Sanofi SA (SNY) 2013 Q2 法說會逐字稿

Ladies and gentlemen, welcome to Sanofi second-quarter results 2013. I now hand over to Sebastien Martel, Head Investor Relations. Sir, please go ahead.

Thank you. Good morning, good afternoon, hello, everyone, and welcome to our Q2 2013 results conference call. As always, I'd like to draw your attention to the Safe Harbor statement. I must advise you that the information presented in today's call will contain forward-looking statements that involve known and unknown risks, uncertainties and other factors which may cause actual results to differ materially. Please refer to our Form 20-F on file with the SEC and also our document de reference for a description of those factors.

Our presentation today will be divided in three parts. We'll start off with a business review of the key highlights for the quarter with Chris Viehbacher, our CEO, as well as a review of the performance of each and every growth platforms with Peter Guenter, our newly-appointed Executive Vice President, Global Commercial Operations, as well as Pascale Witz, Executive Vice President, Global Divisions and Strategy Commercial Development, and Olivier Charmeil, Executive Vice President for Sanofi Pasteur. Then Jerome Contamine, our CFO, will provide you with details of our financial performance in the second quarter. And before we take questions, Chris will wrap up the presentation.

So without any further ado, let me turn the call over to Chris.

Thank you, Sebastien. Good morning, good afternoon, everybody. As you all know, Hanspeter Spek retired at the end of June from the Company after 28 years with the Company. And we created a new pharma organization led by Peter Guenter and Pascale Witz, so I'm happy to welcome both of those to the call.

I am less happy about the results we have to present to you today. So if we start with the first slide, the title says this was a difficult quarter. I would say I would call this a frustrating quarter, largely because I think a lot of things are going extremely well in the Company. And you'll see a number of our businesses are doing very strongly. And in particular, I'm very happy about the strong progress we're making in research and development. But there are -- there's no question that we've hit some speed bumps. We will talk about a charge that was related to our Brazil generics business. But I don't think we can describe the whole quarter in terms of the charge to Brazil. There is clearly some commercial underperformance in some parts of the business, and we'll come onto those.

Obviously the main element of this quarter and -- is the key genericized products, EUR481m of sales down as a result of those. EUR223m of what we call Others, this is a mixed bag of things. This is principally the typical EU tail erosion. A newer element is increased genericization of brands in Japan. Japan has not traditionally been a market where we see significant erosion quickly on generics. But new government policies in place are calling for 30% substitution at a pharmacy level, and actually now increasing to 60% means that Allegra, Myslee and Amaryl have been hit harder than originally expected. The Brazilian generics, if we take -- we'll come on to the detail a little later, is EUR212m or roughly EUR0.17 a share. The growth platforms were EUR354m up, and the foreign exchange was obviously negative in the first half and certainly in the quarter.

This is a slide I've shown -- I'm on slide seven here. You can see Q1, the key genericized products were still EUR813m. Now I've been showing this slide for a number of years now, and some of you may recall that that EUR813m started off as EUR2.2b. So we have been regularly eroding that, chipping away at that, and you can see that the EUR813m became EUR752m in the second quarter, but drops to EUR400m and EUR250m by year end. So I think the -- my favorite part about this presentation is that I'm looking forward to next quarter. No matter what happens, at least we can finally be done with the comparison to the prior year on key genericized products.

Obviously, the impact is not felt just only on sales. It's also felt on the EPS, because as you all so well know, for many years, that Plavix in the United States as well as Avapro were in a joint venture with Bristol Myers Squibb such that Bristol Myers Squibb actually consolidated the sales and we received income on two lines, the revenue line and the income from associates. And you can see the significant drop at a profit level. The entire impact for the first half was EUR795m. Of course, many of you also will remember that that's very much in line with the guidance that we gave of about EUR800m.

Now we had somewhat of a mess in Brazil. Some of you may remember us talking about slower sales in Brazil, even in the first quarter. Obviously in emerging markets, trade channels are much more complicated. You're talking about big company -- countries here, you're talking about numerous wholesalers, first line, second line, third line wholesalers. So to a degree there is always some bumpiness in trade channels. However, as we looked and dug more into this, into Brazil, we realized that the level of inventory in trade was far beyond what one would normally and reasonably expect and the level were clearly significantly and I would say inappropriately in excess of the volumes needed to sell to satisfy sell out demand.

So the financial impact is really felt on two lines. There's an adjustment reducing quarterly net sales of EUR122m, and that's for product returns, customer discounts and rebates, because there was so much in the channel that essentially product expiry was going to occur and so we were anticipating even more returns. And obviously sitting in our own warehouses was stock. And given the expiry date you really -- in a country like Brazil -- in most countries we would sell product with six to nine months of shelf life. But in a huge country like Brazil and given the transit times, you really need -- you can't really sell anything unless it has at least a one-year shelf life. So there's a provision for inventory of EUR79m.

Now Medley in particular, this generics business within Sanofi, but the bulk of it is in Medley, continues to have good sell-out demand from a volume point of view. It maintains its leadership position amongst generic companies in Brazil. But obviously between our warehouse and the pharmacy we had too much inventory, and so we've corrected that. We have also replaced management. We've replaced the management of our generics business at the end of 2012. We've replaced the General Manager of Brazil and the Head of Latin America. So I think as far as we can tell, we've undertaken all the appropriate actions to clean up the situation.

And so when I look at the growth platforms, because of this cleanup cost, we're presenting here the growth platforms if we take out Medley, so that you get a better chance of understanding the underlying dynamic of these businesses. Obviously the growth platforms in the press release were at 2.5%, but if we strip out this Brazilian generic effect, they grew at 6.2% and now represent almost 72% of sales. And we'll come on to talk about those individually. There is obviously some slowdown versus last year on some of these growth platforms, most of which I would say is an underperformance of our own business. And I believe that we can and should be doing better in those businesses. I don't think that all of those, there are some, but not all of those reflect underlying market conditions.

So with that, I'm going to pass this over to Peter Guenter to give us actually a brief overview of what's going on in emerging markets. So, Peter?

Yes, so thank you, Chris. And good morning, good afternoon to everybody. So evidently this quarter in emerging markets is characterized by what you could call various dynamics. Emerging markets as such continue to grow their share in the overall Sanofi Group sales, and account now, as you can see on the pie chart, for one-third of sales, and close to EUR2.7b sales. If you would exclude the Brazil generics issue which Chris has described earlier, the growth in the quarter in constant exchange rates stand at 5.3%. And if you cut it down from a division perspective, you see actually some very nice performances. If you look, for example, at Diabetes, we have a growth rate of 17.5%. We have a double digit growth in Vaccines, 10%. We have a very impressive Genzyme growth of 40%. And finally also Animal Health contributed with an 11.2% growth.

Now it's also fair to say, on the other hand, that we saw indeed weak sales of generics, evidently in Brazil but also beyond Brazil, the Mexico generic sales were soft. And we also see more and more competition for our legacy oncology products like Taxotere and Eloxatin.

If you cut it down from a geographical perspective, if you go to the right part of the slide, actually it's good to see that many regions and countries within the regions continued to have a double-digit growth. If you take, for example, Asia, with a 9.6% and within China posting 15% growth, by the way absorbing recent price cuts, if you look at Africa & Middle East continues to be very close to double digit. If you go then to Eastern Europe, Russia, Turkey, like always it's more of a mixed bag. What we see in this region is a very dynamic Russian growth, 16% growth this quarter, more than offsetting actually weaknesses in Turkey. And as you know, the weaknesses in Turkey are primarily driven by price cuts due to referencing in the price basket.

Finally LatAm, excluding Brazil generics, shows a 2% growth rate. And I think it's important to go a little bit deeper into LatAm. Actually we see very good performances in the LatAm region in many countries except Brazil and Mexico. And as mentioned before, we have issues with generics in Brazil, but also some softness with generics in Mexico. As I mentioned, we see increased competition for the legacy oncology business in both countries. And last but not least, we also saw a soft quarter for flu in Brazil.

This being said, we continue to believe that emerging markets constitutes the single biggest growth opportunity for the industry as a whole, and I think for Sanofi in particular, given our very strong footprint in emerging markets and also our diversified portfolio. However, we also acknowledge we have had specific execution issues recently and we are addressing these.

So without further ado I pass it over to Pascale.

Thank you, Peter. So talking about Diabetes, another growth platform, we are very pleased to see that we have a 10th consecutive quarter delivering double-digit growth, the sales being EUR1.6b, up 16.2%, and this performance was mainly driven by the strong performance of Lantus with EUR1.4b, up 17.7%. To know that the SoloSTAR in the US has increased from a little bit under 52% a year ago to 56% this year.

You can see that actually the Lantus growth delivering double-digit growth in three out of the four regions, with both the US and the emerging markets being above 20%. Western Europe, given the economic context, is delivering a nice 5% growth, driven by volume.

Now staying with Diabetes, we also are very pleased with the encouraging result of the Lyxumia launch. You may recall that we got the European approval in February this year. And Germany was the first country to launch, followed by the UK. And after 18 weeks we saw a 10% -- we passed the bar of 10% market share which confirms to us the value of the Lyxumia positioning as an add-on to Lantus. So we are going to continue the European rollout, the European launch rollout throughout the remainder of the year. And we are preparing also for the launch in Japan, given that we had the approval, the regulatory approval, from -- in Japan in later June 2013.

Now the US, the FDA review is ongoing, including the interim data of the ELIXA cardiovascular outcome trial, for which we expect the complete enrolment to be done by the end of the year.

Now moving on to the next growth platform, Consumer Healthcare. The sales are driven by the top four brands -- Doliprane, Allegra, Essentiale, and Enterogermina, who are between high single-digit to double-digit growth, totaling EUR729m, which is up 1.8%. We have seen a favorable sequential trend in China following the changes that were implemented in the first quarter, both in distribution network and in the reduction of the inventory level. We are also remaining very confident with this business segment, as we are expecting to proceed with the launch of Rolaids, the recently acquired business, in the US in the third quarter of 2013. And you may have seen yesterday the press release on the positive recommendation from the FDA Advisory Committee to switch the Nasacort nasal spray for OTC use. And that will further expand our OTC offering. So we are very encouraged by the ability to continue to build on our Chattem's highly successful OTC launch of Allegra so far.

And now I'll pass on to Olivier for the Vaccines.

Our Q2 growth for our Vaccines has been impacted by phasing of flu vaccines and Menactra. It's always tricky to compare from a quarter to quarter the flu sales due to phasing between Q1 and Q2 for the Southern Hemisphere flu and between Q3 and Q4 for Northern Hemisphere. So overall we show a stable quarter in terms of sales. If we look to the year-to-date data, we have grown 7.2%. For this quarter our growth has been very much driven by our Pediatric franchise, and a very strong growth of Pentaxim in the emerging markets, where we continue to show a very strong momentum. As we previously indicated, we are forecasting a gradual and progressive recovery of Pentacel that will start in Q3 2013, getting firmer in Q4 this year.

We continue to enjoy a very strong performance with regard to Menactra, both on the public and private side, for the quarter a very strong growth indeed private segment for the quarter as well. On the public market we see some delay due to the pattern in terms of purchase order from the US government. Overall Menactra is doing extremely well in the US and we maintain our extremely high market share, 80%. And the strong growth also deriving from our very good performance, more specifically in the Middle East.

Despite a lower quarter for flu, after a very, very solid performance for Q1, H1 and the first half 2013 will be remembered as another record year for flu. We maintain our extremely high market share of 75% and more than 57m doses, growing in terms of value more than 3%.

We are very much looking forward to enter into the flu season, which already has started for us in the Northern Hemisphere. We're the first company to get the licensure and we made the first shipment last week. We are observing a solid pre-booking in terms of volume. We are 7% ahead when compared to last year. We have a new member of the family with the Fluzone Quadrivalent which is an important part of our flu differentiation strategy. We have indicated our product previously after Fluzone Intradermal would be used as a friendly intravenous, with a needle; Fluzone High-Dose for the elderly; and so the new child is the Fluzone Quadrivalent for which we had the approval in June. And that is an important part of our differentiation strategy and we will get the value upgrade that we had mentioned. We observe a strong price premium for Quadrivalent in excess of 50% when compared to regular doses.

So overall a 7.2% for the first half over last year. And as we enter into the second half, we are expecting to have stronger sales in Q4 than in Q3, reflecting the pattern of flu and also the gradual recovery of Pentaxim.

I'm now going to hand over to Merial.

Right, thank you, Olivier. So really under the new organization from July 1, I have Merial reporting into me directly, really as a sign of my confidence really in the potential of this business. I think when you look at the fundamentals of animal health between urbanization of populations as well as the need for quality food supply, the dynamics of this market I think are promising. What we need is obviously a portfolio of products to meet that. And that's really what's been holding the business back. As you look at the quarterly sales, down 5.7% principally driven by our Frontline franchise largely in the United States. As you know, the patent expired for Frontline four years ago and this is the only $1b franchise in the entire animal health market. And it's been a major driver of the reason why Merial is significantly more profitable than most other animal health businesses.

Of course, good things can't last forever and there has been an increased amount of competition as people have been targeting this. So we have seen sales down 14% for Frontline, in part because of that generic competition but in part also for some of the weaker season given the unfavorable weather conditions. What we expect is a return to growth by the next flea and tick season. We have a successor product. This is a highly competitive business and so we can't give an awful lot of detail. But I can share that we have a product that we are branding NexGard that we believe will be available at the latest by the next flea and tick season and which we believe has significant benefit over Frontline and should be able to provide a success there in terms of growth. I would note with satisfaction that Production Animals side of the business actually grew by 11% as did our business, as Peter already mentioned, in emerging markets.

On Genzyme, we have continued strong performance. Last year was the year we got manufacturing and restored supply. So last year was really round getting supply back to -- full supply back to existing patients. This year the team has really been able to get out there in really an unconstrained manner and begin to also win new market share and new patients. I think you've seen some of the disappointing performance of our major competitor here. You see this with Cerezyme, up 18%, Myozyme up 15%, Fabrazyme up 28.4%. What I think is particularly good with Fabrazyme is that we've also been able to make very strong in-roads into Europe. Obviously the US we have pretty much to ourselves since Replagal was never approved there. So that was why it's satisfying to see some penetration into now the Western European market.

The next slide is really around the multiple sclerosis franchise. And obviously Tecfidera is off to an extremely strong launch in this market. But in reality what's I think the most interesting, when you start to look at the overall market, you're seeing a revolution in the market, in the multiple sclerosis market. Almost a third of all new patients are now on orals. Now a year ago, 80% of patients were on either interferon or Copaxone. So this is quite a massive shift and really has been driven since the launch of Aubagio and Tecfidera. So our objective is really, is to make sure we gain our share. We believe that Aubagio's strong performance -- remember we've been able to show equal efficacy to Rebif. But obviously I think the thing that really differentiates Aubagio is its very strong safety profile. This is a metabolite of leflunomide. People understand that safety profile, and I think feel very comfortable about it. We have seen one case of potentially of PML related to Gilenya. The death that was associated with Tecfidera, whether or not it was related to Tecfidera, one actually also -- already saw in the marketplace some sensitivity to that, certainly on Aubagio sales.

So our objective is to continue to get out there and earn our share of a very rapidly growing oral market, we know it's a $14b market. And so even a smaller share can then ensure a big product.

Lemtrada was approved by the CHMP. I think what's really significant about this is that we're very pleased with getting a broad label. Many people thought that this was going to be a drug that's going to be positioned in late-stage patients. What you're actually seeing is I think in the medical community an interest in saying, there's no point giving someone a very efficacious product when the disease has already done so much damage. And so there is at least some discussion about treating a little bit more aggressively a little earlier. This is still under very early days. But essentially we have been approved in adult patients with remitting and relapsing MS with active disease defined by clinical or imaging features. So this is, this gives us I think a good platform. I would still believe that there will be a gradual start, given the prudence of physicians in this area, but I think -- I'm very encouraged by this new thinking that is occurring in the treatment of MS.

So as we look also now at our R&D on slide 19, we've had five regulatory approvals. We got the New Active Substance status in the EU. We were able to do an appeal and succeed on that appeal, which gives us 10 years of data exclusivity on Aubagio. We have the Lemtrada approval I just spoke about. We have the Quadrivalent Fluzone from the FDA. We have Lyxumia approved in Japan. This is certainly a first for our Company that we see a product approved in Japan before the United States. And of course, as Pascale already said, we have the Nasacort OTC switch recommendation by advisory committee. We had very strong turnout for our presentation of the EDITION I and II Phase III studies for our next generation insulin glargine formulation U300, as well as very strong results with the JAKARTA study for Phase III in myelofibrosis.

If I just take slide 20, again, you've seen these slides. Obviously the differing profile of U300 which is not bioequivalent to Lantus largely because of the size of the depot when you inject it, which changes the rate of degradation in the body. And when you look at the middle part of that slide, you see that it has two things. It has a flatter PK profile, but also the pharmacodynamic profile is more prolonged, so you get even better 24-hour coverage. And of course the clinical benefit of that is 21% lower hypoglycemic events.

So we expect a steady flow of clinical and regulatory milestones as our pipeline matures, and that's on page 21. You can see we expect the final EU decisions. The Commission has to approve things after the CHMP, as you all know. So we would expect those for Aubagio and Lemtrada. An Eliglustat regulatory submission in the EU and in the US for Gaucher disease. Fedratinib, the submission in US and EU. We would hope for an FDA decision in multiple sclerosis in the fourth quarter. On our PCSK9 Phase III results late in the third quarter as well as headline data on U300 and diabetes. This is EDITION III and IV. This is the Type 1 diabetes, and a Type 2 diabetes patient that represents more of a, quote unquote, normal population, I would say, or average population. Dupilumab, our IL-4, will start Phase II. And our C.difficile vaccine is also about to go into Phase III.

So I'll now turn it over to Jerome.

So thank you, Chris. Good morning, good afternoon. So it's not the easiest P&L I have to present to you this quarter, for the reasons we've just discussed earlier. Well, the last part of it was expected. This was clearly linked with the patent cliff impact, and again the last quarter we see it from the P&L. But some of the events that Chris described at the beginning of this call including some softer performance of some areas, but also the Brazilian impact have of course also hit the P&L.

Also, and here I'm on slide 23, we have seen for the second quarter in a row a negative impact on an comparative basis of the exchange rate. This again is precisely why we always communicate on a constant exchange rate basis. Last year we benefited from a nice windfall tailwind which contributed to a positive contribution all in all on a full-year basis by EUR1.5b in sales. This year is different and we all know the reasons. On the one hand, the euro is somewhat stronger. But more importantly, the new Japanese economic policy has led to a very significant weakening or decrease of the yen.

So if I take the second quarter, the impact on the sales has been EUR305m versus last year, out of which half is coming from the Japanese yen, the rest being split between the US dollar with a minor impact by EUR51m and some other emerging market currencies. And on the profit basis, the impact for the second quarter is EUR125m out of which around EUR100m is just due to the Japanese yen.

Now if I move to the next page, well, clearly this P&L shows the impact of the loss of patent, or loss of exclusivity of Plavix last year. So you see that, as we all know, on the line other revenues with an impact here around EUR130m to which we can add EUR25m which we used to have as a royalty revenue on Enbrel, which has terminated in February this year. And we see also an impact of the Plavix end of exclusivity on the share of profit of partnerships which is now going down to a very low level, which has been EUR3m for this quarter.

The second impact is on the structure on the P&L, is linked to the evolution of the portfolio on the evolution of the gross profit and the COGS to sales ratio. But I will come back to that on the late -- with the next slide.

And we can see also some other elements on this P&L.

So first of all, you have the impact of the Brazil-generic issue which as such has impacted significantly the operating line. So we can just keep in mind that the operating margin to sales -- or operating income to sales ratio, which in the second quarter has been 25.2%, would have been excluding Brazil generics 28.4%. We should really consider that, well, a one-off event in a way because clearly we'll not see that in the coming quarters.

You see as well on the line other operating income and expense a positive contribution by EUR140m versus a negative one last year. So this is a line which goes back and forth. And last year, as you may recall or remember, we had to take a charge linked to a judgment on Ramipril in Canada on which we made an appeal. But however we had pre-contribute and prepay, so we took this charge. This year it's reversed. We have the impact of on one hand, the negative impact of the provisions we have taken on the Brazilian generics, the EUR79m that we have seen in the previous slide, but also the positive impact of the sales of some tail products that we have sold in the US to Covis which is representing around EUR160m.

So if I move to the next slide. Well, here again, we all know that. So all in all, the earnings per share has been EUR1.11 per share in the second quarter. And this is a decrease by 18.5% on a constant exchange rate basis. But it's fair to say that I said in the last quarter that I expected the first quarter to be the lowest of the trough after the fourth quarter 2012. If we had not had this Brazil generic issue, we would have been at EUR1.28, so I would have been right but we unfortunately had to take this charge.

So if you try to make things simple, well, you can say, well, this EUR0.17 adds to EUR0.18, which is the impact of loss of Plavix exclusivity around 0.9 to 0.10 -- EUR0.09 sorry, to EUR0.10, which is linked to the currency impact, which basically tells the overall evolution of the net profit. And of course there are some other elements which also have positively or negatively impacted our P&L during this quarter. Among things you'll see that we have revised down our expected tax rate for the year, which is now at 24%, thanks to a precise review of the geographic split of our profit, which is evolving to areas with a low average tax rate and also to a positive outcome of a tax audits which occurred in some countries.

Now I move to slide 26. So the cost of sales ratio is of course impacted by the evolution of the mix of the business. And here again is the last quarter we see that significantly. The mix is unfavorable as we have less revenues coming from high-profit blockbuster businesses. At the same time we have benefited from a positive improvement both Lantus I would say more generally in industrial operations in pharma but also from Genzyme, which has contributed, well, at the end of the day significantly the growth margin of Genzyme as such has increased by close to 10% showing the improvements we are implementing at the manufacturing level, but also showing that in this biologic activity you have a lot of fixed costs in manufacturing so that when you increase sales, you immediately benefit from the leverage effect.

The currency impact has been slightly unfavorable and of course on the ratio the Brazil adjustment has had a negative impact of around 1.3% over the quarter. So excluding Brazil generics, , our cost of sales to sales ratio would have been 32.1%.

R&D continues to be under strict cost control. So despite the fact that we're investing more in multiple late-stage clinical trials, we managed to continue to reduce our internal fixed costs and to maintain our overall R&D expense at the same level as it was last year, even slightly declining. As we go into the next quarters ,there will be some increase in clinical trial expenses. In particular in relation to U300 as well as PCSK9. So you should see a stability or maybe a slight increase of this overall expense, but I think this is really justified by the attractiveness of the investments we may do and can do on these compounds.

SG&A, here again, as we said at the beginning of the year, we are re-vesting now the savings we are still doing in mature markets, whether it is in Europe or in mature products in the US and even in Japan and reinvesting it behind growth platforms. And the bulk of these investments are gone over this quarter and the previous quarter behind our MS franchise.

So if I were -- if I'd excluded that, you would have seen, well, basically a slight increase of our overall SG&A. Also I draw your attention on the fact that G&A expense has been flat over this quarter.

While obviously the ratio of SG&A to sales for the quarter has been extreme -- specifically high, as a result of the investments behind Aubagio, and to prepare for the launch of Lemtrada, but also was the result of the Brazilian effect. So if I just exclude the Brazilian effect I would already save more than 1% and if I look now forward for the full year I can confirm that the SG&A to sales ratio should not be, all in all for the full year, excluding the loss of sales from our Brazilian generics, which of course will be much more minor when it's spread over the year, excluding that we should stay at the same level of last year in a range of plus 0.2% or minus 0.2%.

Cash flow. Well, the cash flow generated for the first half somewhat reflects the evolution of the profitability, but also reflects the fact that for the first half, as usual, we are building up our inventories for the flu season campaign. So we generated EUR2.4b on net cash flow. We also invested a limited amount into CapEx, less than last year, keeping good control on our CapEx -- capital expenditures. And we, as you know, bought back shares for a total amount of EUR890m when at the same time the proceeds arising from the shares which have been issued as a result of exercise of stock options generated EUR740m of proceeds.

So we are now at the level of EUR10b of debt. As usual, it's somewhat of a peak, everything being equivalent because of the dividend payment occurring in May. And we should see, putting aside of course acquisitions, we should see this level of debt decreasing progressively over the second half of the year.

Now if I look for the rest of the year, I move on page 30, a bit more of a reminder. In Q3 we will see much less impact of the cliff. There will be some remaining impact and we wanted just to share with you a detailed figure. Last year we generated EUR72m of Eloxatin sales in the US, which we basically bring close to zero this year. And in Europe Aprovel and Co-Aprovel generated EUR155m in the last -- in Q3 last year. While this is not going to go down to zero, but of course it is -- it will be declining. And just a reminder as well, there is a remaining effect of the Plavix expiry which is the one-time payment that we benefited from in the Q3 2012 from BMS for $80m. So this is just for you to know when you want to go into detailed calculation if you want to please assess what will be the Q3 and the Q4 to keep these elements in mind.

Well, this leads me to the guidance. While this is something we of course you all know. So to summarize, given the impact of Brazil and the year-to-date performance, we have revised our guidance somewhat, and we now expect business EPS to be between minus 7% and minus 10% versus last year at constant exchange rate barring major unforeseen adverse events.

With that, I turn to Chris.

Right, thanks, Jerome. Just probably to wrap up. Again, I started off saying we had a transition in management. I talked about Peter's appointment, and Pascale's. We've actually also recruited a new head of our Merial business, who is Carsten Hellman, and he will be joining the Executive Committee. And I've also invited David Meeker to join the Executive Committee largely as a recognition of the need to really bring this patient orientation to the broader Sanofi culture. So we've got I think a new phase where we want to get back to growth, get past the patent cliff and we've got a strengthened team now to go do that.

So just to really to conclude, obviously first half really impacted by the remainder of the patent cliff, a Brazil clean-up and some commercial underperformance that we are addressing. And I believe that it's well under way.

Growth platform still, if you take out the one-off effect of Brazil, grew at 7.7%. That's a robust growth but needs to be better. We would expect to return to growth in the second half 2013. I think the pipeline is doing extremely well.

So with that, I'll turn it over to questions. Fundamentally, I think the business is on track. Nothing has changed from the story that we have been going on up till now. We have had a few speed bumps, as I said. But fundamentally we are -- we're on track for where we want to be in the medium term.

Thanks, Chris. Operator? We're now ready to take questions. I'll ask participants to limit the number of questions to just one or two at a time to allow as many participants as possible to ask a question. You can always go back into the queue if you have further questions to ask. Operator?

Sorry. Ladies and gentlemen. (Operator Instructions). We have a first question from Keyur Parekh from Goldman Sachs. Please go ahead.

Hi, good afternoon. I have two questions, if I may, please. First, Chris, just if you can provide some degree of incremental details on what actually happened in Brazil? And if I look at the revenue for the quarter, you booked a negative EUR173m. I'm just trying to get a sense for what the actual [was booked]. My math suggests you didn't book any sales this quarter in Brazil. So what should we think of as a run rate for the generics business for the second half of this year?

And then secondly, just if we can get a sense from you on how you see the positioning forU300. Do you think that's going to be an opportunity for you to move patients currently taking the double-dose Lantus today? Or do you see it as largely new patient opportunity? Thank you.

On Brazil, when we say inappropriate, that means that essentially people were trying to make sales, flatter sales by having sales out, and the sales out into the trade channels. And we just found that we've -- this is not something that's new in our industry. So we found that out and have had to clean that up.

You're absolutely right about the sales this year. Essentially from the beginning of the year a lot of trade stock was out there, so we weren't selling that much in. And so a lot of this is really writing off a lot of the stuff that has been circulated into the marketplace.

But if you're looking at this Medley sells about 14m, 15m units a month. If you look at IMS sales they have continued to perform well through that process. We are going to have to progressively get back because things have been pretty disturbed out there in the marketplace. We certainly believe that we've done everything to clean up the situation as we have now. Now we've got reps going back out there again, and taking orders. And so we'll give you an update in the third quarter about how things look.

In terms of the U300, for us this is a next-generation insulin. This isn't for a sub-segment of the population. We know that there tends to be in all insulin products somewhat of an under-dosing because even though hypoglycemic events are rare they still can sometimes have an impact on caution on dosing. So we believe that all insulin patients will benefit from the U300. And so we would be actively seeking to switch Lantus patients as well as other analog patients to U300. This is a brand new product that we believe will be for all patients.

Thank you.

We have a question from Tim Anderson from Bernstein. Sir, please go ahead.

Thank you. Obviously it was a weak quarter and guidance was lower and I'm just wondering how this all happens at once where the mid-point of earnings drops by a full 6% and it does seem to coincide with the departure of Hanspeter. Can we assume that this was a quarter where you're intentionally throwing in all sources of weakness at the same time to wipe the slate clean?

And can you confidently say that the outlook is better from here? I noticed that on your prior 2015 guidance that you gave some time ago those elements were not reiterated. And if I look at something like your emerging market guidance of double digits for four quarters now you've been about 6% or 7% including this quarter if you exclude Brazil. So I am just wondering about all the other elements long term guidance.

All right, Tim. Well first, no, this isn't anything that's related to Hanspeter's retirement. Hanspeter is a very effective guy but I don't think he could really influence the weather in North America for the springtime. So I think we have to say look there are a number of things have come together.

You rightly point out; I think we are underperforming in emerging markets. And I think we are underperforming the market. If I track IMS sales since the last four quarters we have been under. And I think the real issue is we have been through the wars the last four years. We have busy restructuring and buying other businesses and integrating and in some ways it's almost like crisis management.

Now, suddenly the skies have cleared. You're giving everybody now let's get back to growth. And I think the last four years have been too much of trying to manage the top and the bottom line through, really through operating expense movements. And so I'm not so sure that we've got the right level of investment. I don't think we need to see anything change in terms of the overall fundamental shape of the P&L.

But I think this is getting all hands on deck. And really get back to growth and moving beyond the phase that we've been through. We've been through a heck of a lot of change. And it -- this is a big organization. It takes a while for everybody to get through. So if I look at it I don't see anything fundamentally wrong.

We see an awful lot of our businesses, by the way, doing extremely well. Diabetes continues to do well, the Genzyme business is doing phenomenally well. You look at a lot of our regions in Asia, in Africa, Middle East, for example, I think the Lyxumia launch has gone well, the Aubagio launch has gone well. So there is an element of getting everybody back and focused on top-line growth. And some of the parts of the business has been doing that quicker than others.

So for the most part we have some elements that are outside of our control, some of the austerity measures in Europe, the genericization rates. But I would have to say that we have to accept from a management point of view that some of this underperformance is really related to internal reasons. And we are -- we can and should step up our game in some areas.

But if I look at emerging markets for example, you really can't say that there should be any reason why we should see a slowdown. If you look at the actual formation of middle classes, that isn't tightly correlated to GDP growth. Just because China grows at a 7% instead of a 9% doesn't mean that you don't have millions of people entering into new demographic classes. And that's exactly the spot that we are targeting.

So, look, I'm not happy about this first half. But in some ways I -- but I don't particularly like having to admit that we are underperforming internally. At least if you've got some underperformance internally those are things that you can address and they are not fundamental issues that are external to your company that you can't always address.

I think we've got the right business configuration, the right portfolio, we are seeing some new products. We now need to get everybody mobilized and do that much better in those areas that aren't. And again I would just caution everybody. I mean there are still an awful lot of parts of the business that have been performing extremely well.

And 2015 guidance are all those elements reaffirmed?

Yes. I don't see any reason why we'd change it. I mean obviously we are not doing the double digits on emerging markets. I personally don't see a reason to withdraw it. We are not doing it and we have to do it. But I don't see anything outside the company that would suggest that that's not possible.

And as I look at the various parts of the business that are able to do it then we are just going to have to -- we can't trip ourselves up in Latin America as we've done. There are going to be some areas that are softer like Eastern Europe and Turkey. So maybe we are not doing this as much as we should be doing on emerging markets. We are doing probably better on diabetes. But broadly I would say fundamentally I don't see any real change in the outlook of the company.

Thank you.

We have a question from Richard Vosser from JP Morgan. Sir, please go ahead.

Hi, thanks for taking my question. Richard Vosser from JP Morgan. If I could just touch on that, the guidance going forward and when I look at the underlying growth of the business at the moment we are around about, to my calculations, about 1% in the quarter or maybe slightly higher than that. Given that level of growth and a sort of 4% sales growth last year on an underlying basis when you strip out all the generics and all the FX hits, could you give us a bit more of a road map how you can get towards that 5% growth. Because at the moment the diabetes care is (technical difficulty) well but you have some issues in terms of tail products declining, just an idea of a road map of how you can get there would be useful.

And then just a second question for Jerome, I think the last quarter there were some commentary on the operating margin progression year on year where I think you stated the margins would be flat year on year at constant currency. Obviously there is the Brazil impact, but how do you see that quarter on -- one quarter on and if you could give us some idea there on a constant currency basis that would be useful, thanks.

So I take the growth platforms, let's look at diabetes, I think diabetes is growing 16%, 17% versus our high single digits. We are clearly easily surpassing that. Personally I don't see anything that really is slowing that down. Clearly the delay of Degludec in the US only helps us, plus we've got the launch rollout, we've only launched Lyxumia really in Germany and the UK. Now we have the rollout in Japan the rest of Europe and are expecting an FDA decision towards the end of the year.

Vaccines at 7.2% is in line with where our mid-term guidance is. We are actually able to sell everything we can make. Here again we have an issue with the Pentacel manufacturing at our facility in Toronto. Our belief is that we will progressively come back to supply on Pentacel through the rest of the year.

But you've got a number of new products that are launching in here with the Quadrivalent and we've got the Flu ID. We've got the High-Dose Flu and you've just heard Olivier that we are actually starting to be able to premium price these products in a commoditized market like flu.

And I think as we start to look at Dengue coming next year, if we get the same result out of Phase III that we did out of the Phase IIb we've got ourselves a robust Dengue vaccine. We should be able to produce -- by certainly the 2015 timeframe we should be able to be producing 100m doses of that.

And this is a major not only public health issue but I think a commercial opportunity. We've got the -- this affects half the world's population. There is no treatment for it. It fills hospitals. And we are talking about countries like Brazil and Singapore. And of course we have the Hexavalent launch in the EU where GSK has largely had a monopoly for the last few years. And so I think as we roll out our Hexavalent that gives us a new growth opportunity as well.

Consumer really held back because the China situation is not like the Brazil, this is just a question of we are kind of green in the consumer healthcare business in China. And we didn't have all of the reps at a point-of-sale site. So if you are going to have 150 wholesalers with 10 first, second line wholesalers and third line wholesalers behind that you really need to be getting around to pharmacies and really understand what level of inventory is out there. There is no suggestion here that there is any inappropriate level. I think we've got inventories down to 30 days.

You've got the rollout of Rolaids. You've got the launch of Nasacort. So you've got also some new launches coming along through there, so my Consumer Healthcare view is that we can certainly do better than we did in this past quarter.

Animal Health I think I talk about this is really predicated on the launch of the next generation of Frontline. Our belief is that this will not only be able to pick up the slack from Frontline but also start to win a number of new patients because we believe this is not only better than Frontline but it's also better than all of the other competitors in this space.

Genzyme is performing extremely well. The Rare Disease business of course has been particularly helped by the fact that we were coming back into the marketplace last year and starting to resupply. And maybe the dose growth rates are not quite as robust, I would still expect double digits on the Rare Disease business.

But equally we've now got Aubagio and that can start to roll out in the EU. We've got Lemtrada that can start to roll out in the EU. And we expect a decision on Lemtrada by the end of the year. If you have two big products rolling out into a $14b market that is something that we don't have today.

And then you've got the other innovative products, which today is a paltry $171m on a quarterly basis. We have Zaltrap now doing -- giving reimbursement throughout Europe. And I think Zaltrap is going to do better in Europe than the US just because of the economic context. We have Jevtana finally reimbursed in France. So with the rollout of Lyxumia again I would expect that that other innovative product piece picks up. And we've already talked about the emerging markets.

If we can simply get back to performance where some of our competitors are who are able to do better than us despite whatever macroeconomic conditions are around them there is no reason why we can't, then I don't see why we couldn't improve that growth rate again. We grew still last year at 9.9% in emerging markets. So I personally am not about to throw in the towel on emerging markets yet.

But clearly we've had some management issues that we've had to deal with and potentially some resource issues here and there. Though I think as we've come through the last three/four years I would probably suspect there are some parts of the business where we have not kept up with some of our competitors and we do have to think about our competitiveness. So I hope that addresses your question here.

Thanks, yes.

We have a question from Mark Clark from Deutsche Bank. Sir, please go ahead.

Yes, hi, gentlemen. I went on an investor trip to Sao Paulo in April and we had a presentation from Sanofi management there who I accept have now left. But the picture that was given there was really of quite an optimistic one about turning around the generics business even with the tax changes, etc. And also there was a graphic put up that showed the generics business as only 12% of LatAm sales.

So I wonder if you could just talk us a little bit more through what your understanding is of the issues here. Is this all a spill over impact of the tax changes in Sao Paulo or is there something that goes beyond this? In which case is there a possibility it also could impact on things like the diabetes franchise in Brazil and some of those other areas that are potentially larger in the mix than generics?

No. Mark, if you were there in Brazil I am sure they took you through all the complexities of Brazil. That there is a different value added tax rate in every single state, that patients are essentially paying cash and so paying the value added. And there has been quite a complex distribution system set up. We have nine distribution centers in Brazil as an example because the idea is to try to move product between these different states so that you can reduce the impact of this value added tax and therefore the price to the end consumer. And obviously in the generics business we are talking about a price sensitive part of the market.

When Sao Paulo last year suddenly increased its tax, this put this whole distribution scheme into disarray. And I think that's really what caused management last year saying well we are going to come up short, and essentially started not only providing incentives to the trade to take on more stock but effectively starting a price war and inadvertently doing that, which became a spiral. And so by the time April came along they were certainly way overoptimistic and in too deep on this whole issue.

You're right from a Latin American point of view, it's not that much. For the moment our belief is that this only applies, and all that we have found, only applies really to the generics business. If I look at the rest of Latin America -- and the pharma business continues to do very well in Brazil. Our Mexican business in generics is off for different reasons. This is just a competitive situation. But the rest of Latin America outside of Brazil and Mexico continues to grow robustly.

So I think the fundamentals of Latin America are there. This tax change I think just put this whole system in place to help manage pricing to consumers. And when you've got products going through nine different distribution channels, the time it actually takes to get to an end customer meant that it became more difficult for anyone really to track exactly what was going on in the marketplace.

I think there was an element of just simply poor management on that. So that's why I decided to change management. We believe that this was all just management error and of a scale that really, really should have been caught earlier.

Okay, thank you.

We have a question from Graham Parry from Bank of America Merrill Lynch. Sir, please go ahead.

Thanks for taking my questions. So just staying with Medley, you refer to there being underlying volume growth still there. Clearly, it's less than the reported growth that we've been seeing, but could you give us a feel for what you believe the Brazilian underlying generics business is actually growing at, at the moment.

Secondly on the latest Chinese investigations, there is a comment on the wires that you have been contacted by the authorities. Could you give us a bit more detail about the level of that contact, which departments or government agencies have made contact and have they actually officially started any form of investigation into practices by Sanofi in China?

And then thirdly, you're pointing to a slow Lemtrada launch. Is that also because of high expected prices the very large upfront costs given that you give lots of the therapy [to achieve] your treatment paradigm upfront or are you looking at ways to spread that cost potentially. Thanks.

So, Graham, I think on the Brazilian generics business I would guide for lower monthly sales than we saw last year, so we are unlikely to get back quickly to the roughly EUR360m of that we did last year. So last year you were talking about EUR30m a month, I think just given the pricing issues that occurred as part of this whole thing to try to appease the tax distribution and get more inventory absorbed it's going to take us a while to build back to that level.

So I think -- and certainly as we come out of this I don't think you're going to really see much in terms of sales in the third quarter for Medley and it will be more in the fourth quarter. So we'll be able to give you a little better guidance on that in the fourth quarter. But in general, you can start with that and take your favorite discount off that in terms of some element of price. That is probably going to take at least 12 to 18 months to reverse I would guess. But we'll give you more guidance on that in the third-quarter results.

China, we have 11 regional offices in China and these are largely outposts, they have marketing and sales people some medical, some market access people. And one of those offices was contacted by the so-called authority on (technical difficulty) on consumer and -- The Administration for Industry and Commerce and this is in the Shenyang regional office. They visited on July 29. And we don't really know what the purpose of that visit was. People come in on one of these things and they just want to look at some documents and they walk away with some documents but they don't tell people locally, those people don't necessarily know themselves when they come in.

So we have had no contact with the authorities on this issue at our Shanghai head office. Personally I think the -- everybody is looking closely at the situation but I think it's too early to come to any conclusions here. Obviously all of us have very tight compliance programs that we run here. We are all taking a closer look. For the moment I don't particularly see any reason to be concerned. But obviously we are looking at everything just as I'm sure every other company in the industry is doing.

On Lemtrada, my cautious approach on this is largely on the one hand we clearly have the best efficacy data that anybody has ever demonstrated in a product. I mean you are talking about over 50% prevention of relapse against an active comparator. So nobody, but nobody has ever shown that level of efficacy against an active comparator. And indeed we've actually seen for the very first time ever in about 23%, 24% of patients some improvement in the physical disability. And I think those are both numbers that clearly I think are what was behind making sure that we have a broader indication at least from the European regulators.

Now my only cautious point on this is that this is obviously a drug that has been in development for 20 years. There are an awful lot of misperceptions I think that have accumulated over those 20 years. We obviously are going to be out there in full force. We have one-year follow-up data from our Phase III study so we can now demonstrate that this relapse rate largely extends into the third year. And as we go to payers they are already paying around, if I look at Europe, somewhere between EUR30,000 and EUR45,000 a year and on a continuous basis. And here we have a product where you're going to get five infusions one year and three the next and nothing else really after that and with some unparalleled efficacy.

So, from a market access point of view I don't really foresee much difficulty just because of the force of the data. I think I'm just cautious because this has typically been a conservative population. The neurologist is particularly affected by what happened with Tysabri, to a lesser extent with Gilenya. And there tends to be a cautious approach to use of new medicines. I may be wrong and I hope I'm wrong on that, but I think really in order to be transparent I think one has to say we -- this drug has been in development a long, long time and we have I think a big communication job to do.

I am not -- the price again we'll give -- we'll let you know when we get closer to getting some market access going. But I don't think price is going to be an issue. But equally I think we have all of the data we need to get a fair and equitable price versus our competition that's for sure.

If I can just follow up quickly on China, are you performing your own internal audit and would there be any point where you would be able to share the results of that kind of audit with investors to say that management is confident that there is no legal risk in China for Sanofi?

I think you could understand, Graham, I can't really say anything more at this time. I think again you can bet that every company is looking at things very closely in China.

Okay, thank you.

Maybe -- sorry, I will maybe take a question from Richard which I did not answer which was on the margins, I wouldn't like to leave this question unanswered. So, Richard, you raised the question about the operating margin. So a), maybe I did not express myself exactly well last time, and I tried to correct it later on. The objective we had was not -- was to get to an operating margin which was in line with the average level we had last year which was between 31%, and 32%. You should remember the guidance we gave for last year.

Actually it's clear that we are not heading into this exact level now, even more because we feel that we want to continue to invest whether it is behind our Phase III trials or behind the new launches so we are not just going to squeeze the cost and to jeopardize the launches for the sake of getting 0.1% and 0.2% more or less margin.

What I would like to say then is that -- and of course the first half as you noticed has been hit by the Brazilian issue but also in terms of ratio but also by the exchange rate issue which is impacting both the gross and the operating margin in particular the yen because it's no secrecy that obviously we have more revenues at cost in yen. And this is not -- this is something which goes down into the P&L. And you know already the figure which is on a net basis the EUR100m, the EUR0.07 per quarter which I just referred to earlier.

So if I put all that together and if I look back where was the gross margin -- where is the operating margin excluding Plavix contribution last year I think that we should be assuming there should not be any change, any further change in the exchange rate, or let's say on the constant exchange basis, it should be in the same range for the second half of the year excluding Plavix impact last year of course.

We have another question from Peter Verdult from Morgan Stanley. Sir, please go ahead.

Thanks, everyone, good afternoon. Chris or Jerome, just a question on the dividend, the policy has been laid out pretty clearly, it's all based on payout. Have you or the Board given any consideration to committing to a flat dividend this year or should we assume that the dividend will fall in line with the new earnings guidance.

A very quick one, Chris, if you look at some of your peers they are basically carving out Central and Eastern Europe and putting it into Western Europe when they report their sales obviously making their emerging market growth look better, wondering if that's something you would consider.

And then can I just push you on Brazil and Animal Health. I know you probably don't want to be talking about it continuously but obviously confidence that we've reached the bottom here and that there is not another shoe to drop is critical to where the shares go next. So can you just remind us what sort of trajectory you've baked into your guidance for Brazil and Animal Health for the remainder of the second half? Thanks.

Jerome, do you want to take the dividend?

So on dividend, Peter, well, obviously under French law the Board decide upon dividends at year end so this is something of course which will be decided upon at year end. However, I think that from the day one we said that the dividend is an important element of the overall policy towards shareholders and return to -- and cash returned to shareholders which is key in our objective that is not just by coincidence that we announced our intention to increase the dividend as well as in past years and to increase the payout.

At the same time all over the period where we have seen a decrease in profit, we have not only maintained but even increased the dividend. And I would add that the 50% payout ratio which could be considered as an average target here of course not a ceiling, I am sure let's say is the floor more. So, putting all that together, I think that it's clear that we will pay all attention necessary to consider return to shareholder. And I don't believe that any event which is not repeatable like the Medley obviously (inaudible) will in any way hurt our dividend policy.

So in short I think we will continue to be -- to pay high attention to dividend payment and the 50% is an average target, but this will be considered as a floor. And once again I can just repeat that even during the period where we had a decrease in profits we increased the dividend.

That's clear, thank you.

We have a question.

Sorry, we have a question on Brazil and Animal Health. So on Brazil we clearly have had a very close look at all of this. We had obviously auditors come in and have a look to make sure that we were appropriately reflecting the economic situation. And based on everything we know now clearly, yes, we believe we have cleaned up the situation. You can imagine it's not in our interest either to have any second shoes dropping later on.

On Animal Health I would say I am not expecting a quick return onto the business. I would expect to see Animal Health continue along these lines into the second half. Really what will change the dynamic of this at this stage I think is the launch of this successor product. So I don't foresee certainly any deterioration, probably some small improvement but I think Animal Health is going to be broadly in line with the first half as we go into the second half.

And moving Eastern Europe into Europe when you report your emerging market sales going forward?

My view is that I really don't like changing the definition around just when it suits us. I think we are very happy to have received an awful lot of support and we've won quite a few awards in investor relations which we attribute really I think to trying to be as transparent and consistent as possible.

Yes, it might be sexier to transfer that out. But I'd prefer not to move the goalposts all the time. So I think we've given you the data by region not just all emerging markets. So I think investors are able to make that decision but that's why actually our double-digit growth is a significant lift here because I don't see emerging markets -- Eastern Europe coming back quickly just because they are so tied to Western Europe.

Now they are spending significantly less than Western Europe on healthcare and at some point there will be a pressure on it, but again we've stuck with that definition and I don't want to give anybody the sense that we've change that goalpost in order to make that particular target.

Sure, thanks.

We have a question from Vincent Meunier from Exane BNP Paribas. Sir, please go ahead.

Good afternoon, gentlemen. Thank you for taking my questions. The first one is on the capital allocation. You are now at the level of EUR10b of debt and that's your target. But also you were talking about possible M&A in the presentation, so can you please elaborate on this? Is the bolt-on acquisition still the preferred route for you versus larger deals?

The second question is on the evolution of the SG&A on R&D cost lines. You are talking about an increase due to the buildup of the sales force in MS and also new Phase III trials. Is this fully in 2013 or is there a spillover into 2014. Thank you.

On the -- sorry, what was the -- oh, the M&A, nothing has changed on M&A. I am very happy with the perimeter of the business. I think we've got a -- I would still believe that we are occupying the sweet spot of the industry. We have businesses that are long life businesses with our Vaccines business and our Consumer Health business and our emerging markets business, etc., etc.

And not only are we present in those but unlike some other companies we actually are the number one, two or three company in all of those different sectors. So we've got leadership, we've got critical mass and therefore what would make most sense is that you do bolt-on acquisitions to strengthen those.

I think the current perimeter of the business is such that we wouldn't want the distraction of enlarging that by any other types of business versus where we are now. Largely, you have to pick and choose because valuations are pretty robust, and so you've seen us take a significant slowdown in M&A largely because the number of value-enhancing transactions available are less.

I am not particularly crazy about buying companies with a single product because the valuations tend to assume that those companies have already achieved peak sales even before they launch, and therefore it doesn't really leave you any room to create any value for Sanofi shareholders. And as I like to say we're prepared to be judged not only on the basis of the deals we do do but the ones that we don't do. And I think we've passed on a number of transactions largely for that very reason that we don't see value creation for Sanofi shareholders.

So I think the guidance of on average EUR1b to EUR2b we didn't spend it all last year we didn't spend it this year. The EUR10b is still very much on the table as Jerome showed you. We bought back EUR890m of shares this year in the first half which is more than we did in all of last year.

We are clearly dealing with dilution of stock options. We are very happy to have seen the appreciation in our share price. But one has to say that for many years Sanofi employees had all of their options under water. So we've effectively -- we've moved to performance shares in 2010 so the amount of dilution going forward is going to be significant. But the stock options that are out there before 2010 we are effectively dealing with seven years of stock options that have never been issued. And so obviously our first measure is to make sure we are slopping up any dilution. And then we will continue to look at this.

Our first inclination is always to invest in the business but only where there is a return. Again, I'll also remind you that 50% of our performance criteria waiting is on a return on asset calculation. So we really can't do any dilutive type or silly type acquisitions and expect to be paid at least on our equity programs. And I think that instills a sense of discipline, so no change to that.

And again in general my message is still I don't see a fundamental change here in the business. We may have hit a few speed bumps but I don't think there has been any fundamental outlook to the business either in our dividend policy or our capital allocation policy or indeed even the outlook we have for the business as we sit here today.

On the -- on your question, Vincent, on the R&D and SG&A, well, A) I think that we should look at R&D and to a certain extent SG&A as an investment. So the ratio as such is not really that meaningful. It is helpful of course when you want to build your spreadsheet but I think that this is really something we need to keep in mind that we have the procedures to discuss that already.

So on one hand you need to continue to take out all the fat from the unofficial cost but on the other hand when necessary clearly you need to invest whether it is behind attractive new compounds, so it can be on new launches or to sustain your growth in the growth platforms or in emerging markets as an example. So, that's maybe my first comment. So we are going to continue as fast as possible to take out unnecessary cost. When we've done a lot of that, we clearly will see a bit less of that in the coming year.

When it comes to R&D we've given the guidance, you remember now 18 months ago. So overall R&D expense, and here it's a lot of different things, could be stay in the range of EUR5b. So I think for the time being we will stay around that. Why it starts to be more? Three years ago it was not that easy -- not difficult to get there because we didn't have so many projects but now we have many projects, so Elias is trying somewhat to manage it, his priorities.

In terms of SG&A on sales and marketing investments clearly, generally you invest before you start to get the sales. This is why as a good example is Lemtrada, you are building the sales force, you are building the marketing, you have some cross-marketing studies which may come. At the same time you don't get the sales so the ratio is of course getting worse, but in fact it's because then you will get an improvement later on. So this is where it's so important. So the key thing from the P&L standpoint to manage this industry is sales. And when you get that you get a lot.

So in short I think that will it be a spillover next year? Well, yes and no. Again on what has been launched this year I think there should not be significant more improvement -- more increase of investments behind that next year.

Now if there is other launches taking place, we are going to launch Lyxumia as an example hopefully in the US next year, so there will be some investments behind that. But all in all we gave an average guidance now some time ago on the R&D and also on the SG&A to sales and I don't think this would change over time.

Yes, let me just add to that. I would say I don't want anybody getting the idea we are bringing the punch bowl out of the closet and turning on the party lights here. I think the -- we -- if you look at our R&D budget or even if you look at the numbers that Jerome showed on SG&A they are still broadly flat.

You will see an artificial bump up in ratios because sales are softer and we've chosen not to titrate down costs largely because R&D is suddenly performing. Just a year ago we suddenly realized that we could put an IL4 into Phase III. We have a high percentage, 70% of our portfolio is in biologics and these things actually move at a faster pace than pharmaceuticals do.

So -- but if I also look at it we have a major program in PCSK9, a major program in U300, a major program with the Dengue vaccine. We are just starting a major program on a C.difficile vaccine. There has been -- there is an awful lot in that pipeline and yet we are still spending less than we spent five years ago.

And so what has really happened over the last four or five years is we've converted spend which was a waste of money into particularly clinical development of the assets that you now see in our pipeline. And even the increase in the multiple sclerosis, you need to build up a sales force in, particularly in the US. In Europe, remember we had Copaxone and so a big chunk of that actually were converted into our multiple sclerosis field force in Europe. But we were still really taking out costs out of the business in other areas.

So I think you may see some fluctuation a little bit in ratios, but I think our objective is still to make sure that we are really being tight on our priorities. Funding those things and making sure we are not harming longer-term growth, but not necessarily going back to old pharma ways either where we throw money at everything that moves or doesn't move in the industry.

Thank you very much.

We have another question from Matthew Weston from Credit Suisse. Sir, please go ahead.

Good afternoon, and thank you for taking my questions. Two if I can. Firstly. you've been very clear with the one-time negative impact of Brazil on EPS of EUR0.17. But I think also in other operating income there are a number of one-time positives. Can you set out how much the Ramipril gain is, the capital gain on the sale of the US rights and also I think there is another negative in there the Plavix fine just so we can get a clear, a pre-one-off earnings number to work with going forward.

And then secondly on SG&A, a number of competitors, particularly in diabetes have made it clear that with the new entrants coming into the market and also with a number of prior entrants significantly stepping up marketing spend, investment is needed simply to stand still in that market. So can you tell us, given the investment that you've made in Q2, is that to cover the Lyxumia launch? Is that to cover Lyxumia launch and further investment to stand still, and really what you think you need to do in diabetes, versus spending on SG&A going forward?

I think on the -- Jerome can take you through the ups and downs of the others in there. You're right. There are some upsides. There are some less visible downsides as well. There's some co-promote income in Japan, for instance, that's not in there. My personal view is, certainly looking at it from a management point of view, that those things are a wash through the year. And certainly, on a year-on-year impact, there's no significant effect.

Clearly the tax rate is an impact. But I think the things that -- like here and there, some product sales but some fines on the other things. I think that -- well, I'll let Jerome comment in more detail, but that's largely a wash.

On the diabetes, I would argue that investing to stand still would not really correspond to 16% growth in sales. So I think we continue to invest because we believe this to be one of the biggest markets anywhere in the world. We have an opportunity to launch some new products, notably with Lyxumia, preparing the pre-launch for U300. And it is true that there is a higher spend elsewhere. But you remember, there's also segments in this market. I mean, we're not really competing with the people who are duking it out in the DPP4 market, as an example.

Even in the GLP1 class, a Victoza really is an add-on to orals, whereas Lyxumia is looking at use in combination with Lantus. So we're not necessarily even going after the same patient on the GLP1s. Yes, Novo has put some more money behind Levemir but we've been beating Levemir on market share for years and years now. And I don't think that's going to change.

I think you'll see some investment, certainly in the emerging markets because of the huge opportunity there. We have Insuman launching out. We have our AllStar reusable pen launching. But I think, when you look at the sales growth there, the diabetes investment is certainly accretive to the bottom line.

As it is, if you actually benchmark us, we are actually probably the most effective -- investment-effective company in this industry. If you look at the level of sales, the spend that we have, we are probably getting a better return, to the point where you could potentially make an argument, in some markets at least, that we have underinvested in that market. But again, I believe the investment we make will be earnings enhancing. Do you want to add anything to the other items, Jerome?

No, I think that I can -- I'm not so sure there is so much to add. So first of all, maybe to make it clear, maybe I was not clear enough, or maybe you were not there last year. But the Ramipril thing is something which impacted last year, not this year. And it was a charge. Well, this year, basically the overall EUR140m represents -- is corresponding to the disposal of the tail products to Covis the rest are plus and minuses.

The bulk on this line of revenue we get from Warner Chilcott from our former partnership, on Actonel. And this is, of course, something which comes quarter after quarter. All the rest is plus or minuses, the competition fine that we get, on which we appeal as well, had a small negative impact which has somewhat reduced the net contribution of the divestment. I'm not so sure there's any more to add to that. So just keep in mind that the net is -- for this year is as Chris said let's consider it's a wash in the long run, is resulting from those (technical difficulty) assets.

Yes, because what you don't put on that line is the loss of some Japanese co-promotion income, which is around EUR100m or EUR90m. But at some point, you can't detail all of these things, so that's why personally I think I'm not so sure. Certainly, if I'm looking at our own internal forecast, I haven't seen any need to take any of those things into account. We just went through a long-range plan exercise. And you need set a baseline for that, just as you all do. And we didn't actually see a need to make any adjustment to our own 2013 baseline for those.

Can I actually just take a quick follow up, if I can? So just to clarify that in the other operating income is the inventory write-down for the Brazil generics. Is that correct -- so the smaller part of the two Brazil charges? And that, when offset with the gain and/or the normal income, comes to EUR140m gain.

And then just very quickly, Chris, regarding the investment in the diabetes sales force, just as Jerome commented that you invest in SG&A but you get the sales later, the comments from your competitors that they've started to invest now, and therefore that suggests the competition will come, I guess my question is do your plans now include the fact that you simply need to raise the number of salespeople, just to keep the share of voice that you currently have?

And the answer to the diabetes question is yes. And the investment is happening now and has been included in our plans.

On your first question, if you want to go into all the details. So the write-off of inventory which we own goes into the COGS. But now the associated cost to this write-off as an example, the impact this may have on the very complex tax system which exists in Brazil or the cost of destruction of these inventories which may be written off goes into this line. So it's only part of the EUR79m, which has been disclosed, which is going in this line and the rest is going on the COGS line.

Many thanks.

We have a question from Michael Leuchten from Barclays. Sir, please go ahead.

Yes, thank you. Two questions. I just want to go back to your guidance, if I could. If I take the EUR0.17 earnings per share that you mentioned for Brazil, that's about 3% for the full year on EPS. But you do get a tax benefit that makes up for that, almost getting into positive territory. Yet you decided to drop the guidance, which means there's other things going on. And you did mention generics. You mentioned Japan as well. But how much of that is stuff that you think you can deal with this year and how much of this is actual structural changes that resets the bar for 2014 and thereafter?

And then a second quick question for Jerome. Your comment on the tax rate of 24%, you did mention there were some agreements in smaller countries. Are those one-off benefits or is that a sustainable tax rate? Thank you.

So I think on the -- I think this was -- if I remember, it was Graham's question. I think we went through each one of those growth platforms. I don't think there's anything really there that is structural. We clearly need to do a better job in emerging markets but I don't think it's structural. I think there is an execution element.

I think, on Animal Health, Animal Health I don't think is going to improve for the rest of this year. I would argue -- I guess you could argue that Animal Health would be structural if we didn't have the new products coming along. But the reality is that we do have the new products coming along, so I don't even think Animal Health is structural.

So I think this is a series of things. We've had some production issues in our vaccines business. We've had a little bit more generic erosion in Japan. The Animal Health business is down. We had lower consumer sales in China as we cleaned up some things. We clearly had the Brazilian situation. And the Brazilian situation, even though we believe we've cleaned up the market, will take some time to get back. So on a like-for-like basis, we'll still see some drag on the business in the second half from the Brazilian generics business. So not a year to be proud of, but I don't think anything either to say that longer term, there's anything fundamentally changed on the business. Jerome?

So on your question on tax rate, so first of all, in a company like ourselves, you need to keep in mind that there is permanently between 12 and 20 ongoing tax audits all over the world. So it's not something -- which is recurring by construction because all tax authorities in all parts of the world are reviewing our accounts. And as a matter of fact, because of the level of profits you generate immediately is a risk but also maybe the good news you may have arising from these taxes. It can go back and forth.

In general, when you assume that there is some risk, you take some reserves, based on probability rules. So then outcome could be either more positive but you (inaudible) positive, it depends. But clearly, this quarter, we had some positive outcome and things went pretty well, which has helped to get to this 24% ratio. So I would not say that this 24% ratio is sustainable because it inevitably some things will go the other way around on some occasions.

And secondly, for more structural reasons that we have less revenues, at least for the two years to come, from patent-protected products which benefit from lower tax rate, which are generally linked to IP taxation in many countries, including France.

Now if you remember, I've said in previous time that the best estimate I can give you, and it may be a bit conservative, is that we should head back to 28% to 30%, let's say in 2015. We are working on ways to improve this rate. And I think that we're heading into the right direction. So not everything from the 24% is coming from this tax audit, but also part of it is coming from the evolution of the location of both our production, as well as where we generate our sales on our profit.

So to give you guidance today, I would say that progressively there will be an increase of tax rate. The wrench, let's say, before we get into a period where we have more protected product could be more into 28% to 30% so let's take 2015. And hopefully I can come with something a bit better in the coming quarters.

Operator, we're going to take the last two participants, please.

Thanks. So we have a question from Andrew Baum from Citigroup. Sir, please go ahead.

Hi. A couple of questions, please, Chris. First, you mentioned that you've replaced the head of LatAm, as well as the head of Brazil. I just want to ensure that the reason for replacing the head of Lat Am was solely related to overseeing Brazil or was there any other reasons for replacing the head?

And then second, could you comment, for the European pharma business, particularly of the tail, what you're seeing in terms of incremental pricing pressure and access pressure within Europe. Thank you.

So just to be clear, in actual fact, at the time this occurred, the head of Latin America and the head of Brazil were the same person. And so this was in fact related to Brazil. The structure had been that we had a head of Brazil and a head of LatAm. And we have moved to that, so we have a new person who has taken on Brazil. And we have another manager looking after Latin America. From October 1, we have a new person coming on board from Novartis, actually, who will be looking at Brazil. And then the person that had stepped in, on an interim basis, in Brazil becomes the head of Latin America. So probably a little more detail than you wanted to know, but it just happened that at that time there was no specific, separate head for Brazil versus Lat Am. And it had nothing to do with the rest of Latin America.

I'll turn it over to Peter, who until recently was actually head of Europe and is probably the best informed on the tail question.

Yes. On the tail question actually, we foresee that the price pressure continues. You see this portfolio going down, with a base between 15% and 20% over the last quarters. And again, this quarter is no exception to that. However, what I want to mention to you is that we have seen also in that tail big small molecules generifications, like Plavix and Aprovel. And actually, what we will see is that with Aprovel, we have actually the last of the small molecules generification. So to a certain extent, due to a mechanistic or a portfolio effect, you should expect a bit of a slowdown in the generification rate. But to answer to your question precisely, in terms of price pressure on that tail business, we do foresee that this will continue.

On the other hand, you will also have noticed that with our generics division in Europe, Zentiva, we also had profited from that, and that we have now a very strong continued growth rate over the quarters with our generic business.

I guess I was referring to leaving out the recent genericizations, that looking at the established tail that you have in Europe and just looking at the pricing pressure, so putting Aprovel and Plavix to one side and looking at the much older brands, like Amaryl and the like.

If you look at what we call the tail of the tail, you would normally expect, moving forward, decreases which are in the same neighborhood of what you have seen in the past.

And the real issue here is more increased generic erosion. These don't really get subject to any specific and direct price reductions. Here and there, a little bit, but it's largely -- Southern Europe, for example, you had very low generic penetration rates, historically, in countries like Italy and Spain. Now you're obviously under austerity measures. You're seeing higher generic utilization. As a result, in the tail of the tail, as we call it here, obviously those products which did not have much generic competition now get more. So it was about EUR100m in Q2. And I think, as Peter said, you can probably expect that to continue at more or less that same rate. But again, that's not really a surprise. That actually has always been bolted to our forecast.

Operator, we're going to take the last question, please.

Yes. The last question is from Philippe Lanone from Natixis. Sir, please go ahead.

Good afternoon. Thank you for taking my question. A quick one on the R&D and PCSK9 because Roche announced last week that they would de-emphasize their PCSK9 because of IP issues. Is there any reading to make on your development, whether on data or IP questions?

And maybe one question again on the tail business, which in the quarter has been raising two-thirds of the growth of the growth platforms. Chris, what would be your take on some of your competitors making a specific division of the mature businesses, and maybe to facilitate some kind of M&A. And could you talk about you sold some products, about the possibility of maybe divesting some of the European business?

All right. I think on Roche, on the PCSK9, I think they could -- I think we would argue they were just simply late to the game here. We certainly don't see any issues with our PCSK9 on IP or any other front. This is largely a race, at this point, with Amgen and ourselves. You've got a couple other companies, like Pfizer, who are coming in with a slightly different approach, who will come later in the game, but with a potentially different molecule. So no, we are absolutely bullish on our PCSK9.

I think one of the things that people might forget in all of this, because as you try to do your forecast, one of the biggest questions is, well, how many people really want to get injected for high cholesterol? And one of the most interesting things is that we obviously have a big experience with our diabetes population here. And in actual fact, if I look at the rate of recruitment that we've had and a lot of the patients studies that we have done, there is actually quite a high willingness on this front. So I actually think that this is going to be quite a significant product. We have to get through Phase III. But we'll have our first phase III results late in the third quarter.

Remember, this is also a group of patients -- there's a group of people walking around on the planet that have a genetic mutation that actually simulates this drug. And so I think we also have a reasonably high level of confidence in the safety and tolerability of the drug.

Just concerning the tail, this is kind of the holy grail of this industry. I've been looking for the answer to tail products for at least 15 years, that you can just get this thing off the books and have it stop being a drag on sales growth, and yet not be dilutive to our shareholders. Nobody has really found too many ways to do this. Actually, Sanofi had a specific division for this. It was called the Base business. And I have to say, I have not really seen much -- especially in Europe, I have never really seen much benefit, and I've tried it over the years, in just having more active management of the tail products. I personally think a milking strategy is the best way to gain cash.

Now there may be some other creative solutions where you try to create something that combines some of this stuff with other companies. And you try to deal with some of your manufacturing infrastructure and the like. But I'll tell you, there's a lot of complexity to that. You're talking about some older products, dossiers that would all have to be updated and everything else. So we clearly have an active approach to studying the tail products. But I have to say, again, as someone who has spent at least 15 years looking at this, there are no simple solutions to this. And just given the amount of cash in there, you want to be careful that you don't do anything to actually hurt shareholder value on that.

But we'll continue to look at it. I can assure you that all the investment behind it is cut. That actually is a trickier thing than you might imagine because people love these older products. But all the investment behind it is gone, so it's just almost a -- it's a run for cash business, at this point in time.

Okay. Thank you.

Chris, would say maybe just a couple of words before we close.

Yes. Look. There is no point in sugar coating this. This is a quarter where we have disappointed. I personally don't like disappointing. My team doesn't like disappointing. And I think the fundamentals of the business are robust. The business model we have is a proven model. It's not one quarter results. You guys have all been around. I've known a lot of you for years. You know as well as I do that fundamentals of a business don't change from one quarter to the next. And that is the case with Sanofi.

There is clearly some work to be done. There is work to be done in getting an organization mobilized around launching new products and growing again. Sanofi is a company that hasn't launched an awful lot of new products in the last 10 years. Some of those launch muscles need conditioning. And I think we've been able to attract some top talent, really, from other companies.

Being able to attract top talent is a sign also of the fundamentals of a company. It's certainly one I pay close attention to myself. People who join this Company join it because they see the business model, and it's one they like. They join the Company because they see it as one that's willing to do things differently and perhaps take a more radical approach than some other companies they've come from. So nothing out of this really has any impact on my confidence in the long-term view of the Company.

That having been said, I can tell you the first half -- because this new team, this new reinforced team that we have is really making sure that we're addressing absolutely every element of our operating aspects here, that we have some businesses that have to do better. Some of that will require the launch of new products. And as I say, I look at the Lyxumia launch. I personally believe that Lyxumia has a higher value than most people are ascribing. I would say, in general, most people are discounting significantly what Sanofi has in its R&D pipeline. And obviously, looking at our emerging markets business, our Animal Health business and fixing finally some of these manufacturing issues in vaccines are all top priorities and that's what we're going to get on with.

So we look forward to giving you an update in the third quarter. Thank you very much for listening and thank you for your questions.

Thank you, Chris. I think, given the success we've had also with the ADA conference call on U300, we decided to do another investor relations call at ECTRIMS in early October. And we will be issuing very shortly a save the date. The idea is to shed more light onto Aubagio and Lemtrada.

So with that, I will thank everybody for their participation and wish everybody a good day.

Ladies and gentlemen, this concludes the conference call. Thank you all for your participation. You may now disconnect.