Sanofi SA (SNY) 2015 Q3 法說會逐字稿

Ladies and gentlemen, welcome to the Sanofi 2015 Q3 earning call. I will now hand over to Sebastien Martel. Sir, please go ahead.

Thank you, operator. Good morning, good afternoon to everyone. Thank you for joining us to review Sanofi's third-quarter results. As always, the slides of this call have been posted on the investors page of our website at sanofi.com.

With me today on the call are Olivier Brandicourt, our Chief Executive Officer, and Jerome Contamine, Executive Vice President and Chief Financial Officer. Other members of our Executive Committee are also joining today for the Q&A section. We have Olivier Charmeil, Executive VP Vaccines; Peter Guenter, Executive VP Global Commercial Operations; Carsten Hellmann, Executive VP Merial; David Meeker, Executive VP Genzyme; and Elias Zerhouni, President Global R&D.

First Olivier will discuss the key business results for the third quarter, and then Jerome will review Sanofi's financial results during the period. After that, we'll open the call to Q&A.

As you can see on slide 2, I'd like to remind you that information presented in today's call will contain 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 document on file with the SEC and also our Document de Reference for a description of these risk factors.

Just before we begin, let me mention that during the call percentage changes in sales will be expressed at constant exchange rates or CER, unless otherwise indicated.

With that, I'd like to turn the call over to Olivier.

Thank you, Sebastien. Good morning and good afternoon to everyone. I'd like to welcome you all to our third-quarter earnings conference call today.

So on slide 4, my first message to you is that we continue to deliver sales and business EPS growth in the third quarter, and at the same time we accelerated investments to drive future growth. Let me briefly review the key performance highlights of the third quarter.

First, sales were up 3.4% as we continued to deliver solid topline growth despite diabetes sales erosion in the US. Second, we have posted another quarter of steady financial results, with business EPS up 6.1%. As expected, we increased our operational expenses as we are accelerating the investments in our multiple new product launches in key markets.

Third, we maintained the momentum in our launches and are pleased to see a nicely growing sales contribution from recently launched products, such as Aubagio, NexGard, Lemtrada and Toujeo. We also made progress in R&D, with a number of significant milestones achieved. Praluent was launched in the US in late July, and approval for this innovative treatment was granted by the European regulatory authority in September.

Late September, we also announced that the FDA has accepted for filing the NDA for lixisenatide, our once-daily prandial GLP-1 receptor agonist, for the treatment of adults with Type II diabetes.

Lastly, we've been working diligently over the past months on a comprehensive review of our diversified businesses in order to build a sustainable path forward. As a first step, we have announced the organization of our Group around five global business units and the globalization of functions. Our plans for implementing this new structure are on track.

Now, moving to slide 5, Group sales reached EUR9.6b in the third quarter and business EPS was at EUR1.61 per share. The observed FX impact from foreign currency was smaller in the third quarter as compared to the previous two quarters, but we continue to see stronger growth on a reported basis and at constant exchange rates for both top and bottom line due to foreign exchange. On a reported basis, third-quarter sales were up 9.2% and business EPS was up 9.5%.

Turning to slide 6, the table on this slide gives you an overview of the operational performance across our diversified businesses in the quarter. As you can see, all businesses reported sales growth with the exception of diabetes. Sales of pharmaceuticals were almost EUR7.3b, up 2.6%, representing approximately 76% of our total Group sales.

I'm particularly pleased by the performance of Genzyme, where we saw yet another quarter of impressive double-digit growth, driven by the rare disease and multiple sclerosis franchises. Sales were up 32.7% and are close to the EUR1b mark for the quarter. Of note, sales of the largest business within pharmaceuticals, established products, stabilized in the quarter, reaching EUR2.8b.

Vaccines showed good sales growth and increased 5.5% to EUR1.7b. Lastly, animal health continued strong performance with growth of 9.3% and exceeded sales of over EUR600m in the third quarter. Importantly, excluding the impact of diabetes, Group sales increased 6% in the quarter.

At this point, on the next slide I want to spend some time talking about our diabetes franchise, because I know this is going to be the focus of many of your questions.

If we begin with the quarter, you will see that diabetes sales decreased by 6.6%, a faster rate than in the first six months, reflecting greater sales erosion of Lantus in the US than expected. As a consequence, diabetes sales represented less than 20% of Group sales this quarter and US diabetes sales fell to 11% of the Group total.

Looking at the US market, Lantus sales were impacted by higher discounts as compared to last year, but also by slower growth of the basal market than we had anticipated and by a higher proportion of sales than expected to Medicaid and other government channels as a result of the Affordable Care Act. This resulted in US sales decline by 16.4% in the quarter and reaching EUR1.1b.

While Lantus US quarterly sales have been disappointing, this does mask the success of our US diabetes team in defending our US glargine TRx share since the launch of Toujeo. Indeed, our US glargine share has remained above 68% since February of this year, which represents a stabilization after a long period of share decline.

Outside the US is a different story. Indeed, we saw good growth of the non-US diabetes business, was increased by 8.1% to almost EUR800m, representing 42% of total diabetes sales in the third quarter. Importantly, this performance includes sustained double-digit sales growth in emerging markets, up 15.5% in the period. In Western Europe, sales growth has recently been eroded as insulin biosimilar glargine has entered the market in some countries, as expected.

Given recent sales trends for the diabetes business and ongoing market dynamics, we now expect global diabetes sales to be down between 6% and 7% in 2015. The further deterioration in Q4 reflects an increase in the wholesale acquisition cost price in the US taken in November 2014 and assumes a larger share of Medicaid. Excluding these two factors, our global diabetes franchise sales decline will be below mid-single digit in the fourth quarter.

Given the change in US market dynamics and as part of the strategic business review, I've asked the team to take a fresh look at the midterm prospects for the diabetes franchise. We have conducted detailed scenario analysis and arrived at what we consider to be a realistic range of outcomes for the period 2015 to 2018.

Based on our detailed modelling, we now project global diabetes sales to decline at an average annualized rate of between 4% and 8% over the next three years. I know that you will all need reassurance given the disappointment in diabetes over the past year, but I feel comfortable in telling you that the low end of this range is genuinely conservative.

In arriving at this new guidance, approximately half of the revision is linked to insulin glargine. We explicitly assume that three non-substitutable biosimilars will be on the market by the end of the period. The other half of the revision is related to lower than expected penetration of both Afrezza and Lyxumia, as well as a deprioritization of blood glucose monitoring systems.

As we said in the press release, we intend to mitigate the impact of this revised sales expectation on our business operating income by 2018, and we will provide a midterm strategic and financial outlook for the Group on November 6.

Advancing to slide 8, there are bright spots in diabetes, however, especially when we take a closer look at the recent launch of Toujeo. Our next generation insulin is now available in several large markets around the world, including the US, Germany, UK, Japan and Canada. And I'm pleased to report that Toujeo sales in the third quarter of EUR46m came in well above consensus.

As you can see by the graph on the left side of the slide, Toujeo already captures 14% of the new-to-brand prescription share of the US basal insulin market, despite having a less favorable label than in Europe. As I mentioned earlier, this performance has led to a stabilization of our US TRx share for insulin glargine in the US since the Toujeo launch.

In Germany, early unit share data show a promising trend for the uptake of Toujeo when compared to similar Tresiba launch period. After the first full quarter following the launch in Germany, volume share of Toujeo in the basal market has reached 6.8% in this country, and I'm pleased to report that we observed similar trends in other European markets.

As we move on to slide 9 and review our other businesses, which I would remind you accounted for 80% of our sales in Q3, I'd like to start with the performance of Genzyme, where total sales increased 32.7%, reaching EUR923m for the quarter.

The MS franchise continues to more than double sales on an annual basis, reaching EUR293m. Aubagio is now Genzyme's largest product by sales, driven by strong growth in the US but also France. Lemtrada is increasingly contributing to the strong performance of the franchise, with sales of EUR68m in the quarter, up 24% sequentially.

Highlighting the value proposition of these two brands in MS, we recently presented new data showing the favorable impact of Aubagio on brain atrophy, as well as the long-term treatment effect of Lemtrada maintained over five years in a majority of patients.

The rare disease business delivered, once again, double-digit growth in the quarter, up 13%, and recorded EUR630m in sales. This performance was mainly driven by continued new patient accrual across the three major disease areas, Gaucher, Fabry and Pompe.

On the next slide, slide 10, you can see that our vaccine business showed good sales growth of 5.5% in the third quarter. Major contributors to sales of EUR1.7b in the period were the US flu vaccines, up 8.3%, the PPH family of vaccines, up 17.8%, driven primarily by strong sales in China, but also Menactra, up also 17.8%, resulting from strong US public sector purchasing. The overall performance of the flu franchise was stable, as we had delayed supply in Western Europe and Mexico.

Importantly, we continue to be on track to deliver more than 65m doses of flu vaccine in the important US market in the 2015 season, and the Q3/Q4 split will be closer to a 60/40 breakdown this year versus a 69/31 breakdown last year.

Of note, the business operating margin of Sanofi Pasteur for the first nine months of 2015 is slightly above Group average, at 29.1%.

As I mentioned last quarter, we continue to expect the first license to market our Dengue vaccine before yearend. This is a breakthrough innovation designed to help reduce the worldwide burden of Dengue. Launch preparations are fully on track, and with the expected first wave of launches in endemic countries planned for 2016, we are aiming to maximize the impact of this new vaccine on public health through broad vaccination programs.

Now, turning to our animal health business on slide 11, the third-quarter performance marks the sixth quarter of consecutive strong performance at Merial. Sales exceeded EUR600m in the period, an increase of 9.3%.

The companion animals segment continues to be the main driver, with NexGard acceleration in the US, which is supported by a successful advertising campaign. In the production animals segment, sales were up 2.5% at constant exchange rates to EUR206m, driven by the avian business in emerging markets.

Importantly, the business operating margin of Merial continues to be very solid, at 28.5% for the first nine months of 2015.

Now, on slide 12, looking at the global breakdown of sales, the two largest geographies, namely the US and emerging markets, continued to show growth in the third quarter. These two geographies represented over 70% of Group sales this quarter.

Let me point out that emerging markets delivered double-digit growth, with strong contribution from Asia and in particular from China. Despite the economic slowdown in some emerging markets, all other emerging market regions continued to perform strongly during the quarter as well.

In Western Europe, sales were slightly down for the quarter, reflecting lower sales of Renagel and Aprovel as a result of generic competition, as well as lower Doliprane sales in CHC and delayed flu vaccine sales. Rest of world sales were also down, mainly because of generic competition to Plavix in Japan in the third quarter.

Now, turning to slide 13, I want to share the early progress we are making with the launch of Praluent, addressing the major health and economic burden of cardiovascular disease. Following US approval in late July and EU approval in late September, the product was launched in the US within days and will become available in some major European countries by yearend.

Our comprehensive patient and prescriber support hub called MyPraluent has already served as an effective platform for over 4,000 prescribers. We also continue to make important market access progress and recently secured branded preferred Tier 2 commercial formulary position with Express Scripts. Decisions from negotiation with other important players such as CBS and United are pending.

In addition to gaining greater US market access, near-term expansion opportunities are focused on driving product awareness and adoption. We are also pleased to report that launches in the first European countries are underway. Overall, launch progress is consistent with our expectations of a gradual uptake in the market.

Slide 14 helps to illustrate the various pushes and pulls on the topline year to date 2015. What you can see here from this bridge chart is the positive contribution of almost EUR600m in sales from new product launches, in addition to the approximately EUR650m in increased sales generated by other businesses over the last nine months. This contribution more than offset the EUR332m decline in Lantus sales during the same period.

As our new product launches become an increasingly important contribution to topline performance, I expect the balance of these pushes and pulls to further dilute the impact of the headwinds facing Lantus.

On my last slide, slide 15, I'd like to highlight the timelines for the regulatory submissions of two high potential products. Both admissions are expected to be completed by yearend.

For Sarilumab, the regulatory submission in rheumatoid arthritis in the US is imminent, and we expect to submit the product in the EU during the third quarter of next year. The submission in Europe will include the results of a head-to-head Phase III trial, the MONARCH study, comparing sarilumab with the leading anti-TNF drug Humira. I'm pleased to report that this study is now fully enrolled.

Second, regarding LixiLan, based on recently announced positive Phase III results, LixiLan-O and LixiLan-L, we plan to file this important addition to our diabetes portfolio later this year in the US and shortly afterwards in the EU.

With that, I will now turn the call over to Jerome to discuss the details of our financial results in the third quarter.

Thank you very much, Olivier, and good morning, good afternoon to everyone.

So I'll start with slide 17. As Olivier highlighted earlier, Sanofi grew both top and bottom line in the third quarter. As you can see from this slide, the impact from the foreign exchange tailwind on the net sales and business EPS has been easing in the third quarter, mainly due to weaker currencies in emerging markets.

Of note, Venezuela significantly reduced the positive FX impact in the period, and I will return to the impact of this country in our P&L in just a minute.

In the third quarter, Group sales were positively impacted by EUR508m, plus 5.8 percentage points, and the impact on EPS was plus 3.4 percentage points, of EUR0.05. As always, for additional information on foreign exchange sensitivity to key currencies, please refer to the first slide in the finance appendices of the slide deck.

Now, looking closer to the P&L on slide 18, sales were EUR9.6b, an increase of 3.4% in the third quarter. Gross profit was EUR6.682b in the period, up 4% at constant exchange rates. I will come back to the detailed gross margin and OpEx on the following slide. I therefore move straight to the other current operating income and expenses line.

Other current operating income was negative EUR136m in the quarter, compared to positive EUR39m during the same period of last year. As you may recall, in the third quarter of last year we booked a EUR40m gain from the termination of a license in the US in this line.

In the third quarter of 2015, other operating income includes a foreign exchange loss of EUR137m associated with a Group subsidiary based in Venezuela, following a change of Venezuelan bolivar rate versus the US dollar used for the translation of intercompany US dollar denominated payables in light of the most recent transactions.

Continuing with the next line item, you will see that the share of profits from associates has almost doubled as compared to the same period in the previous year, reaching EUR78m for the third quarter alone. This line, as we all know, includes Sanofi profit share from our equity in Regeneron under the vaccines joint venture of Sanofi Pasteur with Merck in Europe.

In total, business operating income was broadly stable at constant exchange rates when compared to the same quarter last year, reaching EUR2.8b in the third quarter of 2015.

I now turn to slide 19 and review the items below the business operating income. Net financial expenses were lower as compared to the same period of the previous year. The effective tax rate was down to 22.2% in the third quarter, which is now what we reflect for the year, which is an expectation of a tax rate to be 24% for the full year 2015, down from the previous guidance of 25%.

Business net income in the third quarter was EUR2.1b, up 5% at CER. And as mentioned earlier, we delivered business EPS of EUR1.61 in the third quarter, up 6.1% and up plus 9.5% on a constant exchange rate basis and reported basis, respectively.

As a result of our continued opportunistic share buyback activity, the average number of shares outstanding decreased in the third quarter by approximately 8m shares compared to the third quarter of 2014.

When it comes to the fourth quarter, as Olivier explained, we expect diabetes sales to have a somewhat adverse impact on the topline, and we have flagged that we expect to continue to invest in OpEx behind our new launches on late stage pipeline.

In addition, you should recall that there was two specific one-off items in the fourth quarter of 2014. That means there is a tough base for comparison. We benefited last year to the sum of EUR79m from divestiture of small products in Europe and also from a below trend tax rate of 21%.

Now, moving to slide 20, our gross margin in the quarter was consistent with our expectations for the full year, as [covered] earlier this year and reaffirmed last quarter. The third-quarter gross margin reached 69.7%, up 1.3 percentage points, benefiting from the favorable FX impact, the strong performance of the multiple sclerosis franchise at Genzyme and a favorable mix within the vaccines business.

These drivers in the quarter more than offset the negative impact from lower sales in the US diabetes business and the launch of generic competition for Plavix in Japan. Consequently, we now expect our gross margin for the full year 2015 to be around 69%.

Moving to slide 21, finally, I look closer at the evolution of operating margin expenses. OpEx was EUR3.8b, up 7.5% in the third quarter, and EUR11.4b, up 5% in year to date September 2015. This growth rate of operating expenses of 5% was fully in line with our previously communicated target of a mid-single-digit OpEx growth at constant exchange rates, and we continue to expect the same growth rate for the full year 2015.

Third-quarter R&D expenses of EUR1.4b were up almost 10% at constant exchange rates, reflecting a higher spend on the development program for dupilumab, the ODYSSEY cardiovascular outcome study with Praluent and our new collaboration with Regeneron in the field of human oncology which we had announced in the previous quarter. For the first nine months of 2015, the ratio of R&D to net sales was 13.8%, which was 0.3 percentage points lower than the same period last year.

SG&A expenses were EUR2.5b, reflecting an increase of 6.2% at CER, mainly driven by investments in the direct-to-consumer company for Toujeo in the US, the launch of Praluent in the US as well and certain European countries, as well as promotional support for multiple sclerosis brands and animal health advertising costs.

For your modeling purposes, please let me reiterate at this point the importance of ForEx as a significant driver of our operational expense line. In year to date September 2015, the impact of ForEx in OpEx was 8.9%. This significant increase simply reflects that a large part of our OpEx increase is in US dollars. We continue to target a mid-single-digit growth rate at constant exchange rates for OpEx for the whole year.

You have also noticed in our press release this morning that we have had a subsequent event related to a recently notified manufacturing issue with epinephrine auto-injector. The financial impact of this event is under evaluation and will be accounted for in the fourth quarter. An initial estimate is a negative impact of approximately EUR100m on business net income.

On slide 22, let me finish my review of the financial results with some comments on the details of capital allocation. For the period of the first nine months 2015, the Group generated over EUR5b in free cash flow, up 18%. Capital expenditures were EUR1b during the same nine-month period.

As of September 30, 2015, our net debt increased to EUR9.4b, which is largely resulting from the EUR3.7b dividend paid to our shareholders during the second quarter. During the first nine months, we've also returned EUR1.5b to shareholders in the form of share repurchases which we partially funded -- which were partially funded, sorry, by EUR552m of proceeds from the issuance of new shares.

Net of disposals, another EUR1.4b were spent on M&A, business development activities during the first nine-month period, including the Regeneron immune-oncology collaboration of EUR584m and the acquisition of Caprelsa rights for around EUR150m.

My last slide of this presentation, slide 23, reaffirms our full-year guidance. Sanofi reaffirms its 2015 financial guidance, with EPS to be stable to slightly growing at constant exchange rates. The positive currency impact on 2015 full-year business EPS is estimated to be approximately 6% to 8%, assuming that exchange rates remain stable in the next quarter at the average rate of September 2015.

At this point, I would like to turn the call back to Sebastien to open the Q&A session.

Thank you very much, Jerome. Operator, we're now ready to open the call for questions. As always, I will remind participants to limit themselves to one or two questions at a time. You can always come back into the queue and we'll be happy to take your further questions, if you have any. Operator, we are ready to open the Q&A session.

(Operator Instructions). Graham Parry.

Great. Thanks for taking my questions. So firstly, if I can ask a question about the mix of your guidance downgrade on the diabetes midterm outlook, it looks like it's entirely US related, but can I confirm that's correct and there's nothing changed in your outlook for the ex-US markets? And can you help us understand whether that's more of a volume or a price expectation that's changing?

Secondly, on Toujeo, you didn't mention any revised expectations for Toujeo, so can I just confirm that's also the case and you still expect to switch more than 15% to 20% of the Lantus franchise the consensus is currently assuming?

And then thirdly, on cost savings, regarding your comment about wanting to mitigate the impact of this, the guidance downgrade, at the operating profit level, that sounds like cost savings. Again, can you clarify that that's the case and that we should be expecting an updated cost savings number along with your midterm outlook next Friday? Thank you.

Okay. So thank you, Graham. I'll take the midterm outlook, the 2015 to 2018. And again, your question was related to ex-US. So the balance between US and ex-US, it's mainly, mainly US, of course, US based, using the same trends that we have seen during the last quarters there, in addition of course on Lantus, the fact that we will see and we have assumed three biosimilars on the market.

And in addition, our midterm includes half of the guidance related to Lyxumia penetration, Afrezza penetration, which is of course US driven. Lyxumia, it's a balance of Europe and the US. And again, on that half of the guidance, you have the BGM, as I mentioned during my remarks, business, which in that case is mainly European. So it's a mix, but the biggest impact is by and large coming from the US side.

Your second question was related to Toujeo. Do you want to take that question, Peter?

Yes, I can take the question. Hi, Graham. So you've seen in the slide actually that if you look at the European uptake, it's delivering really to the promise. You've see the German numbers, and actually we see that constantly in all the countries we have launched in Europe. In the US, if I look at the latest data in NBRx, as Olivier mentioned, we're at 14%. We're at total NRx now close to 4%. We're at total TRx 2.5% in the latest weekly data.

If you add all that together, we still think that we will be ahead of the numbers that you mentioned, which is 15% to 20%, as a share of Toujeo in the overall glargine business.

All right, Graham, and your third question was related to mitigate. So we use the word in order to indicate that through cost savings, as you mentioned, we were going to partially offset the impact of our new guidance. So the translation of mitigate in that case is partially offset.

So thank you very much, Graham. Next question, please.

Vincent Meunier.

Thank you for taking my questions. The first one is another one on the diabetes outlook. Lantus and Lyxumia contribute to the lower midterm targets. How do you think LixiLan can offset this, and could you quantify how much could be then protected?

I have a second question on Praluent. Can you please give us an update on the timing for the publication of the CV outcomes study?

And the last question is on the R&D spending. It was up by 10% in Q3 at constant exchange rates. You say that it's due to dupilumab, ODYSSEY and the new investment in IO. Should we expect this growth at the same level going forward? Thank you.

All right. Thank you very much, Vincent. So we can start with -- Elias, can you start with the CV outcome and (multiple speakers)?

So, as you know, the CV outcome study is an event driven study, and so the timing will depend on the accumulation of adjudicated events. Right now, what we have planned are interim studies that the DSMV is obviously going to look at, a 50% event, and then a futility analysis at 75% event.

So in terms of timing, if you look at the recruitment rate that we have, it could be mid-2016 or end of 2016. Can't tell you exactly the timing, but by next year we should have at least the interim studies. Now, if nothing happens in those studies and the study continues, as you know, by the planning that we have it will be about 2017, second half.

Very good. Thank you, Elias. Jerome, do you want to talk about R&D expenses in --?

I think that -- you know, Vincent, we mentioned already earlier this year that R&D expense would tend to increase for the reasons which we finally saw over this quarter. We are clearly seeing that the return we get from R&D investment is increasing. You can just measure that by the value of the assets which are coming from our pipeline.

Now, for beyond 2015, I more refer you to what we're going to say for medium-term financial outlook next week, so let's wait for next week to get some more detailed guidance beyond 2015.

Okay. Thank you, Jerome. Vincent, your question on LixiLan, of course, it's based on the results we have obtained. LixiLan will be an important asset in our diabetes portfolio, and that asset has been accounted for and is part of our guidance.

Thank you very much, Vincent. Next question, please?

Luisa Hector.

Thank you very much for taking my questions. So going back to the glargine franchise, could you add any more color on whether this is more of a volume or a price impact, particularly in the US there, please?

And on the three drugs where you've downgraded the expectation based on the latest penetration rates, Lyxumia, blood glucose and Afrezza, are you still looking for growth from those products, and would you say that your numbers are perhaps more in line with where consensus was for those?

And I noticed in other diabetes for the US there was a larger number than usual in the third quarter. I just wondered if there was anything unusual there and whether Toujeo had any stocking effect. Thank you.

Okay. So let me start with the first question, on volume or price. You have seen that we have indicated that glargine all together, Toujeo and Lantus, we were able to maintain our volume, right, TRx share of the basal market. So volume wise, we've been stable. Of course, Toujeo, there was a significant number of switches from Lantus to Toujeo. That's what you would expect, right? And as of today, the volume on Toujeo is driven about 75% by switches.

So the answer to your question is more net price, but it's not due to a change in our commercial terms during the quarter. It is mainly driven by what I alluded to or mentioned in my remarks, which has to do with a much larger and non-anticipated volume in government channels, and more specifically Medicaid, 340B, DOD and VA, which are now representing about 30% of our total Lantus volume, and prescriptions in that segment were growing around 20%, especially on Medicaid and 340B.

And as I'm sure you know, when you have increased your price regularly over time, in those segments you have a CPI penalty, which of course drives a much less profitable return on those prescriptions. So I think that is the answer to your question.

Now, on the longer term, of course, when biosimilar, and I'm talking about now midterm, will come up, we have to expect an impact on prices in order to compete effectively within the glargine market.

So your second question has to do with -- I forgot now.

Yes, this was basically Lyxumia numbers versus consensus and Afrezza numbers versus consensus. Obviously, we don't guide precisely on a per-product basis, but we have indeed rebased in these expectations both products. And I don't have the consensus figures in mind.

Right, right. It would be difficult for us, Luisa, to give you whether or not we are above or below consensus on those two assets. But again, the message is we have revised our forecast with a lower penetration of both compounds.

Next question, please?

Tim Anderson.

Hi. Thank you. On your multiyear planning assumptions, are you expecting that Lilly is the only biosimilar seller? Because my understanding is that US based Merck is likely to file their glargine in the next handful of months, most likely.

And related to that, when you sued Lilly it triggered a 30-month stay. Then you settled with Lilly. I'm assuming that that settlement is completely independent and wouldn't preclude you from suing other companies like Merck that could then cause a delay there.

And then a question on mergers and acquisitions. So often in the drug space, companies do M&A when they see their future growth prospects slowing. Today, you're saying your biggest franchise will slow more than you anticipated, so that begs the question of how you might seek to fill in the gaps. And historically, you've done lots of deals. Some of those have been big. Can we assume at this point that everything is on the table in terms of M&A and there's no upper limit to deal size, or are you more likely to stick with smaller bolt-on types of transactions, like Genzyme, for example?

All right, Tim. Biosimilars we have assumed in our midterm guidance. As I mentioned, we have assumed three biosimilars on the market at the end of the period. However, we also indicated that we don't think they would be [substantial], and therefore we would compete on the marketplace. So that's the answer. I don't want to enter into the legal aspects of what could be our strategy or not against some of those biosimilars or companies filing for biosimilars.

Regarding M&A, now, the sector has been very active, right, for M&A transactions in recent years. And from our point of view, some of the valuations observed were so high that we were not entirely convinced of the value creation for shareholders there. Now, interestingly, valuations now of a number of healthcare companies have started to come down since the summer, and it remains to be seen, of course, to whether or not the value of those assets are now more reasonable and if their boards or shareholders can be more realistic as to the price they can expect from their asset or company.

Now, Sanofi itself, we have been less active, as you know, in the last few years. It doesn't mean, however, that our M&A team has not actively reviewed opportunities, but we have remained financially disciplined and we will continue to be.

Now, in the meantime, as a result, we have a very strong balance sheet with low net debt level and strong free cash flow generation, and the current cost of borrowing remains providing financing flexibility, and this element could allow us to act very swiftly if we come across attractive opportunities. So that's what I would answer.

M&A is a very useful tool for the months and years to come which we will be able to use, again, when we are creating shareholder value, in order to strengthen the strategic areas we are going to compete in. So that's what I would answer. And your question around bolt-ons, there likely would be certainly more in the space of bolt-on acquisitions than anything else.

So at this point, we can move to next question, please.

Next question, please.

Jeff Holford.

Hi. Thanks very much for taking my questions. Still on the same themes, a year ago your predecessor made a big cut almost to the day today. Just really want to get a bit more from you on your confidence that this is enough of a guidance change around the diabetes franchise. Tim's already mentioned there's others like Merck coming in. Just really a little bit more from you, you really think that that's probably a very conservative look at this market.

And just if you can build into that what your thinking is on how Lilly is going to price in the US and whether this is going to be a battle for exclusive contracts, or you think that you both can coexist with individual payers.

And then the second question is your response on diabetes and how you're going to try and mitigate some of that, as you put it, could it be that it's the broader mix of your business that potentially needs to change? And may you potentially also be considering changing that mix through disposals and M&A, potentially? I just wondered if that has come up in your thinking in your strategic review.

And generally, if you could just give us a bit more perspective on your longer-term thoughts about managing the business. Is it more important to defend earnings through cost control or buybacks, or is your preference really to invest for growth? Thank you.

All right. A lot of questions here. So to your question, Jeff, on what can Lilly or what Lilly will do in the US, it's a different question to answer.

Regarding the portfolio discussion, I would prefer to keep that discussion for next week, Friday. I think it would be more appropriate to have that discussion there, including overall capital allocation, frankly.

So on the diabetes and the guidance, Peter, do you want to give the answer to Jeff?

Well, I think perhaps one further comment on the biosimilar. Of course, we cannot speculate what the pricing of Lilly would be. The only fact that we know is of course what Lilly is doing in Europe, and there we see indeed that they're coming in with I would call it a reasonable price discount compared to the Lantus prices, let's say between 15% and 20%, depending on the country. By the way, we see so far relatively limited penetration of the biosimilar of Lilly in Europe, with the exception of one or two minor countries.

And then on the diabetes guidance, of course, you will have noticed that the range of that guidance is a relatively large range. And as Olivier mentioned before, he is confident that this is a robust guidance with a certain degree of prudence baked into it.

Yes, Jeff, you used very conservative. We have used conservative. So it's genuinely conservative, but maybe not to the degree of very conservative.

Thank you. Next question, please.

Michael Leuchten.

Thank you. It's Michael Leuchten from Barclays. I'm afraid I need to go back to the diabetes franchise, please, because I think I get what you're saying about channel mix, but what I don't understand is why that would all happen in the fourth quarter this year. So the timing of the rebates, the timing of the channel mix into the government programs, why did that all come to a head in the third quarter and going into the fourth quarter?

And then also, why does it then extend into 2015 to 2018, because your longer-term reduced guidance compounds that into the years thereafter? So that's question number one.

And then question number two is just in terms of the biosimilar. So the basal insulin market overall, in your long-term guidance, what do you assume the volume growth of this market is going to be, please?

Okay. For the first question, Jerome has the answer.

So, Michael, you know -- maybe you know how it works. Actually, when you sell a dose of Lantus, you don't know in which channel this is being sold. So in fact, the way you do it is that you take some assumptions on your share on the various channels. And when it comes to the government channels, it's a bit later that you actually know how much has been sold through these channels, in particular because then you get, in particular for Medicaid, invoices, actually, coming from the various states, the 51 states of the US. And these come even with back bills which come back to 2014.

And actually, which is what is happening now, that we get back bills which are some of them referring to 2014 or beginning of 2015, which are somewhat increasing the assumptions we took. And then of course, when you see that your share of sales taking place in the, let's say, Medicare channel is increasing, you have to bake that into your own models, that you revise a bit up the share, the level of average rebates that you assume to pay on a quarterly basis to the various channels.

So if you put all that together, it may impact your variation over one quarter. So more precisely, if you take the fourth quarter, the fact that we are -- now we know that we're having to book a bit more of these rebates in the fourth quarter, including some back bills coming from 2014. And we know as well that back -- and I think it was mentioned earlier today, that back in 2014 we took a price increase, so that we had a hard, tough comparison base for 2014.

So there is no acceleration as such, but a recalculation of the share of Medicaid, and part of it is a result of Affordable Care Act, which is driving more patients into the Medicaid -- the Medicaid segment. So altogether, this share has, yes, increased to the area of 16%, 17%, and on top of that a few other channels.

Now, your second part, which is about the medium-term outlook, then you start to think which channels do I sell, what are the rebates happening in each of these channels? And of course, if you look at the end of the period, we take into account the biosimilars, which we may have mentioned before. And of course, all those are cases; these are just models. They are models, and this is why you come to a range.

So you should not conclude. There is this trend for clearly more being sold in government channels. Now, the rest is of course a combination of various assumptions.

Thank you very much, Jerome. And, Michael, your second question, regarding the assumption on the market growth of basal, we have taken a rather conservative assumption of low single-digit growth from the basal market growth. And I understand that it may be more conservative than some of our competitors, but that's what we have put in.

Thank you. Next question, please.

Steve McGarry.

Hi there. Thanks a lot. Two quick questions. In terms of the guidance for the glargine, the diabetes franchise, a minus 4% to a minus 8% compound, obviously within that you've got growth products such as Toujeo, LixiLan and whatnot coming through. And between pressure on Lantus and switching from Lantus to Toujeo, it certainly suggests that we're going to have a sustained double-digit decline in Lantus reported sales. Can you confirm if that's the case?

And then secondly, in terms of the biosimilars and how bad this could possibly get, does your assumption for biosimilars assume the three products in the US market, or is it ex-US predominantly? Thanks.

All right. So the last one, the biosimilars, it's US and ex-US, so it's really global, and certainly US and Europe. That is our assumption.

Now, on the midterm guidance, again, the Toujeo, the glargine assumptions we have made is 2% to 4% decline, with the pricing pressure of those biosimilars on the market on Lantus, while Toujeo will continue to grow. So that's what I think I can say about that piece of our guidance.

Peter, do you want to add anything there?

I think Jerome alluded to the number of balls in the air in the whole model, obviously, and at the end of the day you get a couple of positive elements, like Toujeo, like LixiLan. You get another couple of negative elements, like for example the mix into the Medicaid channel. So for your information, we saw this year an 18% increase for our glargine business in the Medicaid channel.

And if you look at the total government channels, like Medicaid, DOD, VA, etc., this is now accounting for 33% of the Lantus sales. So you see that the increase, which is pretty high on a level which is already 33% of the total Lantus sales in the US, you get a pretty significant negative lever on that. And that is exactly what you see, of course, in Q3, and you will see more of that moving forward. But as Jerome said, it is a model. There are, of course, assumptions in that model, and more than that I cannot really add.

Operator, we're going to take a couple more analyst questions, please. So one before last.

Florent Cespedes.

Good afternoon, gentlemen. Florent Cespedes from Societe Generale. Three quick questions. First, to come back on diabetes guidance, maybe could you give us a little bit more color on the shape of the decline, notably in 2016, as you will not have biosimilar on the US market? So is it a fair assumption to assume that next year maybe it will be a little bit less under pressure, and then towards the end of the three-year period, as you assume more biosimilars, we should see an acceleration?

Second question is on the emerging markets. You reported a pretty strong quarter here, even on some almost double digit. Could you give us a little bit more color how sustainable it is, and could you give us the growth rate in China for pharma only?

And maybe a last question on vaccines, for Olivier Charmeil. Could you give us more color on your expectations for Q4, as it's quite a volatile business, and also on dengue vaccines, as I see that you expect to launch by the end of the year? Could it be possible to have more than one country by the end of this year, or is this a bit delayed towards early 2016? Thank you.

All right. Let's start with Olivier Charmeil. Do you want to answer the question on vaccines, Olivier, please?

Okay. So to guide you for Q4, we are expecting a strong quarter, a double-digit growth for the last quarter. That is going to be very much driven by the second part of the flu season. We have in the US a flu season that is going to be more geared versus last year in the Q4. We are on track to deliver another record season in the US, with more than 65m doses in the US.

So we are very happy with the way we progress our differentiation strategy. It's very successful. So it's both nice in terms of volume, but also in terms of price. The high-dose performance is continuing to progress very nicely.

With regard to dengue, as we had indicated in the previous quarterly calls, we are expecting to get the first license by the end of this year. It could be one, two countries. Difficult to say whether we are going to have sales this quarter for dengue. It will depend on exactly when we get the first license. What you should keep in mind, should we get sales, it's going to be very, very minimal, but we are expecting to get license for dengue this quarter.

Okay. Thank you very much, Olivier. Peter, emerging markets?

Yes, Florent. So, actually, we're extremely happy with our Q3 results in the emerging markets. It is a very consistent performance. It is a continuation of already a strong second quarter and it is actually across the businesses, across the regions. So it's a very consistent performance.

Your specific question on China and on pharma, so I can tell you that we have a third-quarter growth on pharma of 16%. And actually, again, it is very, very consistent. We have very good performances with our cardiovascular, and so basically Plavix and Aprovel. Diabetes portfolio, Lovenox is growing well; Depakine is growing well. And even our oncology business unit is doing well with Eloxatin and Taxotere, also partly benefiting from label extensions on Eloxatin last year.

I think the reasons, of course, are notable of that outperformance of the market, by the way, which is actually pretty strong. I think we have an ideal portfolio for China and we're basically treating chronic diseases. We are less subject to markets like, for example, antibiotics that go down faster than markets like diabetes.

Second, you might remember that in the last quarter last year we again added a wave of what we call our county expansion strategy, or geographical expansion strategy, which of course bears fruits, and so this is another reason why we are doing so well.

Now, in terms of outlook, it is a bit difficult really to understand exactly how this is going to play out today in China. Besides, of course, the economic outlook, you know that a couple of reforms have been taken in that market this year, and then actually it is not so easy to predict. But of course, obviously, price pressure in China that has already started in the past, which is actually not very new, is of course predicted to continue.

But all in all, a very decent quarter in the third quarter, and consistent across the geographies and the businesses.

All right. Thank you very much, Peter. Your last question, Florent, is related to 2016, and obviously we cannot give you a full 2016 financial guidance today. And as usual, we will share that with our full-year results in February.

The only thing I can tell you is qualitatively. We can point to 2016 as another year of investment in new product launches, so continuing what we have started in 2015, and also developing our pipeline, including what we announced earlier this year, our immuno-oncology alliance, with the sales mix which can include another difficult year in diabetes. But that would be mitigated by growth from our other franchises and the growing sales contribution, of course, for new products. So we can discuss that aspect a little further next week.

And when it comes to specifically on diabetes in 2016, the only thing I can tell you is we do not expect significant additional pressure on rebates for both Lantus and Toujeo. However, of course, based on what you heard in the last half hour, the pressure through government channels may still be there.

Thank you. Thank you very much, Florent. So last question?

Yes. Operator, we're ready for the last question, please.

Philippe Lanone.

Hello, gentlemen. Thank you for the question. One, on the PCSK9 market, because from the prescription we can get, it seems that Repatha is taking off more rapidly than Praluent, so could you add some more color here?

And even if we're not talking too much about 2016, maybe a question for Jerome on currency, because the current situation seems to be less favorable because of EM countries, and I guess that in 2016 we might have a slightly negative currency impact based on what we have today.

And also, maybe a quiet comment on tax rate for modeling purposes, because it's been lower in the second half of 2015 than in the first half. So should we project that for next year?

All right. Thank you very much, Philippe. Jerome, can you start with currency and then tax?

The beauty, or whatever, of currencies is that they are extremely volatile and so it's always extremely difficult to predict. So everything being equal, I think you're right, of course. We are going to first start with a much higher base in 2016, when you compare 2016 to 2015.

Again, the overall positive headwind for the full year is between 6% and 8%, which of course is still quite important in 2015, and we should not expect to see that next year. Are we going to have a negative headwind? Well, maybe. I don't know yet. You need to go country by country, and of course the US dollar/euro exchange rate remains the first driver beyond any other one. So I would wait a bit to think how it's going to work.

However, you can just refer to the tables we now give you regularly, so that you can do on your own many, many calculations if you so want. I think there is a lot of details available, so hopefully that's enough for you to make this type of calculation. And of course, the IR team is here also to help you in that respect.

On the tax rate, well, it's always a bit difficult to predict tax very precisely, tax rate. There are many elements which influence the tax rate, including the share of profit which you generate in which country, and this may depend upon the profile of growth, on the profile of your activity, to a certain extent when you increase your sales in Lantus and in [Lyx]. Taxable income which goes to Germany, and Germany has a higher average tax income than the average of the Group, so surprisingly favorable on the tax rate.

So altogether, you remember that we guided that the trend was towards an increase. Back in 2014, we were at 24%. We guided for 25%. We managed to get 1% improvement, which we have posted this quarter for the full year. But I would say that the trend up remains a tendency even if we try to improve that, so we do consider that the tax rate increase which we have guided for medium term remains true. And if we can clearly do a bit better, we'll do.

Thank you very much, Jerome. So, regarding your question on Praluent, I would caution that it's very early days, frankly, in the launch. We would recommend not to over interpret PCSK9 market data. The PCSK9 prescription data at this point is extremely small compared to, of course, the expected size of the market. And again, at this point we do not view the differences in product performance as really representing the underlying demand.

And when you look at the data itself and the NPA prescription data, they are underreporting some specialty pharmacy. It's the case for Praluent regarding Accredo, and Accredo, however, provides data for Repatha, and we are not part of it. In addition, our prescriptions are very much into the patient assistance program and also what we call the bridge program, where patients are waiting for coverage by their insurance company, and of course those prescriptions and those patients are not captured by IMS.

So, overall, at this point, it's really -- the task is to get coverage for those patients and the future patients. And we're very optimistic based on what happened with Express Scripts and we are waiting now for two other very important PBMs to give us their answers and their decision.

But very importantly, we continue to be confident in Praluent, its clinical program, in the education, the number of prescribers we have in our MyPraluent hub, which is over 4,000 subscribers now. 75% of them are specialists, about 25% GPs, and insofar they are prescribing very much at 90% cases the 75-milligram dose. So we think we have the flexibility there of the dual dosage.

So that's what I would answer. Thank you very much.

Thank you, Olivier. So at this stage, we'd like to thank all participants in today's call. And I obviously will be very pleased to share with you the roadmap for the Group in our upcoming mid-management meeting on November 6, which will take place here in Paris, in our corporate HQ.

With that, goodbye.

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