Sanofi SA (SNY) 2014 Q3 法說會逐字稿

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

Thank you. Hello, everyone, and welcome to our Q3 conference call. As always, the slides to this call are available on the investors page of our website.

Maybe, before we begin, as you can see on slide 2, I'd like to remind you that 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. I refer you to our Form 20-F documents on file with the SEC, and also our document de reference for a description of these risk factors.

As you can see on slide 3, for today's call we have with us Chris Viehbacher, our Chief Executive Officer; Jerome Contamine, our Executive VP and Chief Financial Officer. First, Chris will discuss the highlights of the third quarter and first nine months, and then Jerome will review our financial performance during the period. After that, Chris will return and make concluding comments; then we'll take your questions. Peter Guenter, Executive VP, Global Commercial Operations, is also with us, and he will join for the Q&A session.

I will now turn the call over to Chris.

Thank you, Sebastien.

So, good set of results here. Net sales up 5.1% at constant exchange rate, which has led to earnings per share -- business earnings per share up 10.3% at CER. And as you have seen earlier in this year, we've put an awful lot of emphasis on cash management and so we actually see free cash flow up 15.8% in the nine months.

The growth platforms, which when we started were about 38% of our sales, have now grown to 78% of our sales, and those were all up at double digit, collectively, at 10%. And obviously -- and we'll say more about the diabetes market later.

Importantly, vaccines are back to growth, and animal health doing well. And we've got some very good progress, and I'll come back on that, on what we are seeing in R&D.

So if I go to the next slide, you can see that one of the benefits of the quarter has been that the foreign exchange impact has gotten less. Obviously, there's been a strengthening of the dollar versus the euro. And since 25% of our sales are done in the euro, 75% obviously foreign exchange matters a lot to us, but we are not seeing the same erosion as we've seen in the past.

But you can see again very good growth on top and bottom line, and that's really been driven, if you look at slide 7, by the growth platforms. And when we set these growth platforms up, the reason we did that was, in all my years in the industry, you will always find that something will happen somewhere in the business. And the more international businesses become, the more research and development progresses, you are not always going to be able to predict each one.

I think we set up these growth platforms largely on the basis of having a sustainable growth picture, even if one part of the business does more or less well. And what you can see, and you know what's happened in the business over the last three years, but this slide shows you from Q1 of 2012 to Q3 2014 that we've been largely able to keep these growth platforms in a band of 5% to 10%.

Now, we've taken the Brazilian situation reserve out of here, because it would reduce Q3 2013 but would also inflate Q4 of 2013. So we tried to provide a like-for-like basis, so it's not benefiting one quarter and penalizing another. But largely you can see that the growth platform model has actually been a benefit.

And if I turn to slide 8, you can see a very strong performance of all of them. Emerging markets up 7.6%, growing just under double digits for the year at 9.9%, partly because we obviously had a slowdown in China last year, as the whole market came back, but generally good performance across the picture. Obviously, a number of things always happening in the world, as you read in the newspapers, but fundamentally a strong growth driver for the Company.

Diabetes up 8.3%, I'll come back and talk about that, but still growing for the year-to-date period at 12.5%. Vaccines really driven by -- particularly by flu sales and the return to production in Toronto. Consumer up 13%; Genzyme up 25%; animal health 12%. And the other innovative products will be aligned, which plays a strong growth for the future, but we'll come back to some of these in a minute.

Let's move to slide 9, on diabetes. So, Lantus sales up 8.1% at constant exchange rate, very good growth in Western Europe, and remember this is all volume in Western Europe. A very robust 19.7% in emerging markets at constant exchange rate.

The US growth, at 5.8%, really reflecting the increased competitive pressure at the payor level. And there's this question of excise tax to fill the donut hole, and that often is hard to assess at the beginning of the year, so it's more of a timing effect on that latter aspect.

So what's going on in pricing? You may remember already at the second quarter that we included in our revised guidance for the year, where we moved guidance from 5% to 7% to 6% to 8%. That was actually in spite of the competitive pressure. But we've flagged it because I think we've seen and you've seen a number of competitors announce that they've won accounts and you cannot have pricing pressure unless you have a competitor willing to reduce pricing in another market -- in a channel.

And as we went into the contracting for the third quarter, which principally affects contracts, not exclusively but principally affects contracts from January 1, we were very pleased to see that we've been able to achieve over 90% unrestricted coverage in commercial and non-commercial channels, so there's actually very little of the market that we can't access. However, this did cost more in rebates.

We believe we are in a much strong position as a result of that. It's absolutely fundamental that we maintain a strong prescription base in Lantus, because that will serve really the launch of Toujeo, and also I think the ability for further competition from biosimilars has become less obvious. So, for us, while there may be a shorter-term hit, we actually think that this puts our diabetes business on a much more sustainable platform going forward.

So the broad outlook when we look at everything, and obviously we have the launch of Toujeo next year, we have the launch of Afrezza; we've got very good growth in emerging markets. There'll be some impact potentially of a biosimilar in Europe, and then the new contracting. So when we net all that out, we look at that as being broadly stable in 2015.

Moving to the next slide, obviously there's been a benefit because our Toronto facility, which had had a supply issue, has progressively come back into production. But I say progressively, because very often you've got in excess of one year's lead time on vaccines. So we haven't actually fully seen yet the recovery of that, but progressively we are back.

What's really been, I think, a success has been our flu season. Very strong success with our quadrivalent vaccine, and there's only two players in quadrivalent, and also our high-dose flu vaccine which is really meant for people over the age of 65. That has allowed us to get some premium pricing in the market and in addition market share from those players who don't have either of those versions. We're the only ones with, for example, the high-dose flu.

So flu's been a strong success for us this year. Other vaccine sales were up 8.4%. This was due to the Pentacel sales, due to improved supply.

What I think has also been extremely important was the completion of the Phase III program for the Dengue vaccine. We've submitted the files for a hexavalent vaccine in the US. This is the PR5i that we have co-developed with Merck.

And we've also started Shantha's investigational rotavirus vaccine in Phase III. Rotavirus is a major health concern in emerging markets, and really with Shantha we've built a strong portfolio now of very affordable pediatric vaccines for broad populations in emerging markets, and so rotavirus will help expand that portfolio. As you know, we are just coming back to the market now with our pentavalent vaccine, Shan5.

Looking at Genzyme, on slide 11, we've got an extremely strong sales ramp up of our once-daily product Aubagio. Obviously, lots of attention goes to Tecfidera, but we've been quietly working in our corner and this is a product that has been able to find its group of patients. And we've seen nice, steadily growing sales.

We've seen the results from two Phase III studies now, TEMSO and TOWER that have now been added to our label, which allows us to extend our promotion activities. The same label expansion in the EU is expected in Q4, following a positive CHMP opinion in September 2014. Obviously, we are also waiting for the regulatory decision by the FDA on Lemtrada.

Now, Merial delivered strong growth in Q3. I think that's a really good sign. I think this has happened for two reasons. Clearly, there's been a very successful launch of NexGard. This has been the best launch in the animal health space in at least a decade, and we've had very good acceptance. Some of you here in the US might have seen some of the television commercials for this.

But I think there's an element here which is that we were able to stop the bleeding on Frontline. We've been able to really invest in that. I think we have been able to find separate channels for those two products. And so actually, where we lost 18% on Frontline, we only had a small loss in this year. So you've got a dynamic of we are not losing so much and we actually have a very strong launch of NexGard.

Obviously, solid performance of Heartgard and pet vaccines. The production animal health business also performing strongly in the quarter.

Now, the next slide I think is critical, because we've been talking now for years about growth platforms, and you all know them, on OTC and diabetes. But if you look to what we are actually focused on in the Company, it's really getting these new products launched that we have here, and this is just a selection. We also plan to take you into a little bit more detail on these products at an investor seminar on November 20.

Alirocumab, known as brand name Praluent, has had nine positive Phase III top-line readouts. And of course we got a priority review voucher in the US, and we do expect to file in both the US and the EU by the end of the year.

Dengue vaccine, I just spent three weeks in Asia, meeting with ministers of health, public health officials. Deaths due to dengue were up 300% in Malaysia this year. I went to Tokyo, and for the first time Japan has actually had some dengue. China, not known as a dengue country, has now had thousands of cases in the southwestern part of the country.

If you go to India, India is like the biggest country in terms of dengue incidents. And of course, earlier in the year I was in Colombia, and there's been a number of markets, everywhere from Brazil to Colombia, which have dengue concerns.

What's really interesting is that in the Northern Hemisphere we don't really think about this, but if you are in the south and you use the word dengue, you see the emotional response of people. In fact, if I'm doing a town hall with employees, I ask anybody here had dengue, and you'll typically find a third of the people put their hands up. And these are our own employees. And I can tell you, you talk to those people who have had dengue, they cannot wait for this vaccine to come.

So I think we will have a very successful vaccine to launch. We are working with governments. We plan regulatory submissions in the first quarter of 2015, and could potentially have some of the first sales by the end of 2015.

Cerdelga is an oral drug for adult patients with Gaucher disease. Again, an interesting thing, I was talking to one opinion leader in a Latin American country and she says the interesting thing about the pill is not only is it more convenient, but for people who have been taking infusions every two weeks for their entire life, having to just take a pill has been expressed to her as I'm now back to normal again, because normal people take pills and don't take infusions every two weeks.

So we don't expect it to completely cannibalize Cerezyme, because there's not a pediatric indication and a lot of patients who are doing well, but clearly a lot of people live far form infusion centers and perhaps who have milder disease who have not had treatment. Plus, I think cannibalizing not only some Cerezyme but some of our competitor products I think make this a very interesting opportunity for us.

And Dupilumab, we have had patients come and talk to us about how this has been transformative in their life. We've had people who have been suffering for 30 years from atopic dermatitis. And we are not talking about a little bit of dry skin here; we've got people who've had over 50% of their bodies covered with this.

This has been disfigurative for people. This causes emotional problems. It's often associated with other immune diseases. And the ability to just take a shower and get dressed is an unbelievable experience for many patients.

Obviously, we are developing this for other indications. After very good Phase II results, we are looking now to see in a more robust Phase IIb study exactly how this is going to perform in severe asthma. And of course we also had a very positive proof of concept in nasal polyposis, which is often associated, by the way, with asthma, and we announced those in the third quarter as well. So, very strong R&D progress.

We also, on slide 14, have brought in a new medicine in diabetes called Afrezza. And I think Afrezza, obviously, I know in the minds of an awful lot of people they think we bought Exubera. We know Exubera. Sanofi sold it to Pfizer for a nice chunk of money. But I think because we knew of Exubera, we also were able to, I think, assess why Afrezza is different.

One of the first, as you see it immediately in the picture, is the small elegant device that is there. The other is that this has a PK profile that really can mimic the natural prandial insulin response. This is a pretty quick on and a pretty quick off; very easy to take.

We are not necessarily seeing it just to replace injection. What we know is that there's often a lost decade that many specialists refer to, and this is the time it often takes for people to move from oral therapies which have really stopped working and transfer to an injectable product. So we think actually that even as an add-on to oral could be an interesting way to get people on insulin therapy a little bit faster.

Moving to slide 15, we've still got lots of momentum coming on the R&D side. We expect the Lemtrada decision in the US for MS, the Cerdelga decision in the EU, as well as the quadrivalent intradermal in the US. We've talked about the filings of Alirocumab, and also our insulin lispro in diabetes going into Phase III.

So, with that, I'll turn it over to Jerome for financials.

Thank you very much, Chris. Good morning, good afternoon, everyone.

So, as Chris mentioned earlier, Sanofi delivered both solid top and bottom line growth at constant exchange rate this quarter, which reflects the consistent execution on our strategy. And with sales of roughly EUR8.8b, up 5.1%, and business EPS of EUR1.47, up 10.3%, our results in the third quarter were once again driven by the strong performance of the growth platforms.

Now, as we move on the slide 17, you can see that unlike in previous quarters, as mentioned already by Chris, exchange rate movements had only a limited impact in the third quarter, which was mainly due to the strengthening of the US dollar. So this quarter sales were impacted by a limited EUR81m, or minus 1% versus last year, due to exchange rate impact. And at the business EPS level, we experienced a negative currency impact of 2.2%, which is EUR0.03 in the same period.

So clearly this is much smaller than recent quarters. And currencies impacting sales in the third quarter were primarily the Argentine peso, the Japanese yen and the Russian ruble, and the impact of the US dollar tends to be very limited.

Of course, we cannot predict the exchange rate movements in the coming two months, but if we just assume September 2014 exchange rates and we assume that they remain stable through the fourth quarter of the year, the negative foreign currency impact we have experienced the past couple of years is expected to turn positive in the fourth quarter.

So, assuming September average exchange rate remaining stable once again 'til the end of 2014, the negative foreign currency impact on full year 2014 would be 2% to 3% -- or 2 to 3 percentage points, sorry, on sales, and between 3 to 4 percentage points on business EPS. This is based on the September exchange rate (inaudible) October, which will be somewhat more favorable.

For additional information on foreign exchange sensitivities to key currencies which may help refine your modeling as exchange rate evolves during the year, please refer to the last slide in the appendix of our slide deck.

Now let us move on the next slide, slide 18. So before looking closer at the details of the P&L, you can see here once again in the third quarter we managed to leverage our top line growth [past] the earnings growth. So basically you see that sales have been growing 5.1%, the gross profit is growing 7.3% and the BOI is growing by 11%.

So this quarter, as a result of a limited increase of our cost of sales and a slight decline in R&D, our business operating income increased by 11%, and also we have posted an increase of the BOI margin to 30.9%, which is 1.4% higher than last year.

Also, I'd like to point out a couple of other elements on this slide. First of all, the third quarter marks the second time that we are partially consolidating our ownership in Regeneron. We have highlighted to you previously that we expect to benefit from our investment in Regeneron by approximately EUR45m on a full-year basis in 2014. That's for three quarters, actually, since the beginning of April.

The contribution from Regeneron is booked under share of profit of associates and reached around a quarter of EUR43m in Q3, so basically in one quarter what's expected for the full year.

Additionally, looking at the other current operating income line, this quarter includes a payment of EUR40m before tax resulting from the termination of a licensing agreement in the US.

Now, looking at slide 19, we see that the cost of sales remained stable at EUR2.9b in the quarter, up 0.7% at constant exchange rate. As a result of the stronger sales growth, our gross margin improved once again in the third quarter, up 1.4 percent points in Q3 versus the same quarter of last year.

This favorable trend mainly reflects the recovery from manufacturing issues at Sanofi Pasteur, as mentioned already by Chris, in particular for the Toronto site. We also saw an improved industrial performance at Genzyme, coupled with a solid sales ramp up of Aubagio, which Chris mentioned already earlier during the call. Lastly, I'd like to mention the positive mix effects in the US and China, which have contributed to the improved gross margin as well.

On a full-year basis, in the whole year 2014, we continue to expect improvement in the gross margin compared to last year.

Turning to next slide, 20, you can see that we continue to control our R&D expenses rigorously, which resulted in a slight decrease, by 2.6% at constant exchange rate in the quarter. Of course, the variation of a quarter depends upon when you end a study or when you start another one.

So in the third quarter we have lower expenses in oncology. We also completed the initial trial program with Toujeo in diabetes, which partially explained this decrease in R&D expenses. These items were somewhat offset by the higher expenses resulting from the clinical development program for dupilumab.

As already guided, we confirm to expect R&D expenses to slightly increase during 2014, while staying below the EUR5b already mentioned.

Now I advance to slide 21, where we see that SG&A expenses increased by 10% at constant exchange rate in the third quarter, to EUR2.2b. So clearly this is an increase, which we have already mentioned, which largely reflects a rebound from a low base for commercial activities in China, but also investments in our commercial infrastructure. For example, we invested in pre-marketing activities for our upcoming product launches, as well as for Genzyme launches in MS and rare diseases.

We also saw higher A&P spend in the US in our animal health business in connection with the stop of the bleeding in Frontline, the launch of NexGard, as mentioned already by Chris.

Overall, on a full-year basis, we expect to keep the ratio of SG&A to sales broadly stable compared to last year, which is in line with the guidance we communicated last February.

Looking at the lower part of the P&L, on slide 22, we again highlight that business EPS was up 10.3% in the quarter. I may have here that year to date business EPS was up 10.1% at constant exchange rate.

Net financial expenses also increased in the third quarter to EUR139m, compared to EUR123m in last year's third quarter. This is mainly due to lower revenues from the cash we have, due to the very low interest rates we have, and also to the capital gain that we booked in Q3 last year.

Our tax rate was 25%, which is consistent with our full-year guidance, but increased by 1 percentage point on the same quarter last year.

Also, I should point out that due to our share buyback activity during the first nine months of this year, the average number of shares outstanding declined by approximately 8m shares relative to the same period of last year. Up to now, we have bought back shares for the total amount of EUR1.1b since the beginning of the year.

Moving to next slide, 23, you can see that free cash flow increased by about 16% in the first nine months, which is faster than profits, and reached more than EUR4.2b year to date. This is a result of our tight control on working capital and capital expenditure, despite the fact that we have a higher working capital at the end of Q3 in general because of the higher sales of vaccines which have not been still yet paid.

The cash flow statement also includes a dividend payment, of course, of EUR3.7b, approximately, paid in the second quarter, as well as our investments in biotech partnerships, both Regeneron and Alnylam, which totaled about EUR2.2b during the first nine months net of disposals.

As you can also see, our net debt at the end of June was -- at the end of September, sorry, was approximately EUR9.2b, which is slightly below our net debt target which we continue to monitor.

So, in summary, we are pleased with the continued execution of our strategy and the strong financial performance in the third quarter.

As we look to the fourth quarter, we want to remind you of a few items for your modeling consideration.

First, recall that last year's fourth quarter included a payment of EUR92m before tax following the amendment of the Actonel agreement with Warner Chilcott, and an income of EUR93m before tax resulting from the Rituxan arbitration between Hoechst and Genentech. In the fourth quarter of 2014, from what I know, we should have more limited one-offs of that type, and which could include a positive impact of a disposal of some minor products in France and Italy, generating a profit of approximately EUR70m before tax.

Second, we expect a continued progressive improvement of the supply situation for vaccines and a continuation of trends we have seen in the flu business in the Northern Hemisphere.

Lastly, we will also continue to invest in our late-stage pipeline and pre-marketing activities for our upcoming launches.

Given these considerations, and taking into account the performance so far of a 10% increase of our EPS, but taking also into account all I've just described, we continue to expect business EPS to grow between 6% and 8% on a full-year basis 2014.

I now hand over to Chris to wrap up.

Thanks, Jerome.

So, again, good results; continue to grow the sales at mid-single digits with a leveraged P&L, growth platforms up by 10%, earnings per share guidance is reconfirmed. And I think, as I said before, I think what's really driving a lot of us internally is the opportunity to launch a number of new medicines, not only next year but pretty much pretty regularly in the years to come.

So, with that, we'll, Sebastien, open up for questions.

Thanks, Chris. Operator, we are now ready to open the call to questions. I would like to ask participants, as always, to only ask one or two questions at a time. Anybody can always come back into the queue to add further questions if need be. Operator, we're ready.

(Operator Instructions). Peter Verdult, Citi.

Good afternoon, everyone. Pete Verdult, Citi. Two questions; one for Pierre, one for Chris. Pierre, can we just talk about diabetes? I just want to get a better sense in terms of the significant change in the outlook for the diabetes market. How much of that is Novo specific versus just the general deterioration of the US reimbursement outlook from a payor pressure perspective and the perspective from channel mix changes? That's question number one.

And one for you, Chris. You laid out a clear strategy when you arrived as CEO and you showed that you created value with Genzyme. Is the Company now in a good position, in your view, to execute another major transaction to diverse away from diabetes? Thank you.

Just on diabetes, we can't comment on any competitor. What I will say, though, is there is not really -- a deteriorating payor environment only works if you have actually people who are going to actually offer something in return. So, in other words, if someone wants price protection or someone wants a higher rebate, it only works if there's a competitive offer on the table. Payors play one person off against the other; that's the way it works. So there really is only one dynamic, and that is competitive pressure out there.

So I think, obviously, what we do is we look at what has happened with previous accounts, dialogue with payors. As I say, I think the most important is that we believe we've secured extremely strong coverage, and still at a very good price point, with an adjustment in a one-year timeframe, but I think it actually positions the Company well. And we have Toujeo and Afrezza to launch, so we continue to believe that diabetes will contribute to the growth of the Company over the medium term.

Concerning diversification away from it, less than 20% of our sales today are in the US and Europe on diabetes. And I think when you look at it, the Company still grew its bottom line here by 10%, even though clearly the diabetes growth is significantly less than what you saw in the first two quarters of the year. That's the advantage of the diversified model.

The most accretive way that we can continue that diversification is through the launch of new products. Doing an acquisition doesn't change anything on diabetes. So we are going to continue to grow and develop our diabetes franchise. Whether or not you want to add some in terms of an acquisition is something you can do at any time. You don't have to wait until you are concerned about diabetes or not. The reality is that you have to do a transaction, though, that makes financial sense for our shareholders.

Today, the cost of capital -- of debt capital is virtually zero, and that's often reflected in a lot of asset prices. We continue to look at everything, but we continue to look at everything no matter what the diabetes business. We are still a very big company and I think the growth prospects, when you add in new products, is good. So I don't particularly see a need that we have to go do a deal, and I think the Company is actually pretty well diversified today.

Thank you.

Next question, please.

Tim Anderson, Sanford Bernstein.

Hi. Okay. So obviously, on Lantus, to me it's really strange to see this action you guys have taken, and there's only two possibilities. One is that Toujeo is going to get fully blocked, so you are buying access for Toujeo, but I don't see how that's hardly the case because Toujeo is not approved. So it narrows down to only one other possibility, which is Novo competing on price with Levemir. So I know you don't want to comment on a given competitor, but are there other competitors besides that that I'm missing? That's the only possibility I can think of.

And if you could comment on your ability to secure access for Toujeo at this point, and whether I'm mistaken in thinking that you probably can't wrap this in as part of a deal.

And then, last question on this whole topic, is this multi-year contracting we are talking about? Normally payors would only want to do this sort of thing one year at a time, because they know that the market is changing.

No. All I can say is that we are talking about competitive pricing, Tim.

That's it?

Yes.

Okay. And then Toujeo, long-term access or market access for Toujeo in 2015?

I think Toujeo is going to stand on its own two feet. It's a product that's got a benefit on hypoglycemia. We've clearly been talking to payors and key opinion leaders. But that market access will occur when the product is launched; this is normal. And we believe that actually Toujeo has a very strong market positioning.

I think over time you are going to see this basal insulin market being a competition again between two players. It will be Toujeo against Tresiba. And the benefit is that Toujeo, A, gets to market first and, B, we have a bigger base of prescriptions to build Toujeo off of. And three, we actually believe we've got a better profile in terms of the PK/PD profile, which leads to a different titration schedule and actually better 24-hour coverage.

So that's an independent thing, so that's why we are confident about launching Toujeo, but that's not today's agenda.

And is it only a one-year contracting cycle, most likely, for Lantus and Toujeo?

It's kind of a mix. I can't really say, Tim.

Okay. Thank you.

Mark Clark, Deutsche Bank.

Yes. Hi, gentlemen. Two questions. Firstly, can Jerome just take us through where the extra rebates flow through the P&L account, just so we can think about modeling?

And secondly, clearly the outlook for next year is rather tougher than most of us had previously modeled. Are there any offsets that you can take to mitigate the pressure on the diabetes franchise sale? Thank you.

Mark, on the rebates question, basically, you know how it works. So you start with a WAC price, which makes your gross sales, which are reported in the 20-F in one of the appendixes, and then you count for the rebates. And of course the rebates here will be a combination of multi factors. On the one hand, you have the rebates on the commercial channels, you have the rebates on the public channels, you have the impact of the coverage gap, so all that will be booked into the same line.

So I think that we've given already the guidance for next year that this will be broadly flat. I don't think we are going to give more guidance or more detailed guidance, but the way it works is that you will see an increase in rebates, clearly, time passing.

At the same time, if you look at 2014 to start with, clearly we've seen that, everything being equal, an increase of the WAC price transforms into a net inflationary -- I mean a net positive impact even after rebates. And this will -- whatever is the rebates, this will be true if we take any other price increase next year from a listed price standpoint.

Okay. This is going to be probably too far -- pushing you too far, but historically, Chris, you've talked about growing the franchise in diabetes through the loss of patents. Do you think we can look forward to a return to growth in 2016, or do the factors we are talking about today flow through to 2016 with further contracting pressure next year, etc.?

I think it's difficult to speculate on what everybody else is going to do. I'll tell you how I look at this. Generally, what you see in these types of market is that you have some people -- because you're essentially in oligopoly situations here. So there's usually an attempt in that. We saw this in flu vaccine a number of years ago. Somebody comes in, tries to gain some market share with price and everybody aligns their price, so nobody really gains share. So usually you don't -- it's not really in anybody's interest, but it could happen.

But I think you're going to see people come in with branded products. I think you have to also remember that the basal insulin market is not an isolated market. There are other insulin markets, and therefore pricing in one segment could have an effect on others. We may well see migration from pre-mix, for instance, or even human insulin into the basal market.

You've got players coming in. All three are proposing -- if I take Lilly as well, have branded products coming in. And none of us are going to make a return on the investment if everybody has a race to the bottom here.

I think Toujeo will increasingly be the product that overtakes Lantus, and you add in Afrezza. Then you also add Lyxumia and then you add LixiLan. So I think we have a number of options to look for growth in this segment over time.

Okay. Thank you.

Alexandra Hauber, UBS.

Yes. Good afternoon. Sorry, just one more question from me again on the pricing in diabetes. So, Chris, I think you said the rebates are kicking in from next year, so just wondering why were sales flat this quarter? Why did all this positive pricing you had in the first half suddenly evaporate?

And then secondly, on the SG&A line, given that you're going to have about five or six new product launches next year, what does that mean for SG&A? It's already up significantly this year. Are we going to see more demand for you to add headcount in the various regions and add other costs?

Yes. No, I was referring to some contracting that had been done towards the end of the year. There is an effect on price this year. There was an effect in the first half of the year and even some contracts can have an effect in this year, but the full-year impact comes in 2015. But there is an impact in this year. Primarily on price, but we actually lost some market share because we lost a couple of accounts at the beginning of the year.

SG&A.

Oh, the SG&A. Yes, I think we haven't -- we're not going to give guidance on the whole year. I would just say, yes, we will be investing in new products, particularly Praluent, Toujeo and Afrezza next year. To a degree, Toujeo and Afrezza can rely upon an existing promotional base from Lantus, but there will probably an incremental investment be on that.

Praluent is a new product and there will be investment behind that. Again, though, we're trying to leverage our diabetes franchise in that, because you see an awful lot of comorbidity in the patients at risk with high cholesterol and diabetes. And obviously we're not talking about a -- especially at the launch period, a primary care product. Cerdelga really can fit into the Cerezyme field for us. Dengue is largely going to be a government contracting approach.

So I think there will be some. We also believe we still have opportunities to reduce cost in the business, so we'll be looking at cost mitigation on that. But there is going to be some investment on new products next year, absolutely.

Thank you.

But I would point out also, Alexandra, we launched things like -- we actually have put about EUR400m into new promotional activity in 2012 and another EUR700m into commercial and R&D in 2013. You didn't really see that, because we were able to offset a number of those costs through cost savings. I'm not sure we can do it 100%, but I wouldn't also assume that 100% of those costs are going to be translated to the bottom line.

Okay. Thank you. Very clear.

Next question, please.

Vincent Meunier, Morgan Stanley.

Good afternoon, and thank you for taking my questions. The first one is a follow-up again on Lantus and diabetes. For 2015, assuming flat sales for the diabetes division globally, this suggests a US sales decline for Lantus. Can you confirm that? And do you think that the pricing power can be regained in this market after the phase of higher rebates, or not?

And I have another question on the PSCK9. In the context of Amgen's infringement against the patents of PSCK9, can you confirm that there is no restrictions in terms of manufacturing of alirocumab, and also on your ability to file by yearend? And more broadly, what are the next steps and what kind of protection can you put in place here? Thank you.

Vincent, I think we've tried to be transparent here. I'm trying to give you guys some -- look, we don't really want to get into a 2015 guidance or a region by region conversation. I think the math is pretty obvious on this. I think also we're trying to be prudent at this point. So I can't really speculate on what assumptions are on market share.

I think the next question's important. There is and always has been more to Sanofi than diabetes, and that's where we're going, and PSCK9 is one. The patent situation was something that was investigated by the Company at the time we opted into the program with Regeneron. So obviously our own patent attorneys took a view of the strength of those patents that Amgen is trying to assert, and obviously that analysis led us to opt in and we're going to be vigorously defending our situation. And at this point, we see no delay to the launch of PSCK9 -- to the filing of PSCK9.

Okay. Thank you very much.

Graham Parry, Bank of America Merrill Lynch.

Thanks for taking my questions. So again, I'm afraid, on the lack of diabetes growth into next year. I think everyone's surprised to see no growth in a year where there's no incremental competition from new entrants, so perhaps you could help us to understand the dynamics into 2016 a little bit more.

You made a few comments this morning, talking about a sustainable path post this and still expecting diabetes to contribute to growth over the medium term. Does that mean you think you've re-priced the market now to a level that you're comfortable with and you expect less price competition in 2016, as you've come down to some sort of floor level?

And could you comment on where you see your net pricing being versus Levemir? Do you think this brings you more into line?

And then secondly, a question for Chris. There's obviously a lot of stories around in the media about your relationship with the Board and your tenure. I'm just wondering if following yesterday's board meeting you've received any reassurances from the Board that your position is secure and that you have their backing to run the business and execute further deals.

And then finally, one for Jerome, a question on COGS. Historically, you've talked about COGS improvements being offset to rising R&D and launch costs. In 2015, as we're looking at negative Lantus pricing, is that something you still feel you can achieve? Thank you.

I think -- Peter, I don't know whether you want to comment further, but I think at this stage we can't really start speculating on 2016. Competitive pricing doesn't really depend on us. But I would just say the pricing is far more complex, obviously, because you've got a Medicaid segment, you've got a Medicare segment, you've got a commercial book of business segment. And as I say, I think our view is that we've got a very solid competitive position now, where we are. If you've got over 90% coverage, you've got the whole market to go after.

I can't really say anything more than I said this morning. I'm the CEO of the Company. I'm focused on running the business. The Board put out a statement saying that the issue of succession was not on their agenda, and we're pushing ahead on all fronts.

So, Graham, on your question on the gross margin, A, once again, we are not going -- we are not in the position to give you guidance for next year. So how can you manage gross margin versus SG&A? Along with what Chris said earlier, even on SG&A there are still ways to cut costs and how to invest more behind key projects and [the other ground].

What is very important when you think about gross margin should be the mix of the business. So it's clear that you're right; if -- whatever happens, of course when you increase the share price of Lantus, let's put it like that, this is directly favorable to the overall gross margin. So this will not be exactly similar next year.

Now, there are other trends. We mentioned earlier today that the vaccines gross margin should improve. It has improved in 2014. And as usual in vaccine, all the improvements you manage to put in place start to go into inventory. So you unwind the positive impact over time, which means that the improvements we are doing today will impact our gross margin, everything being equal, in 2015, 2016.

Genzyme is also another area, as long as it grows. Genzyme is a biological activity. So the more you produce, the better the gross margin, simply because the bulk of the costs are fixed costs.

So these can be very significant positive drivers. I will not forget that we continue to improve the overall operation -- industrial operations. If you remember, we announced a number of cost savings back three years ago on our industrial footprint, on our industrial optimization.

And all in all, this should allow us to have a good control on gross margin. How this mix of business will work exactly, it's a bit early to say. I would like just to remind you that just for 2014 we are now planning to improve the gross margin. This is a guidance we gave at the beginning of the year. Now it's confirmed over the first three quarters, and I just confirmed today that we are going to improve the gross margin in 2014 versus 2013. So I think this is a bit where we are.

If you look forward, the main drivers beyond what I said is the new launches. In general, as you know, the new products tend to have a higher gross margin, typically, because they are highly priced, basically because they are just priced to pay for the innovation we spent before and the R&D we spent before. So if the mix goes more towards more innovative products, clearly it will also be favorable to our gross margin. This is why in the medium run we feel comfortable that we can continue to increase and improve our gross margin from where we are today.

Can you just come back on the Lantus pricing area, though, just in terms of where you feel you are today relative to competitors? Historically, there's been a much narrower rebate for Lantus than your main competitor. Do you feel that you're more close to a pricing parity level now or do you feel there could still be pressure, or is that a target for pressure in 2016? Thank you.

So, Graham, it's Peter speaking. Obviously, we do not know the exact price point of the competition and this is also a moving target. It varies, as Chris said, account per account and channel by channel. It is probably fair to assume that after the pricing actions that we have taken now, we are closer to where Levemir was or is. How this is going to unfold in the future is pure speculation, so I would not enter into that game.

The only thought I would give you, however, is that and Lilly and Novo and ourselves are entering into the innovation play in basal insulins. So I think it is not in the interests of the existing players to go for a race to the bottom.

Thank you.

Next question, please.

Jeff Holford, Jefferies.

Hi. Thanks for taking my questions. I'm still struggling a little bit on the Lantus and the pricing here, because in what's still basically a co-preferred market and with Novo planning to launch new products here as well, not too far, it seems strange that they might lead a new round of price competition here. Can you just maybe reassure us that this isn't pushback from the payors on Sanofi's own recent price action in 2013, potentially the Company had been too aggressive in the past on price increases?

And then also, as a follow up, does this at all impact what your pricing strategy might be for Toujeo on launch? You have referred to that as a premium priced product relative to Lantus in the past. I wonder if you're still thinking that might be the right strategy to go with. Thank you.

I'm not aware of ever having described Toujeo as a premium priced product. I think on the payor dynamics, you go in and are negotiating contracts, and we obviously are in competitive situations on these contracts. The pricing on a WAC basis is not so relevant and has largely followed what Levemir has done. I think it's a competitive situation and I really don't know what to say more than that.

Next question, please.

Richard Vosser, JPMorgan.

Thanks very much for taking my questions. Two, please. Just on Lantus but in a different geography, if we could just talk about how you're seeing the growth in emerging markets at the moment, whether you're seeing in certain markets increased competition from Tresiba and how you're seeing the Japanese market develop at the moment.

And then, away from diabetes just into animal health, obviously the NexGard launch has been pretty good. If you could give us an idea how the conversations are going with that into 2015 and also reassure us, perhaps, that Frontline is now stable as well? Thanks very much.

Yes. So I'll take the question on Lantus ex-US. So, emerging markets, the product is growing extremely dynamically and we do foresee that this continues in the future. You know, for example, in China that we have de facto called it biosimilar competition since a decade now. And actually, looking at the third-quarter growth of Lantus in China, we had a very healthy 35% growth rate, and that's basically what you see in many emerging markets.

Japan, we are in a specific situation to the extent that you have a Tresiba with a pretty liberal market access. And what we see is that we hold onto two-thirds, or let's say 65% new patient share with Lantus. So I think we're doing a pretty good job in defending our share.

In the overall share, we still hold a 60% market share with Lantus, whereas Tresiba must be somewhere a little bit above 20% in the last monthly data. So that's basically what I can give you as an update on the ex-US situation.

Perhaps last point, Europe, as Chris mentioned in the introduction, had a very strong third quarter. We are close to 10% growth for Lantus, overall more than 10% growth on diabetes in Europe. And this is actually with a very slight negative on prices, even more than that in volume. So it's a very healthy performance, actually.

On animal health, sorry, the question was?

It was just basically reassuring us on Frontline being stable going forward and into 2015 and how we should think about the development of the NexGard launch through the annualization of that launch next year.

So, NexGard has not yet been launched in all markets so we would expect further launches, particularly in Europe. And the only thing that will happen is we will have competitor activity, we know, from -- there is one from Merck. So it is a competitive space. So I don't think we're going to see as strong a growth in Merial next year, but we would expect to see the franchise continue to grow.

Thanks very much.

Steve Scala, Cowen.

Thank you and apologies; a couple more diabetes questions. First, does your Lantus guidance assume Lilly launches a biosimilar in the EU, or does Sanofi have a legal strategy to block the launch so no launch is assumed, or maybe it's irrelevant whether or not Lilly launches as it relates to your guidance? So that's the first question.

Second question is, Chris, you have previously said that a good proxy for conversion of Lantus to Toujeo is Copaxone, which I understand converted about 50% of prescriptions in about six months. Would you detail the strategy to deliver that degree of conversion beyond the superior hypoglycemia data? Thank you.

Do the biosimilar in Europe?

Yes. So in the assumptions for 2015, commercially, we have embedded a biosimilar launch in Europe by Lilly, yes.

And in terms of the analogue, what we're really trying to do is obviously cannibalize Lantus. You can look at a Copaxone; you could look at a Tresiba in Japan. There's a number of other analogues out there. Obviously, this will depend on how fast you get out to market on market access.

The most important is I think that we're going to be putting all of our promotional effort behind Toujeo in next year. And I think there are a couple of strategies that'll be different in terms of promotion that we're doing, but we'll be able to tell you that more close to launch.

Thank you.

Philippe Lanone from Natixis.

Good afternoon, gentlemen. Thank you for taking my question. I'll try to ask the Lantus question another way. You have given half of the guidance for 2015 with the diabetes indication, but in Q3 2014 the rest of the business has compensated for that. And you have been at 5% growth organically, which has been a kind of guidance over time. It's not to stick on one figure. But the question is will you be so far away from that level in 2015 for the whole Group? And can we envisage, in your view, for the next few years this kind of level?

And maybe a second question on Lemtrada, which is still not taking off. So is there any hope here, or is it a lost cause?

The debate we have always is the minute you start trying to provide some transparency on some major aspect of a business, everybody wants to know about the rest. We will be giving guidance for 2015 with the fourth-quarter results in February. And so the idea was just to say, look, we have seen a shift in market dynamics in part of the business, and rather than just say we've seen a shift in market dynamics, trying to help quantify that for you.

But obviously the rest of the business continues to develop. We have our growth platforms; we have launches of new products. There are cost-cutting maneuvers ongoing. All of that is going into a budget process for 2015 that has not yet been finalized and will typically be finalized in another four to six weeks, and we will be able to provide a guidance for the whole business with the earnings announcement in February.

Okay. And on Lemtrada?

On Lemtrada, I think let's first wait for the FDA decision and where that is. Lemtrada is a -- first, I think it's hard to extrapolate from Europe sales, because if the FDA doesn't approve a product straight away, even if you get it approved elsewhere, there's still a waiting to see what the FDA does, so I wouldn't use that. And you've seen it with other products. If you looked at the InterMune product, for example, I'm quite certain that Roche, when they bought InterMune, didn't extrapolate from the European sales. So there is that impact.

What we have seen, and I went to ECTRIMS just a few weeks ago, September, which is the global MS conference, there are an awful lot of opinion leaders that have used Lemtrada, love Lemtrada. A lot of them are believing that it's actually going to end up being patient driven. But it's very clear that this is a product that has had a history, and it's going to take time for people to really get used to using it.

But for those who have used it, we're seeing people -- we had a patient actually address our top 300 meeting at the beginning of September. This is a person that had Lemtrada seven years ago and is back to running 5k runs and living a normal life and taking no medicines. And I was talking to a number of KOLs in Australia, for example, where they've been really starting to use this in a big way, very positive. But it will take some time for that patient experience to be seen by enough physicians.

So I think over time this is an important medicine, but I would not expect this medicine to rapidly take off out of the chute. But let's wait and see what the FDA decision is before we can really be definitive.

Thank you.

Michael Leuchten, Barclays.

Thank you. It's Michael Leuchten from Barclays. Just taking the change in dynamics, Chris, that you mentioned, a little bit broader, I think your message around pricing is very clear. On the volume side of the story, however, in the past you have commented about how this market is relatively stable and sticky on the insulin side. Do you see changes on that side of the coin as well? Is managed care able to drive a more dynamic momentum into this market that historically has been quite sticky?

And then secondly, on the government programs that you've mentioned, there is a potential threat that you get the best pricing kick in on a franchise like Lantus is. I just wondered whether that is part of your assumption on the pricing side or whether you are clear of having that negative collateral damage. Thank you.

Yes. So, on the market question, you see indeed an uptick of roughly 1% to 1.5% of the insulin class as a whole. Most of that increment goes, however, into Medicaid as a channel, which is of course the least profitable channel.

Your second part of the question was?

In terms of the changes of the dynamics in the market. Obviously your pricing side was very clear, but (multiple speakers).

Yes. So that's -- the best price in Medicaid is baked into the assumptions.

Next question, please.

Louisa Hector, Exane.

Thank you. Good afternoon. So, first on Toujeo, I noticed on the timeline that the US decision has moved into Q1, which seems a little bit earlier versus the first half and I just wondered if there's any particular reason for that, and just to confirm that -- whether or not you are expecting an advisory panel. I'm assuming not, but if you could just update us on that.

And then, Chris, you said the key to the success of Toujeo will be the market access. So, in your recent rounds of contracting, have you been discussing Toujeo? Does it form a separate conversation? How far advanced are you in discussing that product with the payors?

And maybe I could ask, on Dengue, how many doses do you expect to have at launch? And as you've been around Asia recently, is there any clarity on how you could incorporate this into the vaccine schedule? Would it be a particular age cohort? And how you can ensure that everybody gets the three doses over the quite wide timeframe, any color there? Thank you.

So, the filing -- so approval date for Toujeo is Q1 for the US and Q2 for EU. So I think it's been a short form to say both in H1, but there's no real change on the expected timeline for Toujeo.

When I talked about market access, it's principally a question of when you start saying, okay, start looking at cannibalization rates, you have to make sure that you're starting from a point where you get a broad coverage, and today we just don't know. But it's not -- it is important for the longer term, but it'll be more of a factor about how big your sales get to be in 2015.

We haven't -- you have discussions with payors at a medical level, at a very general level, but you really can't go into any detail with payors until the product is approved. You can orient the product with your medical people, but you can't actually engage with the pharmacy benefit people until you have an approval.

On dengue, dengue is -- we have actually built a model that we work with ministries of health on. It takes the past 10 years of data, typically, for a country of dengue incidence. In some countries, it depends on the level of surveillance data that is there. If I take Malaysia, for example, they have excellent tracking data, and so you can look at the incidence by state in Malaysia and also by age cohort. So you can actually model and say, if you vaccinate so many people, here's what you would expect the incidence of dengue to do, so is it this age group or that?

And what you find is actually there is a little difference between countries. For example, in Malaysia, you actually see more dengue related deaths in a young adult population, whereas in most countries you'd actually see it in a younger child or adolescent. But it's because Malaysia is a little less endemic. Therefore, if you get it when you're a young adult, you haven't necessarily built up any antibodies from prior infections.

So this is what we're working through, country by country, and being able to help public health authorities figure out what's the right vaccination cohort, what's the right amount to spend upfront. You can possibly have a target of X percent of the dengue at-risk population. Do you do that over three years? Do you do that over two years? Do you do that over five years? You can model in what the impact on the incidence of dengue is.

Because the interesting thing about this vaccine is that it not only includes the people you're protecting, but everybody you've protected is no longer infecting anybody else. So you have -- the more you protect people, the less there is of other people being affected. So you get a dual effect, if you like. And all that is being modeled.

For the moment, we haven't actually said how many doses we have available, largely because we don't want to necessarily be giving a sales forecast on that. But we do believe that -- we have said that on an annualized basis we can certainly be able to supply about 100m doses. But we're also just in the process of working on the product and we may have yield improvements and a few others, but that's the only guidance I can give at this point, on volumes.

Okay. Thank you.

We're going to take a couple more questions, operator.

Fabian Wenner, Kepler Cheuvreux.

Yes. Good afternoon, and sorry to come back to the dominating question. I guess you're not going to give us any detail on what the extent of the rebates that you've given for 2015 are, but I want to come back to Mark's question about how much of the impact on the sales level you can actually compensate on the bottom line.

And I think, Chris, you did say that you do see flexibility on the cost line to at least counter some of the effect. I just wondered if you can give us any indication how much you can rein in, actually, given that most of the impact's going to be on pricing and not on volumes, whether you can actually rein in some of the sales force, what other cost items you can flexibilize. Thank you.

Look, I think -- first of all, no, we can't give you any details on the rebates, mostly from -- I'm sure our competitors would like to know that, so we can't really do that.

And for the rest, it comes back to we don't really want to give guidance for 2015. There are going to be cost reductions that we can do. We've got launches of products that we can do. Equally, we're going to be investing in new medicines. So we'll be happy to put all of that together for you there.

Again, the real objective was we wanted to give you a heads up, because we had perceived some change in market dynamic already at the half year and that became more crystalized in the third quarter. And that's really all that this is meant to be, is to help get at least some level of upfront information so you can do more modelling.

If I can just try a follow up to that, aren't you surprised somewhat about the timing of the competitor's behavior? Couldn't that competitor have behaved this way, basically, a year earlier or even earlier than that, with that kind of price pressuring?

All I can say is that -- actually, you have to go ask the competitor.

Okay.

I think, look, it's -- markets are dynamic places, and I would say that this is a change in our own expectation; there's no question about it.

Thank you.

We're going to take the last question, operator.

Seamus Fernandez, Leerink.

Thanks very much for taking the question. So just two questions. First, on your views on the prospects of a directly substitutable generic in the insulin space, this is something that one of the generic manufacturers, Mylan specifically, has commented on. Really, the question surrounds where you think breakeven pricing might sit for a smaller participant in the market in that context and how much room there is for price thresholds, and what you see the challenge is for a directly substitutable generic in that regard.

And then the second question is, as we think about the launch trajectory of a product like alirocumab without outcomes data, how should we think about the launch trajectory of alirocumab in the context of both another competitor who may help grow the market but also the absence of outcomes data?

Mylan Biocon is a number of years behind, so I think it'd be difficult to speculate on what the market is going to be by the time they get there. By then, you've got Toujeo out there; you've got probably a Tresiba, probably a Lilly biosimilar, possibly a Lilly novel basal. And I think by the time that comes, you're going to probably have seen a market between first generation basal insulin and second generation.

So I think we'll wait and see. We know that Lilly has not gone for a substitutable biosimilar. And I think, trying to do a substitutable and doing the clinical studies, you just have to question about what the economics of that are for the company wanting to do that. But I think it's too early to speculate on that today.

On alirocumab, look, we'll give you a whole lot more -- try to answer more of these questions in depth at November 20. I think what we'll really be trying to communicate on is what are physician attitudes. Do physicians believe that lowering cholesterol is a good thing?

And if you particularly have patients who have multiple risk factors, if you've had someone with -- who's already had a heart attack and despite high fat [reduce] has still got high cholesterol, maybe overweight, maybe he's still smoking, possibly has diabetes, and you can offer a product that dramatically reduces their cholesterol by 60%, how many physicians would be willing to treat that patient with or without outcomes data?

And I think we'll be able to give you some more indication of that. But I'm sure if you go ask your favorite cardiologist and ask that cardiologist whether he or she thinks it's a good idea to reduce LDL, I think you'll find them at least 9 times out of 10, if not 99 times out of 100, that they think it's a good idea.

I think you're going to be really in this period of really looking at a number of targeted populations, between the FH population, the statin intolerant population, the secondary prevention population. You're not going to be out there to try to replace statins. But there's probably a bigger unmet need than most people think. But as I say, I think let's try to distill this a little bit more for everybody when we've got a little more time on November 20.

Thank you, Chris.

So, with that, I would like to conclude the call and thank everybody for your interest in Sanofi today. We look forward to having you follow the IR Thematic seminar on new medicines and vaccines which will take place on November 20 in Cambridge, Massachusetts.

With that, bye-bye.

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