reduced the ratio of R&D to sales again this year. And we have been able to bring all these deals in largely because we have been able to take out a big chunk of our costs, fixed costs in particular, that were devoted to internal projects and now we are able to invest in external projects.

We are also starting to take a much different view to R&D expense, in the sense that I am not really looking at R&D to sales so much as what is the percentage of fixed cost to variable? And, in particular, I think we look at R&D expenses, the amount needed to fund the ongoing infrastructure of R&D, if you like, the sites, the people and the like.

And then we are starting to look at R&D projects in a similar way to looking at capital projects. So we now are starting to assess the budget in two ways, where obviously the infrastructure costs are something that you really want to maximize and get the most efficiency out of. But projects then have to wash their face in terms of return on investment or potential to add growth.

The next slide is on the -- you've seen just this week that we put out an announcement. We have appointed a new CEO to a company that we are now formally going to call Merial-Intervet. This is a company, as I said earlier, that has over $5.3b in sales, prior to divestitures. The combination value is $16.5b. We would expect the transaction still to close in Q1 of 2011.

Everything that we have seen is confirming the level of synergies and the level of divestments that we had anticipated. Integration continues to go well so this is a -- this is an important business for us. As you look at the rising income levels, people do eat more protein. You have a rising population and they have to be fed. But one shouldn't forget the pet business either because we have seen that there is an interesting correlation between rising income and the willingness to have pets.

So finally then we'll go to slide 13 and obviously the business has suffered from some generic erosion but you've seen that the investments we've made in the growth platforms are really compensating for this. And that's going to be a trend we are going to see going forward into this year, into next year.

Obviously, this has all been married with some tight cost control and Jerome will give you some more color commentary on that. But I think we have got a fair discipline, not only on just the absolute amounts we spend, but how we allocate resources.

So the business is actually on track. We have changed our guidance. Our guidance previously was 2% to 5% earnings per share growth, not assuming any generic for Lovenox. Well, as of Friday evening, of course, we can't assume that any more. So the difference really between the 2% to 5% is really an estimated impact on Lovenox.

Obviously, the actual financial impact of Lovenox is still difficult to determine. We haven't got immediate clarity yet as to how much of the market the generic can supply. And, at this point in time, price reductions by the generics seem to be relatively modest. So it may be that the erosion curve is less aggressive than with some other entries, but obviously to the extent that other generics come in or there is greater supply, that might change and hence the range.

We were surprised by the timing, at least, of that. Obviously there have been a number of rumors around for quite some time. We talked about that also at the first quarter. It was unusual to see the approval of this in a week where Congress was potentially criticizing the handling of the heparin scandal in China, two years ago.

And we also believe that, from a technical point of view, the FDA, in using immunogenicity data from a generic company, has really violated the law really on how generics get approved. Normally it's the originator dossier that is used and, under the statute in which this was approved as a substitutable generic, it would be unusual to request additional data.

So we have contested that. We've contested also the fact that they have approved a substitutable generic since the FDA has standing guidance that low molecular weight heparins are not substitutable. And finally, obviously, we don't believe that there has been an adequate response to the citizens' petition, which really points out the significant body of scientific evidence to suggest that there are risks to approving a substitutable generic without a clinical trial.

And it's interesting, obviously, that the FDA would be now much more aggressive than other agencies around the world, Europe, Canada and Australia having said that they want a clinical trial.

Guidance does include the effect of US healthcare reform, as well as the recent EU price cuts. And of course, as always, it bars any unforeseen, major events.

But I think largely the business is on track. I think we had a very strong quarter, given what the headwinds we were facing and again I think you are really starting to see the emergence of a new Sanofi-Aventis, that will allow us to grow beyond the patent cliff period.

So with that, Hanspeter, perhaps I'll turn that over to you to take us into a little bit more detail on how the business has developed.

Yes, thank you, Chris. Good morning everybody. If you switch please to page number 15, you'll find in a rather schematic but also impressive way how the sales results of the first six months of 2010 have been constructed. You see that we have lost approximately EUR1b due to generification of our major products. On the other side we have driven growth on the five platforms of growth totalling EUR1.2b.

From other initiatives we have another approximately EUR100m of incremental sales and, yes, we have also benefited from a positive ForEx impact equal to -- close to EUR300m. So in a nutshell, the good performance of the first half is due to the fact that we have overcompensated what we have lost due to generics.

On page 16, then more focus on one of our flagships, the so-called emerging markets and their performance within. You see then that we have obtained sales of close to EUR2.3b in the second quarter alone. This is a growth of approximately 13% at constant exchange rate and even 23% on a reported basis. The so-called BRIC-M countries grow even stronger by nearly 31%, with sales very close to EUR850m.

We are rather content with the split of sales. You see we have on the left side of the chart an equal share in Western Europe, 29%, USA, 31% and in the emerging markets 29%. And as a new reporting section, you see for the first time rest of the world, which mainly consists of Japan and beside also Australia and New Zealand. So we, of course, hope that this will help you to understand our performance, even better.

On page 17 a focus on our presence in diabetes. We have a growth with Lantus alone in the second quarter of close to 11%, or 17% on a reported basis, sales of EUR926m. During our last quarter call, I introduced you to the fact that we see the need to accelerate our investment in the diabetes market, especially in the US. We have done so. We believe that we see a first, positive reaction to this in terms of prescription, in terms of overall growth.

The market definitely is today much more competitive than, let's say, one or two years ago, due to the various new products entering the market during this period and, of course, accelerated investment of our competitors.

We believe that overall it is not at all only Lantus which is driving our presence in diabetes care. No, there is also good performance of Amaryl, which is a product largely promoted of course outside the United States because it is a product which has lost already during the last four or five years already its patent protection. But you see in an impressive manner we are able to continue to grow this product, mainly in the rest of the world and in the developing markets, by close to 10%. And we are equally satisfied with the 20% growth of Apidra.

On the lower right side of the page you find then a picture of one of the various devices we are currently developing, together with AgaMatrix, and which we intend to launch by the end of this year 2010 and very early 2011 in the United States and in Europe. In fact, we will introduce the whole program to the market at the occasion of the upcoming Congress of the European Society for Diabetes, which takes place in late September in Stockholm.

So we more and more have a really holistic approach to this market, attacking with oral products, evidently with our insulin products, with blood glucose monitoring and evidently also with future products to come.

On page 18, then, I focus on two new products currently being launched. Chris already had alluded that we are content with the acceleration of absolute sales of MULTAQ in the second quarter. And there is more to come, as Chris equally has outlined. We are preparing currently the launch in three major markets in Europe; France, Italy and Spain.

We are very content to have obtained a totally homogeneous price level in all of those three markets, also very in line with the price we already had obtained before in the UK and in Germany. A price in the very small span between EUR2.25 per day and approximately EUR2.50.

We have gotten approval for Jevtana cabazitaxel in the USA in a record time. We also have managed to launch the product in a record time, within less than four weeks after approval. I have attended the launch conference. We have an extremely positive expectation from oncologists in the United States, for a disease which is otherwise today not treatable. And we are very confident to see here a rather positive launch.

We are out there since approximately two weeks and what we hear so far is absolutely in line with this. We believe that the product has more potential to come. You see on the chart that we expect CHMP opinion for the second quarter for 2011 and, yes, we have initiated the necessary steps to take the product into other settings and, first of all, to the very close setting of first line prostate cancer.

On page 19, a totally different angle to two major products, what is the future for those two major products being under generic threat? Plavix and Lovenox. So on Plavix, first of all, you see that, as we speak today, the performance of Plavix in the US is positive, is a growth of above 7%. And, yes, the sales which are currently under threat from generics represent only 12% on a worldwide level.

We feel it is really important to underline that what we are losing in Europe, which has been in the second quarter approximately EUR200m, is exactly compensated just by two markets, which means the growth we achieve in Japan and China where we have obtained EUR189m. It is an extremely high growth rate of 42%. It is worth mentioning that Plavix beside continues to grow in all other Asian markets and also in South America.

On the right side of the chart, Lovenox. Sales have been growing by 5.5%, EUR866m during the second quarter. Chris has outlined our position with the recent approval of a generic in the United States. I'm sure you will get back to the issue during the Q&A.

Of course, we defend this product by all means in the United States but, nevertheless, we feel it is important to outline that 40% of sales are being achieved outside the United States. And we do so with very reasonable growth rates. As you see in the emerging markets, the growth is approximately 8%, close to 9%. In Western Europe, it is still growing 4%, despite existing competition since many years in Europe and in the other markets the growth is even stronger with 14%.

So in very short we believe that both products, Plavix and Lovenox, even after finalization of the generification, will remain strong blockbuster products.

Finally, last chart from my side, page 20, a snapshot on the Consumer Health Care business. We are very satisfied with this development. We have given it more structure, as you may remember it during the second half of 2009, in terms of organization, in terms of spending, in terms of investment and last but not least, also in terms of acquisition. I remind you of the acquisition of Chattem, which is doing very well. Also in this respect we are very content.

You see then a very impressive growth rate for CHC of 65%, which of course is a little bit inflated by recent acquisitions. But, nevertheless, even if we take the acquisitions out, the growth rate remains at 16%. So we really are in the process of doing a [vastly] successful diversification in this field of activities. And, in saying so, I pass it over to Wayne Pisano in order to comment on the performance of the Vaccine business.

Thank you, Hanspeter. Good morning and good afternoon. In the second quarter the Vaccine sales, as you can see, were relatively flat. We're starting to see some improvement from the phasing that occurred in the first quarter in the US and the recovery, in terms of filling and packaging with H1N1. As you know, we completed our H1N1 production in the first quarter. That did have an impact on our filling and packaging for the rest of our product line and we are in the stages of just about completing that.

In terms of our Polio, Pertussis and Hib product line, we had very good performance, particularly in the emerging markets. Pentaxim is a pediatric pentavalent vaccine that is now licensed in 97 countries. Growth was 33% in the quarter. We saw a recovery on Pentacel in the US, up 8%. Pentacel today in the US holds nearly 75% market share, compared to the other pentavalent competitor we have in the marketplace.

Menactra, we saw a modest decline in the US and this is reflecting the continued shrinkage of the catch-up market. There was limited impact from the first competitor to Menactra in the US. And we are now in the stage of licensing and launching Menactra in the emerging markets. The launch in the second quarter was done in the Kingdom of Saudi Arabia and the Middle East is an area where there is concern with bacterial meningitis.

In the emerging markets, like our pharmaceutical business, we had very strong performance. Sales of EUR264m were up 19%. Some of this is attributable to the growth of Pentaxim, as well as a very strong flu campaign in the Southern Hemisphere. So this is Latin America, Australia, New Zealand and Thailand.

We supply nearly 80% of the influenza vaccine for the Southern Hemisphere and we saw both an improvement on volume and also improvement on pricing, which is attributable to the concerns around the H1N1 Pandemic.

Looking forward to the second half of the year, we anticipate a very strong seasonal flu campaign, in particular in the US. This is due to a number of factors. The ACIP has now implemented a universal recommendation for influenza. In essence, they are now recommending all Americans to be immunized, not just the elderly and the pediatrics.

We will be launching Fluzone High-Dose this season. This is a product that was designed specifically for patients who are 65 years of age and older. This set of patients are at the greatest risk for morbidity and mortality linked to influenza. And the existing products do not provide an adequate immune response or at least an immune response that is comparable to what adults receive with the current intramuscular products. So with Fluzone High-Dose we see a superior immune response, which will benefit this population.

We have received full reimbursement from Medicare on this and we expect this to be a strong growth driver for us, not only in 2010 but in 2011.

Finally, on the US influenza, we have seen an exceptionally strong pre-book. We have many new customers and existing customers ordering larger quantities. Some of this is linked to the expanded recommendation for immunization and some of it is also linked to the fact that we are being rewarded for the way we handled the 2009 seasonal campaign.

We were the only manufacturer to actually deliver 100% of commitments on seasonal influenza and this has resulted in many customers increasing orders, or new customers coming to us.

Looking briefly at our pipeline, we have filed for Menactra Infant/Toddler. This is the two dose, nine and twelve month indication for Menactra. And we expect a decision in the second half -- second quarter next year, from the FDA.

And we have also entered Phase II with a quadrivalent seasonal vaccine. The quadrivalent is a vaccine that will now have two B strains. This is particularly important for the pediatric population. They experience the greatest morbidity and mortality from B strain disease and there are two lineages of B strains and we will have both lineages of B strains in this new product.

With that, I would like to turn over to Jerome Contamine, the Executive Vice President and CFO. Jerome.

Thank you, Wayne. So I am moving to slide 23. As Hanspeter has mentioned already, as well as Chris, all in all for the full half-year we have an overall growth of sales by 4.3% which includes basically stability on pure organic growth but as described before it means in fact that on one hand we have lost around EUR1b of revenues from generified products which we have replaced by other sales coming from our growth platforms. And the acquisitions have contributed for 2.5% during the first quarter, only 1.3% during the second quarter because precisely we had already consolidated both mainly Zentiva and also Medley as early as end of Q1 2009. Therefore in terms of variation of perimeter, Zentiva is not contributing any more.

So if I look at the second quarter, it's mainly Chattem which is a contributor to the change in structure which is developing along with plans. And you can see that on the ForEx side there has been an ample impact of ForEx variations and volatility during the second quarter which is not a surprise. The main positive impact is coming from the US dollar but that's not the only one. As you can see just the Brazilian real or the yen is representing each of them half of the overall contribution of the variation of the US dollar against the euro. I think it shows also beyond the pure volatility of currencies the logic of our strategy which is both having global footprint, global presence and taking advantage of the growing but also more and more stronger economy from emerging markets.

I move now to slide 24. As expected I will say the gross margin is declining. This is really the result of the evolution of our business mix. I think we had already ample time a lot of occasions, various occasions to discuss that. I would say that well at the end of the day we have managed to keep a gross margin which is just declining 1.8% and keeping in mind that 0.87% is coming from the sharp increase of the raw heparin price which has been used to produce Lovenox. So the rest is 1%. So we can say that on an ongoing basis where we are today at this stage the evolution of the business mix as well as the acquisitions and the loss of some high margin now generified products has impacted our gross margin by 1%.

Also, I think it was the time to remind you that we start to reap the impact of all our restructuring of the organization of our industrial platforms and I have just put on the slide some short reminders of what we have embarked on in terms of reorganization of our French operations. We are converting Vitry which used to be a chemical plant into a biotech platform; we have transferred Colomiers facility which has been now outsourced; we have decided to close Kansas City in the US as well as Dagenham in the UK and Textitlan in Mexico.

All these are ongoing projects which will bring some extra savings in the years to come. And as we know, it takes always a bit of time to close industrial plants in this industry because we have to at the same time transfer the production and get the adequate approval for the new production lines.

And as a result of our chemical reorganization project which is still a project but this is ongoing, we are going to phase out Romainville close to Paris and we are also going to convert Neuville plant close to Lyon from a pure chemical plant to a vaccine plant and more precisely we are presently building our new dengue vaccine plant in Neuville.

So these are very big evolutions which will bring value over time but I think which gives a good view of how important is this reorganization of our industrial platforms.

Moving to the next slide, R&D. I think now for -- I think it has been a while since we have seen an R&D to sales ratio below 14%. I don't think we should be proud of that as such but it shows that we are really implementing a better efficiency of R&D spending. So beyond the ratio, which I think as such is not that important, what is important is that we are at the same time implementing a shift in our spending. We are reducing significantly our internal R&D costs. Just over the second quarter we have reduced by EUR44m our internal R&D cost. So the overall R&D spending is minus 5% just on one quarter but if it is only on the [internal] costs it's much more than that.

At the same time we benefit still from the portfolio rationalization that we are spending more on partnership, on external partnerships. So there is also behind this decline of overall R&D spending and good control of R&D spending a very significant shift which we have embarked on since last year on where we spend. And as Chris mentioned before, trying to squeeze our internal costs and trying to review external costs and spending as an investment and to benchmark it versus any other capital spending.

Also we are on the way to implement the full transformation. Two things, the first thing, as a reminder, is that we are reducing the number of sites from 28 in 2009 to 16 in 2011 which I think is impressive, keeping in mind also that we are opening a new site in Cambridge, Massachusetts. So it's one more I would say a reduction because we are moving oncology as you know in Cambridge. And we have now fully implemented our new R&D organization model which I think gives more visibility and more challenge on the way to handle it. On one hand we have entrepreneurial units, business divisions or TSUs, Therapeutic Strategic Units. On the other hand we have common facilities which are called Scientific Core Platforms which are providing services to these entrepreneurial units and which are supposed to be competitive against external sources of service to be provided from external outsourcers or providers.

SG&A. Here again the SG&A to sales ratio is down by 0.8% so we have always been rather good in our performance in SG&A to sales ratio. We are again continuing to improve by 0.8% over the first half. And meanwhile we have completely -- we are changing and realigning our pharmaceutical efforts from mature countries to emerging markets. And just to give you a feeling of that, just over this period if you compare first half of 2009 and first half of 2010 we have reduced by 1,400 the sales force in the US, by 400 in Western Europe and at the same time we have increased by 600 in emerging markets and clearly we'll continue to increase our sales force in emerging markets.

Last but not least, we are continuing to reduce our G&A costs and we have reduced these by a few percent just over this period of time. So all in all I would say that we're on track with our overall transformation and cost-cutting program. When I say on track, in fact, we are ahead of schedule. You remember that in February when we released our 2009 full year accounts we said that we were ahead of schedule, that we had the plan to save at least EUR600m from our overall plan of EUR2b recurring savings in 2013. Now we can tell you that we will have saved at least, I would say, more than EUR1b, more than EUR1b in 2010 as compared to 2008, here again on a recurring basis, clearly showing that we will reach the EUR2b much in advance as compared to our initial plan.

On the other items on the P&L, I think I can go short. Just a few reminders. As from April unfortunately we don't have any more revenues from Teva on Copaxone. So this explains mainly why the other current operating income and expenses are declining in Q2 2010 as compared to 2009. We have an increased share of profit from associates, mainly from the increased share of our shared profit in the BMS Plavix Avapro venture. And we are now consolidating 100% of the profit of Merial which basically is doubling the profit contribution. On the other hand, the minority interests are declining precisely because BMS is taking its share of our declining sales of Plavix in Europe.

Net financial expenses are definitely under control and the net -- the gross -- the cost of the gross debt is around 4% and since beginning of the year you know that our expected tax rate for 2010 is expected to be 28% to be compared to 29% last year. And all in all we managed to keep a higher net margin despite of the generic -- the generification of some of our key products at 21.8% to be compared to 21% which brings us to a business EPS of 1.9% -- EUR1.90 sorry -- against EUR1.76 last year which is an increase by 4.5% on a constant exchange rate basis.

Cash flow. Our net cash flow from operating activities has been 4.7% -- EUR4.7b, sorry, so it remains very strong. The CapEx spending is definitely under control. We are spending less CapEx than last year by around EUR60m just over this first half of 2010. Therefore, the free cash flow generated has been over EUR4b before the payment of dividend. We have spent EUR2.2b on acquisitions and licensing, EUR2.1b in fact on acquisitions out of which the main part is Chattem. And we have Others which is EUR785m which is a buyback of some shares which we did during the first quarter for an amount of EUR320m and the payment of the restructuring costs on which we have taken provision last year and so the payment is now coming out and this represents around EUR500m and I would say this is totally expected. Dividend has been paid as you all know, EUR3.1b, and therefore we have an overall debt which is around EUR6b which is in line with what we have expected and I would say that the gearing i.e. the debt to equity ratio remains very low at around 11%.

So just as a wrap-up, we have -- we are continuing to focus on our growth platform, as Chris mentioned at the beginning of this conference, that give us now more than 50% of our sales. We have continued to reduce our operating expenses and we have been able to stabilize our overall operating margins and we have posted an EPS growth in spite of the slightly declining sales growth for reasons we have discussed before. We are now able to confirm that we will deliver more than EUR1b of savings over 2010 as compared to 2008 being ahead of our plan and we have continued to generate strong cash flow generation and low gearing.

Now I think I'll pass the word to Sebastien so that he can handle the Q&A session.

Thank you, Jerome. We're now ready to answer questions and I ask as always to keep your questions to one or two at a time to allow as many people as possible to participate in the call.

(Operator Instructions). We have a first question from Mr. Mark Dainty from Citi. Please go ahead.

On cost savings, obviously you're ahead of plan there and you'll reach your EUR2b before 2013. Will you continue to save more than that EUR2b or will you just stop at that level? And can I tempt you for a number?

And just on the discontinuation of the long-acting Lantus, could you just talk a little bit more about your plans now that product has gone in terms of whether you might go and find something else and whether there's anything out there? And indeed whether you are incrementally now more worried about the potential threat from Novo's Degludec? Thanks very much.

On cost savings, yes, thank you, Mark, yes, you're right to say that we are ahead of schedule, that we will generate the EUR2b ahead of our plans. And we are looking at seeing how much more we can save. (inaudible) I would say maybe the fall is the period for 2011 budget so I think this would be the right time to precise what could be a revised objective which we could disclose later on. So I will not give you any figure today but I think that this is something we are working on.

I think once again I feel it was -- we still have some actions to be taken so I think it's firstly very important to maintain the momentum of what we are planning to do and starting to identify the further savings which we'll implement over time and be in a position to give you an updated objective, let's say, by year-end or when we release the full-year accounts.

But we're not going to stop. Hanspeter, do you want to talk about the long-acting insulin?

Well, it's true that we have stopped the development of the long-acting insulin but we have not given up hope to come to longer-acting insulin. I think I have issued during earlier calls my own doubts what is really the optimal time of a long-acting insulin and we're continuing with this development. Besides, of course, we continue to do our development with GLP1 combination with Lantus which from my personal point of view is really the key target we are pursuing as of today. And beyond we have signed numerous agreements to go into totally new directions in terms of diabetes treatment and diabetes prevention.

On Degludec, well, that's of course a very subjective statement I have to give. I tell you what we think. We believe that there is limited differentiation between Degludec and Lantus what we see so far. Of course, we are following closely what is being happening in the market and also so far we see nothing which would be really alarming for us. We have read comments in the sense that Degludec will be perhaps the product Levemir was supposed to be and that's perhaps a good summary of how we judge Degludec today. But let's keep in mind that the final proof has to come with more Phase III data on this product.

Okay, thank you.

The next question is from Mr. Vincent Meunier from Exane. Please go ahead.

Hello, gentlemen. Thank you for taking my questions. The first one is on your strategy. I can imagine that obviously you will not discuss and comment the current rumors of a US acquisition but can you please give us an update with regard to your strategy in the US and also your strategy in terms of M&A?

The second question is on Lovenox. Can you please elaborate -- can you please tell us what will be the claims you will try to defend precisely against the FDA? And what kind of price cut do you expect from Sandoz?

And the last question is on Jevtana, can you please make an update on the pricing, the number of addressable patients and your sales target for this product? Thank you.

Okay Vincent. I'll ask Hanspeter to respond to the Lovenox and Jevtana questions. In terms of strategy, our strategy hasn't changed. We are clearly looking at external growth opportunities as part of our three-pillar strategy of renewing R&D, seeking external growth and transforming the business. Our objective is -- was really laid out when we established long-term guidance of stable sales and profit in 2013 versus 2008. That really meant that we have enough organic growth resilience to really grow through the cliff. And therefore the acquisitions that we do can really be done to enhance earnings and sales growth. So we've always said we're going to avoid the mega-mergers and concentrate on the small to medium size and again the small to medium size has already been in this industry as you all know, small being up to about EUR5b in market cap and up to EUR20b for a medium size.

What is absolutely important is that these things drive value. We've seen a lot of transactions that don't drive value. And so we look globally. We're looking -- in the last 18 months we've acquired generic companies in Brazil and in Eastern Europe; we've done a joint venture in over the counter in China; we've bought a vaccines company in India; we've bought a consumer healthcare company in the United States. So we're looking globally at these opportunities and wherever they can be bolted on and added to business. The key thing we're looking for is sustainable growth and reducing our dependence on patents. So we did the 33 deals last year, we're on track to do the same thing. I think we've been pretty consistent in what we said we were going to do and have been executing on that.

Hanspeter, (inaudible) about Lovenox and perhaps Jevtana.

Yes, I start with Jevtana. We have a [work] price of $8,000 per injection which gives an average treatment cost of approximately $48,000 which is approximately threefold the treatment cost of Taxotere in first line prostate cancer. Concerning peak sales, we do no more give peak sales any more for reasons you may understand. I have read peak sales which are in the spread of $300m to $400m sales which I could consider as being reasonable. Of course, this is only in the current indication of second line prostate cancer as I have indicated earlier. We, of course, will pursue also this with an agreement of the FDA a further clinical program in first line cancer of the prostate and eventually also in other cancer settings.

Now on Lovenox, you see we have a competitor since less than one week so it's extremely preliminary what I can give you as market information. But nevertheless let's keep in mind that this is a market which is approximately 50/50 shared between an institutional market, largely hospital-driven through GPOs, which means very centralized purchasing in the United States and the retail market. We see so far very little activity in the retail market overall which may be reflecting Sandoz strategies. It may be also indicating a certain short-of-supply situation. All of this is speculation but of course it's part of our war-gaming.

What we see in the institutional part are discounts between 15% and 35%, 38% which is much more modest, of course, what you would expect to see overall but once again the institutional market follows different rules than the retail market and this is not a generification you could compare with a classical cardiovascular product or similar.

So this is all what I can say on the situation. Of course we react to this, I have always stressed over the last five or six years, I said I believe that in the institutional market segment we have a strong foothold, let's not forget that we are producing, distributing with perfect degree of liability this product since decades. We have very strong customer relationships which are of course not only built on Lovenox but also from our other hospital portfolio. And yes, of course we try the best way possible to adapt to the new market conditions which I just outlined and you may understand that for evident reasons I don't want to go into further details at least for the time being.

As far as our litigation against the FDA is concerned, well, I think Chris already had outlined the major hooks we see in this litigation. We believe that the FDA has not properly assessed the overall risk of such a generic, this also in reference to the situation in major other parts of the world like Australia, like Canada, as a neighbor country and evidently the European community. For more details I kindly ask you to go to the website of the Court where our litigation is fully available and where you can get every detail you may need.

The next question is from Mr. Tim Anderson from Bernstein. Please go ahead.

Hello, thank you. I'm hoping to get an update on what you expect for generic timing for Lovenox in Europe. I appreciate that regulatory standards are different there but I'm under the impression that European filings by generic companies could actually occur in the current year and I'm wondering if you can comment on this?

And the second question is just generally your interest in orphan drugs. One or more big pharma companies have disavowed getting into areas where drug prices are so high because of political reasons primarily. And I'm wondering what Sanofi's view is of the political risk to this sort of endeavor?

Well, let me start, Tim, with enoxaparin generic. I think it's important to say that today we have legislation and guidelines in the European community which expressly ask for clinical trials in each and every indication. I believe that in average in Europe Lovenox has about 12 to 15 different indications in each and every member state so this is an important entry hurdle and of course we strongly believe that this is for good reasons the case.

Consequently, at least one of the manufacturers aiming to get access to the American market already has publicly announced that they don't intend to pursue a European strategy with their generic. So the rest really is speculation. I personally doubt that this situation we have today could change within a timeframe of 12 months because those trials would be probably selective. I don't believe that somebody could run 12, 15 indications within 12 months and successfully. So I believe that if there would be any change it will take much more than 12 months.

I also remind you that we have a totally different situation in Europe already because we have other low molecular weight heparins on the market. There is a product from Pharmacia-Pfizer. There are some Southern European products from Italfarmaco and other Spanish companies for example with which we are in a fierce battle also concerning prices. Nevertheless, we have a market share in Europe, if I remember correctly, of approximately 75% in average and the product continues to grow. So once again I am not too much scared about additional competition in Europe because this means basically nothing new.

So Tim, I appreciate your new interest in orphan drugs. I'd like to think about that one a little bit more and I'll get back to you on that one I think, just given all the speculation around the Company I just don't want to go anywhere near having to be seen to be commenting on rumors and speculation which we, of course, as a matter of policy don't want to get into.

Thank you.

The next question is from Mrs. Luisa Hector from Credit Suisse. Please go ahead.

Good afternoon. Thanks for taking my questions. Firstly, on your 2013 outlook which you have reconfirmed, I just wonder whether you could remind us exactly what was in your original thinking and possibly whether anything might have changed? For example your assumptions on Lovenox, are they the same as they were before? And is Chattem in or out of that guidance?

And then on the R&D ratio, Jerome highlighted that obviously you've been controlling the costs there but you do have more external collaborations. So I just wondered how we should think about that R&D ratio if we try to include the costs of the external collaborations. Should we use for example the cash going out on licenses as a kind of proxy for the money that you're spending externally?

And then, finally, I just wonder if you could give us a quick update on Shantha on the vaccine side please?

Sure. So on 2013, we gave the guidance a year ago so that was prior to the acquisition of Chattem. We did however always have a belief that we should plan our lives and future not always in having everything go right for us. So we didn't assume that we kept Lovenox forever. At the time we thought a non-substitutable generic was more likely than a substitutable one. However, given that there are a number of orals that were expected to enter the marketplace, when we actually look at the difference between a substitutable and a non-substitutable in 2013 times the difference is actually negligible. The only real difference is the slope on which you get there. So obviously on a substitutable basis the slope might be a little bit more rapid and steeper.

But it's really -- you talk about area under the curve between now and then which is cash. I look at Plavix in the US, I look at Taxotere in the US and in Europe largely as cash on the balance sheet. It has to come in and it may be a little bit varied on sales. But those aren't the products that really are driving the future growth of the Company. So the only real difference on Lovenox is perhaps the speed at which we get there and so we've adjusted the guidance for 2010 but by the time we get to 2013 it's the same thing.

On the R&D, we have been trying to provide you obviously with all the details of the external deals that we do and it's unfortunate whenever -- and I'm a chartered accountant by profession, I hate it when chartered accountants try to be economists because you end up with a mess, you end up with R&D expense that you spend yourself as being an expense but if someone else does the R&D it goes on the balance sheet. And I don't think that's serving the interests of investors.

Clearly if you pay an upfront that is largely compensating people for past R&D so it really represents the cumulative of a number of years of investment in R&D. So probably to take all of the milestones in one year would be excessive, you may want to take a factor of -- divide it by five or something like that to get an idea of an annualized run rate.

Beyond that obviously as you develop the product from that initial milestone then that is going into our R&D cost and we -- you then only have the milestones as and when you have success on those stages. We will actually be happy to work with investors and analysts to see how we can improve that. Today we are trying to get to and we pretty much are there in terms of 50% of our projects being sourced from external collaborations and 50% internal.

But I think the R&D ratio broadly is where it will be and try to perhaps bring a little bit more visibility on the fixed cost of R&D which is going to stay and then the rest of it will vary by the number of projects that you have. Because at any one time the R&D budget, if you don't do any further external collaborations and half are external, then as you have attrition the cost would by nature then go down. So you can track how we're going to be by the price of deals that we have going forward.

On Shantha, I'll turn it over to Wayne for comment.

Can I just first check -- sorry, on the 2013 guidance that still excludes Chattem?

It excludes Chattem.

Thank you.

Okay, thank you, Chris. So with regard to Shantha, the issue at hand pertains to a pentavalent product Shan 5 and there were reports of abnormal visual appearance to the product for batches that were produced prior to the acquisition of Shantha, the product that was in the marketplace. We have dedicated all of our techno expertise to design an action plan that is geared toward improving the robustness and the processes and guaranteeing the highest quality standards for these vaccines. This root cause analysis and remediation plan was submitted to the WHO on June 21. They have not acknowledged receipt of that plan and we have a number of meetings scheduled with the WHO coming up after the summer break.

So we'll have more information available in the future. Now obviously Shantha is an important acquisition for us, more so for strategic importance. The intent is to have the Shantha facility in India to serve as the platform for both R&D and manufacturing to serve many of the poorest markets of the world. And so that long-term strategy remains in place and that is our overall plan for Shantha.

And we continue to develop the new vaccines. Largely the acquisition around was acquiring a low-cost facility in India and a pipeline of vaccines. The WHO did confirm that re-vaccination wasn't necessary so the issue of flocculation appears to be more cosmetic. It will be redeveloped and will be on the market again as soon as possible.

Thank you.

The next question is from Mr. Tero Weckroth from Kepler. Please go ahead.

Yes, good afternoon, gentlemen. I have two questions please. Firstly, on the M&A strategy if I may push a bit further, Chris. I don't remember the exact term you used but a year ago I remember you said something like at current multiples Sanofi's share is trading it would be difficult to justify paying with paper. So I would love to hear that perhaps repeated or perhaps clarified.

Then the other one on the change in the guidance, if I assume about 4%, 4.5% change in the medium term of the profit guidance before and after Lovenox that gives me more than EUR600m impact on profit and that is a pretty big chunk of the expected US sales of Lovenox in the second half of this year. So perhaps you could help me there? Thank you.

I think our objective is to do accretive transactions. Accretive to top line, accretive to bottom line. And it's pretty hard to do an accretive deal if you're using a paper with a low P/E to acquire anything with a high P/E. So all I'll say is that we take all of those factors into account and our M&A strategy is really designed to create shareholder value as well as strengthen the underlying business.

I'll perhaps ask Jerome to comment a little more on the guidance?

Okay. Well, for me I do a slightly different calculation. We had the previous guidance which was between 2% and 5%. Clearly we have taken the low end of the new guidance because we had very little visibility on the most dramatic case where we'd lose basically all Lovenox sales as early as end of July, in order to be on the safe side. Because I think that none of you would have thought that we could come back and say, hey guys, maybe it will be a little bit lower than what we have told you. So you're right to say that we can expect that the low end of the guidance which has also to be looked at, together with the low end of the previous guidance is really the maximum where we can get to. And then I tend more to look at something like around EUR400m and not the EUR600m you are referring to.

Okay, thank you.

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

Yes, hello. Two questions please. First, I do not see any sign of AVE5026 in the R&D roadmap for the second part of the year. In the context of generic Lovenox in the US is it fair to think that you're reassessing the value of this asset?

And secondly very quickly, how would you rate ex US profitability for Lovenox versus the one enjoyed in the US, please?

Eric, I didn't understand the first part of your Lovenox question when you said to the US?

5026 he means --

To what extent not having AVE502 on the roadmap has anything to do with the context of the situation with generic Lovenox in the US?

There was recently a meta-analysis of three short-term studies SAVE-HIP and SAVE-Knee studies that basically provided initial data that confirms that AVE5026 has a favorable benefit to risk profile. But as you know, we've always said in the pipeline update last year that our focus was to actually to look at the onco and abdominal surgery indications. And those are still ongoing.

So it's just there's no data because we've specialized that on the oncology indications that -- the things that we put in the roadmap were just where we have data readout so there's no change in that. And this is an area where Lovenox really wasn't used and so it was actually part of the reason why we shifted the use of 5026, partly because we felt that there would be oral treatments available and you'd have potentially generic treatment available. So therefore we looked at where were areas of unmet need that neither the orals nor generic Lovenox was really going to address because they don't have those indications. So it'll be a -- it would have a smaller set of indications than Lovenox but it still appears to be well worth developing.

In terms of the profitability, I think you have to assume it is less. We sell about 15% of our volume in the US but we have about 60% of our sales there. So you can see that there's quite a substantial difference in pricing which also makes it less attractive quite honestly for other generics really to do the clinical studies that so far Europe and other countries have requested. And that's why we actually see, as Hanspeter has already pointed out, a drug like Lovenox still being a significant product for the Group, albeit mostly outside of the US and at a somewhat smaller margin but still very much an attractive margin.

Just if I can add, did the new GLP1 analog on the market delay the use of long-acting insulin or Lantus in Type 2 diabetes? Could you update us on that, whether you have seen already anything?

We have started to do intensive market research on this which is a little bit complicated to do. And till the proof of the contrary, I think we have to assume yes.

Okay, thank you.

The next question is from Mr. Philippe Lanone from Natixis. Please go ahead.

Hello. Two remaining quick questions. Number one about the flu vaccine in the second half that you have mentioned will be quite strong. Will we see some booking of that in the Q3 or will all that be in Q4 you can see it now?

And one question probably on [Tirazide] the ischemia drug that will report Phase 3. It's quite a specific drug so how will you market that? Will you use your existing sales force? Will there be specific networks? How will that work?

Perhaps I start with the second question. This will be an extremely selective marketing. First of all, if the product is successful this will go to very specialized angiologists and surgeons working in angiology. Second, the distribution of the product given its mode of action will request precautions which are atypical for distribution of a pharmaceutical. So it will be extremely selective. And third, I believe it's fair to say that this is a market segment which is extremely easy to be penetrated given the small target group but also second if this product should prove to be as successful as what we all hope it would be really such a major therapeutic breakthrough that news would spread through the Internet, through congresses extremely rapidly. So the way how to promote it from a financial point of view is really insignificant.

Wayne, on the flu vaccine?

Sure. I think the flu vaccine for the northern hemisphere is shipped generally from the August through mid-November timeframe. So you will be seeing significant sales in both the third quarter and fourth quarter. And in fact we would expect actually to shift our first early doses at the end of July. So I think it's difficult to say what percent will be in the September timeframe and what percent would fall into October because every single lot is released by the regulatory agencies. But we are at 100% of production right now in both our facilities in [Val de Reuil as well as in Swiftwater and doses will beginning flowing in the next several weeks.

Okay, thank you.

Okay, we're going to take one last question at this point.

The last question is from Mr. Andrew Baum from Morgan Stanley. Please go ahead.

Hi, good afternoon. Could you just comment a little bit more on Lovenox and talk about the supply agreements you have in place with principally the hospitals and if you could give some indication of what percentage of US Lovenox is hospitals? I guess what I'm getting at is to what extent can you lock in any of your existing customers in long-term supply agreements by flexing price?

And then maybe if you could say something also on your plans for an authorized generic at some point over the lifecycle of -- the remaining lifecycle of Lovenox?

Well, Andrew, the percentage, that's really the easy part of your question. The hospital segment in terms of value is approximately 60% of our total business in the US. So 60% are really strongly concentrated either by GPOs purchasing organizations or directly by major hospitals. It is really premature to say something but I can really indicate that because we had really five years to prepare for this situation we are relatively well prepared in terms of the setup of our negotiations with those major customers. What we see so far is a high degree of readiness to continue to work with us given the confidence those customers have in us as a supplier, as a manufacturer and evidently in the drug itself.

Now it would be dishonest if I would say, well, if we sign a contract we can be sure that this will hold for the next years. We have to see how the customers will be compliant with those contracts. We evidently have to see how the new competition has to react on it and lastly we also have to see what the Court of Colombia will decide upon our request for an injunction. But so far we have a very good sustainability of our customer base to be taken with all caution after less than one year of -- one week of appearance of a generic company.

On top you will understand that I'm not ready to go into more details concerning how much we discount but I think overall if you look to our worldwide strategy I believe we have been the first company which did not raise its arms when we lost the patent. Now we continue to fight for the products because we believe it's important for many reasons to keep the volume. And yes, it will be exactly in this sense that we will continue to fight for our important share in the Lovenox volume market.

Can I just sneak in a final question. Just the number of sales reps you have actively promoting Plavix in the US?

Together or without Bristol Meyer Squibb?

I guess in totality would be interesting.

Just our part?

No, total.

Both together. If you really not talk about FTEs but people the number would be approximately 2,500 to 3,000.

That's great. Many thanks.

Okay, so at this point we'd like to thank you for your participation. I also want to remind people that we'll have an Investor Relations thematic seminar on September 30 on diabetes and oncology and we shall be issuing invitations for this very shortly. With that I wish everybody a good evening and happy holiday.

Ladies and gentlemen, this concludes the conference call. We thank you all for your participation. You may now disconnect. Have a pleasant day.