Sanofi SA (SNY) 2013 Q3 法說會逐字稿

Ladies and gentlemen, welcome to the Sanofi 2013 third-quarter results conference call. I will now hand over to Mr. Sebastien Martel, Head of IR. Sir, please go ahead.

Thank you. Hello, everyone, and welcome to our Q3 results meeting.

Before we start, I'm obviously very pleased to let you know that with the recent launch of Sanofi IR, our mobile application for Sanofi financial communication, you can actually follow today's live audio webcast directly from your iPhone or iPad. The app is obviously available already for download on the app store. So that's it for the two-second commercial.

As always, I must draw your attention to the Safe Harbor statement. I must advise you that the information presented in this call contains forward-looking statements that involve known and unknown risks, uncertainties and other factors that may cause actual results to differ materially. And I'd like to ask you to refer to our Form 20-F on file with the SEC and also our document de reference for a description of some of these factors.

Our presentation today will be simply divided in two parts. First, we will start off with a review of key highlights for the quarter with our CEO, Chris Viehbacher. And then Jerome Contamine, our CFO, will then provide you details of our financial performance in Q3 2013. As usual, we will then open up the call to take questions.

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

Thank you, Sebastien. Does that mean, with the launch of this app, that I've just become chief app CEO? Hello, everybody. Welcome to our third-quarter earnings call.

Hopefully, this is the last call where we really talk about the patent cliff. If I turn to page 6 -- 5, sorry, what you can see is really the evolution of sales over the past five quarters. And as you can see, for the first time we have been able to significantly reduce the erosion of sales due to generic entry for some of the blockbusters that have historically driven Sanofi over the years.

The last one, of course, was Eloxatin that went in August of 2012. So, in a sense, if you're looking at Q3, you're really looking at two months where you've still got a patent cliff on the comparator period, and really it's from September 1 that we internally, at least, talk about new Sanofi emerging from the patent cliff.

And so, obviously, if we emerge from the patent cliff on September 1, my first question, well, what is it that happened in September? And we don't want to over-interpret or extrapolate results, but it was at least internally satisfying to see that we had sales growth in the month of September of 6.1%. Obviously, giving the monthly sales number is not something we would normally do, but it certainly was the first thing I looked at when we came out of that.

Now, why that is, of course, you see on the next slide, on page 6. And you can see on the green bars, for 2012, the impact of the generic erosion in 2012 and the same sales of those genericized products in 2013. I would remind you all that when I first started showing graphs like this, that instead of the EUR813m which you see in Q1 2012 -- we started at, I think, EUR2.2b. So we've come a long way, baby. We've gone down from EUR2.2b to EUR0.2b, on a quarterly basis, by the end of 2012.

And when you look at the blue circles, you can really see what the drag on the business has been because of this, even as we go through the year. We have been running now for a couple of years at a loss rate of something like EUR500m per quarter, just because of product sales losses.

And, of course, you're looking at sales, you're not even looking at the bottom line, because I would remind everybody, of course, that Plavix in the United States faced generic competition from May of 2012, but we didn't consolidate sales in our partnership with Bristol-Myers Squibb in the United States, so there's a bottom-line impact.

So this has been certainly a deep and concentrated patent cliff, but when you look over to the right end of that curve, you can see that there's not a lot of sales left out of those products.

So, in that sense, when you look at it by region on the next page, on page 7, you can actually see, for example, that the United States now has returned to sales growth for the full quarter, on Q3. In Europe we don't see that yet, but remember, generic erosion tends to occur slower and some of the generic expires occurred a little later. But even in Europe you can see that we've come up from a negative 13% in the last quarter of 2012 to 4.8% negative in Q3.

And again, I've often said to many of you and in one-on-ones that we actually return to growth by subtraction. The growth platforms continue their progress, and they just get diluted every quarter less and less by products going off patent.

So, now let's look at the growth platforms, and that's on page 8. And obviously, and we'll go through it a little bit, we've had some setbacks through the year, some internal, some external, but despite all those setbacks, I think you see the value of the diversified model. It means we can take some hits in animal health and in emerging markets and in vaccines, and still growth platforms grew by 5.5%, and those growth platforms now represent 75% of the Company.

Now, we can look at these on an individual basis. Emerging markets, at this point we decided to not to bother to separate out Brazil in all the press releases. Some of you have asked questions on the phone this morning. So to give you an idea, if we were to take Q3 and we ignore the effect of the Brazil generic sales, emerging markets would have grown at 5% in the quarter and 6% for the nine months year to date.

We'll cover a lot of these. Animal health, which we won't go into, I would expect for the rest of the year to continue on the rate of the 5% down for the rest of the year. That's probably where we're going to end up the year, largely driven by a poor seasonality in the spring and increased generic competition for Frontline, particularly in the US, somewhat in Europe, as well.

This is a product that's held on really pretty strongly for four years after its patent expiry but faced much more competition this year. Really, Merial's future now rests with the launch of new products, and in particular you'll see we've got NexGard coming on later on. I would point you to the other innovative products.

Now, of course, because we have Genzyme separated out, you don't have the MS products in here, but I think you're going to see that line grow significantly over time. It's a pretty modest line. These are the products that have really been launched since 2009.

So you can see, at EUR191m, our R&D hasn't been particularly productive up until now. It's a pretty pathetically low number. But equally, I think that's a number you're going to increasingly see grow.

Consumer healthcare grew at 9.8%, a pretty robust number. A lot of the distortions in the trade channels in China for the consumer business have reversed, and we saw double-digit growth of our consumer health business in China. We also launched the Rolaids in the United States.

For those of you who don't know, don't live in the United States, certainly it's been an iconic brand in acid relief. It was a product by Johnson & Johnson that got disrupted by Johnson & Johnson's manufacturing difficulties, and we acquired that brand last year. So this is a relaunch of that product.

We've also had the approval of Nasacort to go OTC in the United States, so this will be the first inhaled corticosteroid in that class. I think, given the success we've had in switching Allegra, that we'll be able to use a number of those skills to be able to successfully launch Nasacort OTC, as well.

Moving to slide 9, a little deeper dive into emerging markets, you can see still that emerging markets are still 31.5% of our sales. What you're also seeing is the US starting to grow more strongly. As I look out to 2015 and beyond, those are going to be the two biggest chunks of our pie chart here.

You're going to see Western Europe probably stay slightly declining to flat over the next couple of years, with the US more strongly growing and therefore taking a greater proportion of sales, and the same for emerging markets. You break that out across the piece, you can see this by region.

I would say -- people ask, now we're seeing slower GDP growth rates in emerging markets, is anything changing? My personal view is that what you've really got to look at is the conversion rate of the middle classes, which continues often to be very robust, despite variations in GDP growth.

The other is that I think where we've just been trying to hang on and stay with the growth going up, you're starting to see some areas become less attractive as they get bigger, as they get more mature, and therefore I think we're going to be a lot more selective in our investment. If you take a country like China, as an example, you've got a Shanghai and a Beijing starting to look like OECD countries in terms of their income levels and spending on healthcare, whereas a lot of tier-two, tier-three cities offer significant growth for us.

Moving to vaccines, vaccines was a delay on supply in Q3. We had expected to begin shipping our pediatric vaccines. This is the polio, pertussis, Hib vaccine series that includes particularly Pentacel, Pentaxim and Imovax.

This was largely a technical issue that delayed release of lots for three months, so we ended up having the costs for three months but no sales of those particular products, and that's why you see the decrease of 17%. Those technical issues, which do not have any impact on product quality, have been resolved. We have begun shipping again as of October 15, so that was a one-off factor in the quarter.

The flu vaccines you see down 3.9%; this is really the usual issue we have with flu vaccines. In some years, it's stronger in Q3 and less in Q4. This year, it's the reverse. There will be a lot more shipments in Q4.

What I can say is that I think flu vaccines should have a record year for us. We're extremely happy particularly with the uptake of our High-Dose Flu. You've seen studies published that demonstrate 50% higher efficacy than the normal flu, and this is particularly important for more senior patients. We have the Quadrivalent approved, but that won't really be a market until next year, given that the recommendations won't come in time for this flu season, and we're awaiting approval in Europe at this time.

So the essential message, really, for vaccines is from a market point of view we can sell absolutely everything we can make. We were just inhibited on our ability to produce in that quarter and those issues have now been resolved.

So, turning to slide 11, and I tried to recap where we see things going in the quarter, here are the things that we think are doing extremely well.

Diabetes continues to go along extremely strongly. You've seen the 20% growth in the third quarter. That's the 11th consecutive quarter of double-digit growth.

We also have been able to prepare for the future of our diabetes franchise in publishing very positive data earlier this year for EDITION I and II. We would expect now to be able to publish soon EDITION III and IV, which are two studies, one in type 1 and the other one in sort of a lower-weight, earlier-stage patient, and we expect to file in both the US and the EU in the first half of 2014.

On Genzyme, we saw not only the approval of Aubagio and Lemtrada in the EU, Lemtrada actually got a first-line indication, which I don't think anybody was expecting externally. And this really is arising out of a growing feeling in the neurology community that one needs to strike earlier and more aggressively if you have an efficacious drug, before a lot of the CNS damage is done.

We have an Ad Com coming up on November 13. We also expect to file -- sorry, we've also had the acceptance of the file for Cerdelga, which is the brand name for eliglustat, so that has been accepted for review by the EMA. We've talked about the launch of Rolaids and recovery in China and Nasacort in CHC, and the flu vaccine business.

And on our PCSK9, if we can go to slide 12, we published our first Phase III study, and this study was against ezetimibe, and that is a -- we've not only demonstrated three times the efficacy. This is a study where we were treating to goal, so we wanted to get people to 70, which is the target really for at-risk patients.

And I think what we've seen is that actually most patients remained on the initial low dose of 75 milligrams to treat to goal in this study, suggesting a very strong potency of this drug. We had very few injection site reactions, and we used the 1 milliliter subcutaneous auto-injector for both the two-weekly dosing of 75 milligram or the 150 milligram.

Now, areas where we need to really continue to focus to fully get back on track you see on page 13. So vaccines, we can really put a checkmark beside the first one, because we've actually started the shipment of Pentacel, Adacel and Daptacel, and we would see progressive US supply improvement in Q4.

On animal health, the Frontline competition will continue. I think the new head of our business, Carsten Hellmann, is already in there, looking at how we can really, I think, do a better job of defending Frontline against the generics. But the real relief comes when we are able to launch NexGard in time for the next flea and tick season.

We had the situation in China. This is in pharma. You've seen this with everybody else's results, largely as a result of some of the press around government investigations. You've probably seen IMS data that the whole prescription market slowed down, partly in July and certainly in August.

But I think we're seeing, certainly within Sanofi, promotional activities and sales progressively coming back to normal. I spent a week in China in the middle of October and saw firsthand the situation of the marketplace, and I'm pretty confident that things will get back to normal on a progressive basis.

Brazil generics issue, which was a story out of the second quarter, we took the reserve for the excess inventory. Obviously, the inventory that stayed in the channel of distribution had to get burned off before we started getting fresh orders back in, and that happened in the middle of August.

What I can tell you is that the underlying Medley brand continues to be strong and the underlying [sales out] continue to be strong. This has only been a trade channel issue. A recent external survey of brands in Brazil put Medley amongst the top three brands in Brazil, and this was looking across any segment, cars, cosmetics, anything you want to mention, and this was done in September.

So the underlying value of the Medley franchise continues to be intact. We've now got this inventory situation cleaned up, and we're starting to see a return to growth.

Now, slide 14, I hardly ever comment on exchange rates, because we report everything at constant exchange rates. The only thing I'll say here is that in all my years of seeing results reported this one is a strange one in terms of currency movement.

Two years ago, there were some companies saying they wouldn't even put any money in European banks. Now, two years later, we find ourselves with one of the world's strongest currencies. Who would have thought?

And so, as a result, pretty much everybody's currency is down against the euro, whether it be the dollar, particularly the yen and emerging markets currencies. So, now, the good news is that you wait long enough and the exchange rates tend to reverse, but it has been a big impact, EUR0.17 per share in the quarter.

So when we look at business earnings per share on slide 15, there again you're seeing, much like you saw in sales, a significant reduction in the erosion of the generics. So we were down 29% at constant exchange rates in Q1, 18.5% in Q2, 9% in Q3. The 9% really would have been less, but most of that is a result of the vaccine disruption of supply, and that was really what led to the minus 9% in Q3.

So what does that look like for 2013? Well, if we take into account the expected return to growth in Q4, but also the impact of the extended vaccine shortage that we faced in Q3 that I already described, the outlook now is going to be at the lower end of the previous guidance range. So 2013 business earnings per share is expected to be around 10% lower than 2012 at constant exchange rates and, as always, barring major unforeseen adverse events.

And, with that, I'll turn it over to my colleague, Jerome.

Thank you, Chris. Good morning, good afternoon, everybody. So I'm now on page 18, so some more detail on the P&L, so I'll start with the sales. You've seen a large part of this graph already; maybe a few other comments.

The first one is that, as Chris has mentioned, the negative impact of the key products which have been genericized last year has now been reduced to EUR191m. There will be still a bit of a gap as a result of Aprovel in Q4, but pretty limited, in the range of EUR100m.

The column other is the impact of the tail business in Europe, as well as generic competition in Japan. And this is starting also to be somewhat smaller, as compared to the previous quarter, as we are heading into a situation where we are less faced with the erosion of our sales of the tail business.

And Brazil generics, this is the last quarter you will see it. As a matter of fact, as Chris mentioned, we renewed sales mid-August, so we just benefited from 1.5 months of sales during the quarter. But now that we are back to a full supply and basically back to normal, we expect this to be reestablished, while from the fourth quarter we should see at least stable sales and even probably slightly higher sales than we had last year. And definitely the sales in the fourth quarter will be at least a double of the ones we did for the third quarter, as in the third quarter it was only for 1.5 months.

So growth platforms, I would say by difference, or by subtraction, as Chris would say, have been growing by 6.5% over the quarter. And, of course, we see the importance of the FX impact, and here you see the importance of the Japanese yen, which is on its own impacting by EUR180m our sales over the quarter, while the US dollar has been weaker again versus the euro for reasons Chris flagged it was also impacted by exactly the same amount.

And then you have the impact of the other, more emerging markets for, I would say, also the Australian dollar, which is not really emerging but for the rest of the world region.

So, all in all, we have this slight increase of sales of plus 0.6%, but with a turning point in September, as we said in September, of 6.1%.

So, slide 19. So the P&L shows of course the impact of these various elements, as well as the end of the patent cliff.

So if I look at line other revenues, now this line is basically stable, of course much smaller than what you used to have. I just remind you that we had a last impact of the settlement of a litigation we had with BMS in connection with the Plavix partnership in the third quarter for $80m, which impacted positively last year this line other revenues.

I will comment later on on the cost of sales, as well as the R&D, on SG&A, so maybe a few words on the other lines. Well, first of all, the other current operating income and expense is basically nothing specific to mention for 2013. In 2012 we had the reversal of an environmental provision which helped somewhat this line.

On the contrary, the share of profit of associates is higher in this quarter compared to the same quarter last year. So here there is some artifacts which I'd like maybe to describe more precisely.

As you may remember, we have two joint ventures with Merck in the vaccine area. One is the commercial joint venture for Europe, which is SPMSD, and another one is a research joint venture, which in particular is developing the PR51.

Up to now -- first of all, up to now, we were accounting the share of loss just researched for this second joint venture as a loss coming from associates. Our auditors asked us to reclassify, so we have reclassified, so in fact this cost is now R&D, or vaccine R&D, when then of course we don't have the impact anymore on the loss of associates.

So basically it's pretty neutral on the profit, but it's a reallocation, and this reclass which happened in the third quarter, sorry, or the three first quarters, nine months of the year has been EUR14m.

And the second thing, which maybe some of you remember, is that in the third quarter last year, as we were on the verge to a supply and an approval for Hexyon, our hexavalent for Europe, we had re-invoiced the former R&D expense we had to the joint venture, which here again had a positive impact on our R&D line last year by EUR44m, and then half of it basically went back into the cost of the joint venture.

So there is some here, again, some effects last year, which explains why we have a specifically high level of profit from associates in connection with our vaccine joint venture and a much lower last year conversely. And I'd like also to add that everything we've included, if I put these effects aside, the performance of our joint venture in Europe has improved very significantly.

So now I move to page 20. A few words on the cost of sales. So we have a cost-of-sales to sales ratio which is a bit on the high side, obviously, with 34.1%, which is a bit more than we expected, and here I think that deserves some explanation.

So, first of all, when in vaccines in particular you don't sell, you continue to incur the costs. This is the rule in particular in biological products. So this is really impacting the cost-of-sales to sales ratio from our vaccine business in the quarter. And on top of that, because of lower sales of Frontline, the mix of business is somewhat less favorable in Merial.

So if I put all that together, this impacts negatively our cost-of-sales to sales ratio by 0.9%.

The currency impact, when we are producing more in hard currencies like Europe and selling more in other currencies, impacting by 0.5 this quarter. At the same time, the shift to the new portfolio and the loss of sales from the genericized products is reducing impact and fading away. So it's still 0.5% for this quarter, but it is going to continue to decrease. And when it comes to the Brazil generic impact, it's basically very small for this quarter. It was mainly visible in the second quarter.

R&D, well, I already commented on the reclassification for the vaccine R&D, so we'll leave that aside. The R&D expenses have increased by 2.3%. This is in fact reflecting a continuous reduction on cost control, our internal costs, but then some reinvestment into the Phase III trials.

And as a matter of fact, we still have the Phase III trial ongoing for dengue. We started on C. Diff during the quarter. Alirocumab, clearly, we have a large set of Phase III studies ongoing, as you know, as well as on U300, the IL-6 and the IL-4.

So, all in all, we are exactly within our guideline, which is to keep R&D expense somewhere in the range of somewhat below EUR5b, but with a shift towards more expenses associated to Phase III studies.

SG&A, well, here again we managed to keep SG&A to sales ratio on the low end of the spectrum among the pharma companies. During this quarter, the ratio was 23.9% and the overall SG&A expenses decreased slightly, by 0.8% on a constant exchange rate basis.

And this we achieved despite increased investment in Genzyme's Multiple Sclerosis, to sustain and support the launch of Aubagio in Europe and prepare the launch of Lemtrada, and also some sustained investment in diabetes. So it shows also that we are continuing to reallocate our investments very carefully and maintaining the SG&A ratio, or expenses, I would say, at a good level.

23, I can just confirm to you the effective tax rate for the year, which we put at 24% at the second quarter. So this is a result of the optimization of our tax rate, as well as the outcome of some positive -- or positive, let's say, outcome of some tax audits which occurred both in Q2 and in Q3. So I confirm the average tax rate for the year at 24%, which leads to a business net income at EUR1.789b and an earnings per share at EUR1.35.

EUR1.35 is of course impacted by the negative FX impact of EUR0.17. So if we were -- of course, there's an if, but if we had been at the same exchange rate as last year, we would have posted earnings per share of EUR1.52.

Cash flow. The first two quarters, if you remember, have seen a significant decrease of the free cash flow as a result of the lack of revenues, in particular from Plavix. Now, we are stabilizing. So the free cash flow for the third quarter has been exactly stable versus last year, which shows that we are here again behind the cliff.

The stabilization of free cash flow is also a reasonable satisfaction, as long as we still have some decline of sales -- of profits, sorry, and as long as at the same time, because of the increase of sales in September, we have outstanding receivables, which have been somewhat increasing in connection with that in September. So, all in all, we've been able to maintain a good control of the working capital and to really maximize our cash flow and manage to stabilize free cash flow while the profit has been still declining over the quarter.

So, all in all, this leads to an overall free cash flow for the first nine months of EUR4.5b. The CapEx has been kept low, at EUR865m, which is slightly below the level of last year.

We've continued to do an opportunistic share repurchase, so we have bought back shares for a total amount of EUR500m during the quarter, leading to a total acquisition of shares of EUR1.4b. It is firstly to compensate for this dilution arising from the exercise of stock options, which generated about EUR800m of proceeds over the first nine months. Our net debt now at the end of September has been EUR8.8b.

So if I just summarize the outcome for this quarter, I think that the first outcome is that we are really at the goal of Sanofi coming back to growth. So in fact the first outcome, in fact, is that we expect the growth profile of Sanofi to emerge as from Q4. So Q3, once again, has marked an inflection point.

The growth platforms account now for close to 75% of our sales, up 5.5%, despite [a few cuts] which hit over this year. This demonstrates the value of Sanofi's integrated business model.

Now, we have the satisfaction to have several high-potential R&D projects progressing in Q3. Approval of Aubagio and Lemtrada in MS in Europe, the approval in the US of NexGard for flea and ticks of dogs, animal health, the positive first Phase III results for alirocumab, Cerdelga filing accepted for review by EMA for Gaucher disease and the approval of Nasacort for OTC use in the US.

So, with that, I think that's all, and then I will turn back maybe to Sebastien to open for the Q&A.

Thank you, Jerome. We're indeed now ready to take up questions. I know that the participation in today's call is very high, so again, I'm going to ask participants to ask one or two questions at a time to allow as many people as possible to participate. Operator?

(Operator Instructions). Richard Vosser, JPMorgan.

Hi. Thanks for taking my questions. Two, please. The first, just on the development we can expect in pediatric vaccines in the US, obviously your vaccines have been replaced by others so how gradual of a recovery should we expect for the pediatric vaccines?

And then second question, just on the animal health business. Of course, with Frontline declining, your margins have come under pressure, so the 30% or so level that we've seen is now more around 26%. So how should we think of this with NexGard coming through next year? Presumably we should think of a 26% margin going forward.

And just on Frontline, of course you're suggesting that the decline will continue at around probably about 25% going forward for Frontline. That suggests to me that NexGard has to be EUR100m or so next year to offset that, maybe slightly less than that. So just if you could give us some idea of success of previous launches in the animal health space, to give us some help there, that would be very useful. Thanks very much.

Thanks, Richard. So, on pediatric, we started shipping on October 15, but as you rightly point out, there are other competitors out there, which is why, actually, you never recover the quarter that we lost. You really just get back in there, in the marketplace. So I think you're going to see a progressive return in the fourth quarter, with full supply really being available in the first quarter of 2014.

On animal health, it is certainly true that I think the margin on the business will come down. Frontline is the only billion dollar brand in the entire animal health space, and obviously carries with it pharma-like margins. And so, as you decline, you do get a mix variance. And so I think the level of margins that you're looking at are probably more in line with what's going to go on forward.

I'm not so sure I'd agree that we would expect the same level of decrease. There's two elements. One is generic competition, and that's not necessarily going to go away. I do think that on that front we can do a better job of defending it, and I think we're already seeing some of the benefit of that.

It was also a difficult season, at least year to date. The whole -- this is a market that used to grow at double-digit rates and it actually declined this year. So you've had a massive swing on the growth rate in the marketplace, largely because of the weather conditions.

So I think next year we'll see -- we're seeing actually even a better fall, so I think that may not be as dramatic next year. It is true that NexGard has to do well next year. It's very difficult to look at analogs because -- and let's face it, there aren't that many launches that have ever been done.

I think our view is that this should be a pretty successful product. It won't necessarily be the size of Frontline, just because Frontline will still be there. But I think having a chewable -- having been a dog owner, I can tell you that putting the drops on the back of the neck, you're not supposed to touch the animal then for a while, and you've got kids and everything else. Just being able to toss your dog a chewable tablet is actually a whole lot easier to use.

So I think -- and this will be the only product in oral form that is approved for both flea and tick. So I think, actually, we'll be able to come back with a very strong offering in that space, but I think, as you pointed out, we're probably not going to be quite up at the levels of profitability that we had before. But I'm not so sure that at this stage we would want to accept the levels of decline in Frontline that you were suggesting.

Thanks.

Graham Parry, Bank of America Merrill Lynch.

Thanks. First one is on cost of goods. Just looking into 2014 and beyond, you obviously can't offset the FX hit, but should we anticipate that you would see, into 2014, the bulk of the hit that you've seen on COGS this year rolling off on the vaccine and animal health hit?

Also, could you remind us of the EUR2b cost savings program that you announced out to 2015, how much of that was in COGS, how much of that has been realized and how much is yet to be realized?

Secondly, on the mid-term guidance that you gave out to 2015 of mid-single-digit top-line growth, 12 to 15, and faster EPS growth, do you think that still applies? I know you'd said before that you felt that you could make it but there was no buffer. Just wanting to hear whether you still believe that's the case.

And then, thirdly and finally, on your PCSK-9, just wondered if you had any comments related to Pfizer's claims yesterday that its outcomes trial on its new PCSK-9 that it started as part of its Phase III program are differentiated versus yours and Amgen's because they investigate a population of patients not at goal, despite being on statin, and they look at LDL reduction levels below 70 mgs per deciliter. Thanks.

Okay. Thanks, Graham. Jerome, do you want to take the COGS question?

Yes. So, Graham, so if you remember, we expected to stabilize and even slightly improve the COGS to sales ratio this year. This is not the case. The reasons are too much to mention. We have not yet gone through the business review, so I don't have all the details.

And it may take a bit of time to overcome the impact on the vaccine part because as long as we have resumed production, and this production was forced into inventory, before getting into production, that as long as we are not back to full supply we have some costs incurred in connection with the shortage of supply which we probably saw, which will somewhat impact the 2014 COGS ratio. But on the other hand, we still are continuing to cut costs on the rest of our industrial organization. As an example, the gross margin of Lantus has improved significantly this year, and some other products as well.

The overall cost savings, which is a EUR2b plan, so where do we stand? If you remember, we had saved EUR1.2b at the end of 2012. We said that for 2013 we would continue to save with an effect of EUR500m, but we would reinvest a large part of it. As a matter of fact, we have saved a bit more, and I don't have yet the full figure for the year, but I think the outcome will be somewhat better.

Now, if I go into 2014 and 2015, the bulk of what remains to be saved out of this plan is precisely on industrial costs. So today I can tell you that we will, A, beat the EUR2b savings that we aimed to do, and that, B, a large part of the further savings to come in 2014 and 2015 are going to come from industrial savings.

So I don't give you yet maybe a full figure. This will be more for the full-year results, when we have gone through the detail of our budget, but we know already that this will take place as a result of actions that we have taken in the past year.

Now it remains that the ratio is highly sensitive to an event. And this has been truly the case on vaccines, so we should always be aware of that, and this could be each part of the improvements that we are implementing. But I think that as long as things get back to normal, we should see an improvement of the COGS to sales ratio next year.

Yes. Graham, I'll just add I think COGS is probably still one of our biggest cost savings opportunities. Obviously, a lot has been done. We've acquired a number of businesses, and now we have a much higher ratio of businesses in places like generics and over the counter medicines, more in emerging markets.

And in addition to just site closures, there's an awful lot of work that's been done on efficiency, lean manufacturing, for example, but there's still plenty to be done. Again, when you run a pharma company and you have a couple of products like Plavix in there, it tends to hide a number of other things.

And so there's an awful lot of work going on, and that's one of the biggest areas of focus for us on COGS, because really, when we look forward, we actually see more investment now, slowly in R&D and in product launches, as the late-stage pipeline comes to market. So I don't think we want to necessarily be cutting costs in that area, but COGS offers an opportunity.

On mid-term guidance, I can only say nothing really has changed at this point. We'll give an update at the year-end, as we always do.

On PCSK-9, yes, I read the comments overnight from Pfizer. I'm not so sure I would agree with the comments. When I've gone back to our own people, I think all the populations that Pfizer is talking about are actually covered in ours. There is a primary prevention study, which our belief would be this will be in a familial hypo-cholesterolemia population, one where we actually have those patients in there as well. We have a number of high-risk patients.

I think between Amgen -- all the studies that Amgen is doing, that Sanofi is doing, I'd be surprised if there's too many holes in that, between the two. The interesting thing I'd think you're going to find is that with Pfizer climbing in, you're probably going to have about 60,000 patients on PCSK-9. And if you go back to the statin class, I think a lot of those studies really drove quite a big market.

So one never underestimates Pfizer with their experience out of Lipitor; that's for sure. But equally, for us the competitor is Amgen because it is we and Amgen who are ahead. But I think in general, the more studies that are out there will demonstrate the value and importance of this class of medicine and probably make this a more interesting class for all of the participants.

Thank you.

Next question.

Mark Clark, Deutsche Bank.

Yes. Good afternoon, everyone. Sorry, I had mute on. Two things. Firstly, on rare diseases, I wonder if you could just talk us through the pricing environment. I noticed the comment about austerity measures and Cerezyme in the statement, and my understanding had been that there's a small amount of austerity impact in Europe in the class and that generally speaking, for example in the US, there's a lot of -- there's still freedom on pricing, to a fair degree.

And second question is on structural change in emerging markets. Given the change in leadership in LatAm and the slowdown in China, do you think there is a case for reversing some of the huge infrastructure expansion that both yourselves and peers have been indulging in, in recent years, with huge field forces, etc.? Thank you.

The pricing in rare diseases, I would still say we're seeing little bits of pricing pressure in places like Australia and a little bit of pressure in EU, but I think it's nothing of that significance. You've seen still double-digit growth of our business. We've kind of moved from the catch up population, so you've got more of a true underlying growth in rare diseases. So nothing that I would call out at this point on that.

On the structural changes in emerging markets, I don't think so. Our Brazilian pharma business continues to grow at double digits. I think the opportunity in China, the issue in China I think is more temporary. I think you're going to see -- and I haven't seen anybody predict anything less. I think you're going to still see extremely strong growth in the Chinese market. I think actually you will probably see the reverse.

I think we'll certainly continue to invest and expand into China. We have 4,000 sales representatives in China. That's about the number of sales reps we have in the United States. And considering that the population is so much greater and the number of physicians so much greater, there are new hospitals going up every day. So I think we'll make sure we're not extending ahead of the opportunity, and we'll certainly see what comes out of the current situation.

I think what you will see us doing -- this is what I was saying earlier, that one of the issues of emerging markets has been very little granularity of detail, and it affects not only pharma but consumer, animal health. If you talk about the vaccines business, for example, pediatric vaccines, what you really want to start to do now is, since we operate in private markets, so far you've just had growth.

But now what you'd really like to do is where do you find tier one mothers? These are mothers who have enough disposable income to actually pay for private vaccines. So how do you actually find those? Up till now, it's just been getting out there and getting market presence.

When you start looking, even in China, you start to see variable rates of growth. Trying to characterize China's growth by one GDP figure really doesn't reflect what you see on the ground. Just as you do in the United States, you see differing areas of growth and spending on healthcare across China.

So, whereas I would have said we would have just put more feet on the ground and got out there, now I think we can start to be a little bit more thoughtful about it, a little bit more targeted. So you may not see the same rate of investment increase, but speaking for Sanofi I don't see us pulling back. That's for sure. And more likelihood is we'll continue to put things in.

But remember, the cost of this is nowhere near what it is in the United States. If I just take Europe and US and look at average personnel cost, just like that, you're over EUR100,000 all in, in US/Europe, and you're EUR10,000 to EUR15,000 in emerging markets. So you can afford still to expand. And it's pretty much all field force, so you're not really putting an awful lot of capital into most markets.

But even markets like Algeria, I was in Algeria a couple of weeks ago and our business is growing at very strong double digits. We do EUR250m of sales there. The market is still growing. It's a market -- a lot of emerging markets still are not spending even 5% of GDP on healthcare. Even 5% is half the OECD average.

So it's going to be some ups and downs. You're going to have some situations like you've got in the Middle East, where you've got some of the social unrest having impact on supply chains here and there. You're going to have some currency movements. You'll have some governments, as they start to spend more money on healthcare, there's going to be some issues of pricing, so you're going to have on a particular year potentially a price movement in a couple of key countries.

But generally, I think you're going to still see a volume increase. If you went back to the early 1990s, I can remember when managed care was coming in. We said, "Oh, the end of the market is here," because we were going to have to start paying rebates to men's care organizations. The 1990s ended up being one of the best years ever in this industry, because more and more people got coverage and the volume started to offset that.

And I think that's the phenomenon that we see over the next 10 years in emerging markets. It won't be necessarily smooth or as easily predictable as our Western business. But every time I go and spend a lot of time and detail and look at -- you just have to look at the number of hospitals being built. Every time a hospital is being built, it isn't replacing an old one. There was nothing there before.

As you've got people moving into cities, they generally move into cities because they're pursuing higher paying jobs. And when you're in the city, you actually have access to care, whereas if you're living in rural areas you don't have access to care, which is why the government is having to spend so much in hospitals.

So I think it's still a significant opportunity, and it's probably one that requires deeper analysis. There is no question that here and there there are some pockets of slowdown, but I think there's still growth to be found. We just probably have to look a little harder for it.

Thank you.

Mark, just an additional precision -- Sebastien speaking -- on the rare disease side of things. I'm sure you saw the Fabrazyme numbers, sales being up almost 20%. The market share in value terms, actually, of Fabrazyme on a global basis is now 54%, so we are back to a leadership position on Fabry disease. On Cerezyme, sales were up almost 9% in the quarter, which translates to a market share, globally, of 71%, so very well-established leadership position here.

The comment you referred to about EU austerity measures was essentially applying only to Italy, where basically during the quarter we had a situation in Italy where local authorities which were looking for additional savings started to make a clawback clause applicable to the rare disease portfolio and Cerezyme in particular, and we took that charge in Q3 for the full year. So, starting Q4, we will accrue as time passes, and obviously the impact will be much less.

Okay. Super. Thank you.

Tim Anderson, Sanford Bernstein.

Thank you. A couple of questions. You called out that the patent cliff has largely moved into the background, but as I look ahead naturally there will be some future patent expirations, and it's not clear to me when some of these products might go off patent. So I'm hoping you can address five different products, Lovenox in Europe, Renagel in the US, and then the Genzyme products, Fabrazyme, Cerezyme and Myozyme, either US or Europe.

And then the second question is there's been continued speculation about L'Oreal considering disposing its stake in Sanofi, and I'm wondering if it's ever a possibility that you would consider being a buyer of that stake, if you think you're at an inflection point in terms of your growth profile. And while the valuation is low, it seems like this could fit that definition of being an opportunistic opportunity that you've sometimes referenced in the past regarding share buybacks.

On the patent expiries, so Lovenox, there is no patent in Europe. There are some guidelines about biosimilars, but there isn't one really on the horizon. Remember, the price of Lovenox is already pretty low in Europe. You'd have to do some spending. Biosimilars are not cheap to develop. So I wouldn't exclude it, but we don't really see anything.

On the renal care business in the US, there was an agreement, actually, with a generic company that went to, I think it was the end of this year, that would impact. But we haven't seen anything as to the actual approval of a --

September 2014.

Sorry, September 2014 was the deal. Sorry. So what happens beyond that, we don't know. But there is that patent expiry.

On the Fabrazyme, Cerezyme, Myozyme, these are all biologics. There has been a biosimilar under development in South Korea. It has been around for a number of years. I don't think you're going to really see much biosimilar activity in most of the key markets. If there is one, it may start to try to eat into some of the sales in emerging markets.

But again, these are businesses where you have to spend a huge amount of money to develop them. There are only a few patients here, there and everywhere. And if you actually have to go around and sell this -- if you have a country where there is a tender, and we do have some of that -- for instance, Brazil runs a tender -- you might be able to gain in there. But I don't think we really particularly see anything of significant concern on the biosimilars.

The marketing plan is really just to continue to find patients. We know that there are a whole lot more patients out there, and Genzyme is actually becoming quite adept at actually finding them. And so I think, even if there is one at some point one day, I don't think a patent expiry is what really triggers it because I don't think they're really in a US/European situation anyway. So I'm not too concerned about that.

On L'Oreal, this is all conditional on what Nestle does, and the Chairman of Nestle said all options are on the table. That of course leads to speculation of what does L'Oreal do. And that's the second conditionality. Does L'Oreal buy back that stock and do they need to sell our stock? Nothing is going to happen anyway until the shareholder agreement expires in 2014 in, I think it's April.

I think we've already said if all that occurs, then that would be something that we would clearly look at. But there could well be other options for the stake. Who knows? But it's obvious that we would want to make sure that we're protecting Sanofi shareholder interests in that.

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

Michael Leuchten, Barclays.

Thank you. Two questions, please. There were 10 discontinuations in Phase I and II announced during the quarter and in your press release. Is that a natural conclusion of these programs, or have you gone through a reprioritization of the pipeline?

And then a quick question for Jerome. I notice there's a comment in your press release regarding some net debt and exceptional funding for pension plans in the US to the tune of $305m. Just wondering -- sorry, EUR305m. Just wondering what that was and what that means for your pension liabilities. Thank you.

So Phase -- not really. I think we're going to have a very clear policy of kill early. This is not something our -- this is something our industry likes to talk about but actually doesn't end up doing enough of, and so we'd rather kill them in an earlier stage. I have to say none of those projects were of any particular significance to us. So, I've actually even heard of a couple of them. So I'm not so sure that that has any particular reflection.

The one thing I would say is that when you look at our research pipeline, we essentially inherited a situation where -- one of the things that really stunned me about the research and development situation when I came to Sanofi was that we had virtually nothing in Phase I. I've seen poor pipelines, where you've got nothing in Phase III or Phase II, but the bar has not typically been high in this industry to get into Phase I, but we actually had nothing in Phase I.

So there's still some assets around that got -- that managed to get into Phase I and Phase II coming out of that time. Some of the more early-stage business development and we were a company that didn't do much business development so some of the early stuff wasn't probably as robust as it should have been.

But I think the projects that we're doing now in research for the last two years is really overhauled research. So I think it's just going to take some time for that to get into Phase I, Phase II. But quite honestly, I'm feeling pretty relaxed because if I look at our Phase III pipeline, there's an awful lot of really good stuff in there, whether it's the U300, whether it's the Dengue vaccine, whether it's the Lyxumia rolling out. We've got Aubagio and Lemtrada rolling out. The IL4/IL 13 looks particularly good; PCSK-9, IL-6.

We're going into Phase IIb with the IL4/IL 13. This is a drug that showed remarkable benefit in severe asthma and in atopic dermatitis. If you are operating in two autoimmune diseases with those kinds of results, there is probably something underlying that that would allow you to go into a number of other indications. So we have, I think, another list of 14 indications that we're going to consider that molecule for.

So I think, in any case, we've got a pretty robust -- we have the C. difficile vaccine in Phase III. So there is actually quite an awful lot on that pipe. And the interesting thing is we're actually still spending less money on R&D than we did five years ago, with the exception that we actually have all of those assets in Phase III.

So there's been a massive shifting of funds from essentially people and infrastructure costs to project costs and development, to the point where I'd say it is actually -- I'm not sure how we're actually going to get along with doing that. We're for the first time actually struggling to fund everything we have in development. So that's a luxury problem that I certainly haven't had in a long, long time, so I'm actually feeling very good about the whole R&D situation.

But don't be surprised if you see a lot of this stuff getting killed. We have Gary Nabel, who is our Chief Science Officer. Gary's job is to really make sure that we have the absolute top quality of science, and if it ain't good it's going to get killed early. He's not got the line, so he's got an objectivity. And as I say, this is something that the industry hasn't done enough of. And I'd rather kill it then than kill it in Phase III, to be honest, before we spend a lot of money on it.

Jerome, do you want to take on the pension question that Michael had?

Yes, Michael. In fact, we had the opportunity to fund beyond normal our pension fund in the US, this took place in Q2, in fact, this took place as of April 1 this year. And basically, the level of funding of our pensions in US was before this funding somewhere around 70%, and we've gone through this funding up to 85%.

Why did we do this funding at this time? There were two reasons. The first one is a low interest rate. You remember, we raised $1b in April this year, at a rate of 1.25%. And second, that there was an opportunity, as long as there wouldn't be a penalty for our Company underfunding their pensions in the US, which would be the first to be implemented. On the contrary, there an incentive to do that, if you could do that in the right timing.

So now the level of funding of our pensions in the US is somewhere between 85% and 90%. And of course, I just mentioned that because it had an impact on the cash flow in the year because of this pension fund.

Thank you.

Okay. Thanks a lot, Jerome. So we're actually now going to close the call. Just before doing that, I'd like to ask you to put a save the date in your calendars for February 6, 2014. This is when we will report full-year results.

With that, on behalf of management, I'd like to thank you for your participation.

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