Sanofi SA (SNY) 2016 Q2 法說會逐字稿

Ladies and gentlemen, good afternoon. Welcome to the Sanofi Q2 2016 results conference call and live webcast. I am Celina, the Chorus Call operator. I would like to remind you that all participants will be in listen-only mode, and the conference is being recorded. (Operator instructions.) The conference must not be recorded for publication or broadcast.

I would now like to turn the call over to Mr. George Grofik, Vice President, Head of Investor Relations at Sanofi. Please go ahead, sir.

Good morning and good afternoon to everyone on the call. Thank you for joining us to review Sanofi's second quarter 2016 results. As usual, you can find the slides for this call on the investor's page of our website at Sanofi.com.

Moving to slide two, I would like to remind you that information presented in this call contains forward-looking statements that involve known and unknown risk, 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 Documents de Reference for a description of these risk factors.

With that, please advance to side three and let me introduce our speakers on the call today. With me are Olivier Brandicourt, Chief Executive Officer, Jerome Contamine, Executive Vice President and Chief Financial Officer, as well as Elias Zerhouni, President, Global R&D. Also joining us today for the Q&A session, the heads of our five global business units, Olivier Charmeil, Executive Vice President, General Medicines and Emerging Markets; Peter Guenter, Executive Vice President, Diabetes and Cardiovascular; Carsten Hellmann, Executive Vice President, Merial; David Loew, Executive Vice President, Sanofi Pasteur; and David Meeker, Executive Vice President, Sanofi Genzyme.

First Olivier will discuss the key highlights of the second quarter of 2016, then Elias will provide a summary of the progress we have made in the R&D in the quarter. After that, Jerome will review Sanofi's financial results before we open the call to Q&A.

Before we start, I would like to remind you of some important accounting items that affect the second quarter. First, as a result of the announcement of exclusive negotiations with Boehringer Ingelheim on the potential asset swap, certain changes in the way we report and present our results are required. Under current IFRS accounting standards, we need to report animal health separately as a discontinued operation. However, to help with your year-over-year comparisons, we will use the term aggregate, which simply means that our animal health business is included in our financial result lines as before.

Second, given that there has been no indication of improvement in the economic situation in Venezuela, Sanofi decided earlier this year to change the FX rate used for the Venezuelan bolivar. Sanofi now uses the DICOM exchange, which was around 628 Venezuelan bolivars per US dollar. This new exchange rate replaces the official CENCOEX rate of 6.3 Venezuelan bolivar per US dollar, which was used in the second quarter of last year.

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

Thank you, George. Good morning, good afternoon to everyone, and welcome to our second quarter 2016 earnings conference call.

So, starting with slide number five, as we expected this was a somewhat challenging quarter, which was marked by the headwinds from Venezuela and the Plavix loss of exclusivity in Japan. Company aggregate sales, which include animal health, were down slightly to EUR8.9 billion in the quarter.

Currencies, mainly in emerging markets, had a negative impact of EUR382 million, or roughly 4% of sales. However, excluding Venezuela, sales would have been up almost 2% at CER.

Business EPS in the quarter declined by 2.1% at constant exchange rates to EUR1.31, which Jerome will explain in more detail later. Importantly, however, this is also the last quarter we will be seeing the negative impact from the Venezuela currency situation, and the Plavix LOE impact will be diminished in the second half of this year.

As we will explain in subsequent slides, the gross margin evolved very nicely despite the negative headwind of average net prices for diabetes and the Plavix LOE in Japan. This is largely the result of our initial efforts to streamline our industrial affairs organization as well as to focus on higher margin products, which allowed us to invest in R&D and our new launches.

Now on slide six, looking at our sales performance in more detail, I am pleased that the new organization of our five global business units is now fully in place and is starting to deliver on the targeted operational improvements. A couple of highlights in the quarter included the continued strong growth of Sanofi Genzyme, up 20%, and also Sanofi Pasteur at 6.3%, although this is a seasonally low quarter for sales for this GBU usually.

I will comment on the performance of each of our key franchises in just a minute, but I would like to point out that sales for our diabetes and cardiovascular GBU, which only includes developed market sales, declined only modestly, down 3.5%.

On slide seven, you can see sales by global franchise and geography. The growth profile of the franchises shows the solid performance of specialty care, vaccines, and animal health across all geographies. On the other hand, established products were down mainly due to the combined impact of Venezuela and the loss of exclusivity of Plavix in Japan last year, while Auvi-Q in the US had a small impact on the decline in developed markets as well.

The impact of Venezuela was also particularly seen in our consumer health franchise performance. Once again, we will see a significantly reduced impact from these items in the back half of the year.

Finally, as it is a measure you are all interested in, I will point out that our global diabetes franchise declined by 3.2% in the quarter.

Turning to slide eight and taking a closer look at our specialty care franchise, we maintained our strong momentum in this important part of our business. In MS, our product portfolio continues to gain share and grew almost 70% to EUR423 million, driven by both Aubagio and Lemtrada. We view this franchise as evidence of our ability to build new and successful franchises.

In rare diseases, all our major therapeutic franchises grew at a double digit rate. Fabrazyme growth was enhanced by the timing of orders this quarter, so its 12% overall growth in the first half is more representative of the true performance.

In Gaucher and Pompe, we continue to accrue new patients, and recorded growth of 12% and 14% respectively in Q2. Sales of our legacy oncology business were slightly down despite the solid performance from Jevtana.

Moving on to slide nine, vaccine sales were up 6.3%, driven by strong performance of our pertussis, polio, and Hib franchise. Specifically in this franchise, sales were strong in Europe and emerging markets.

In the US, PPH sales were stable due to a gradual supply improvement of Pentacel as a result of additional batches shipped during the quarter. We continue to work diligently on getting Pentacel supply in the US back to a normalized level during the second half of the year.

On Dengvaxia, we have continued to work closely with local health authorities in various endemic countries to bring this very important vaccine to people. We have seen some progress recently with the announcement of a vaccination program in the state of Parana in Brazil. Also, Dengvaxia was approved in Costa Rica, which is its fifth approval to date.

Despite these developments, the overall uptake of Dengvaxia is delayed by recent political changes and economic volatility in Latin America. With only a limited number of public immunization programs confirmed today in endemic countries and the majority of regulatory approvals still pending in Asia, Dengvaxia is unlikely to meet our prior sales expectation for 2016.

Moving to slide 10, our global diabetes franchise continues to perform in line with our guidance of minus 4% to minus 5% decline at a compounded annual rate for the period 2015 to 2018. We know that you are all interested in any developments regarding our payer discussion for 2017 market access in the US. However, these discussions are ongoing at this point, and the negotiation has been consistent with our existing diabetes guidance.

In the second quarter, global diabetes sales declined by 3.2%, which was largely due to the moderating decline of 7% in the US.

Other encouraging news from our new generation diabetes portfolio include Toujeo reaching sales of EUR141 million in the quarter, which helped to moderate the decline in the overall diabetes franchise, Adlyxin approval by the FDA this week, as well as a positive FDA panel recommendation for LixiLan, which makes us optimistic to receive FDA approval in August as expected.

Now looking at Praluent on slide 11, we continue to believe that the PCSK9 class meets a high medical need and has a tremendous commercial potential globally. I am particularly reassured by the latest US prescription trends, with Praluent capturing about half of the PCSK9 market. Separately, we have made some progress in market access, including an easing of step edits with several US payers, although current payer restrictions will continue to limit uptake this year.

I should also point out that we have filed for once monthly dosing in both the US and EU. Our commitment behind Praluent remains high, and we believe that positive data from the ODYSSEY OUTCOMES study will significantly benefit our discussions with payers and ultimately increase adoption of the PCSK9 class.

Moving to slide 12, our consumer health business had a mixed quarter. On the one hand, the franchise grew 5.4% in developed markets, adjusting for minor divestments, and this was helped by a strong cough and cold performance in Europe and by a successful DTC campaign for Doliprane in France.

On the other hand, emerging market sales were down 13% as a result of Venezuela, as well as challenging economic environments in Russia and Brazil. Of course, the impact from Venezuela will begin to annualize next quarter. Overall, the performance of our CHC business was better if we strip out the impact of Venezuela and parameter changes, with growth of 2.7% in the quarter.

At this point, let me add a brief comment on our excitement about the planned strategic asset swap with Boehringer Ingelheim, which is expected to lift Sanofi into a global leadership position in the large and growing consumer healthcare market.

Once closed, this deal will enable us to optimize our global CHC business through the compelling complementarity of the two combined products portfolios in large CHC categories and provides us with a broader footprint in key geographies.

Besides the addition of highly recognized brands, we also believe that the strong commitment of the teams from Sanofi and Boehringer Ingelheim and their excellent performance will drive the value creation from this attractive business exchange. From a reporting structure standpoint, the CHC business will be set up as a separate global business unit reporting in to me.

Turning to slide 13, taking a closer look at the breakdown of sales and growth by geographies, you can see that our balanced profile remains one of Sanofi's key strengths.

Despite market volatility in countries like Venezuela, Russia, and Brazil, our emerging market sales were broadly stable versus last year and up a reassuring 6.7% when excluding Venezuela. Sales in Latin America, obviously the most impacted, were down 15.1%, but a more robust 5.7% increase if we exclude Venezuela.

As I mentioned earlier, our performance in the rest of the world was negatively impacted by the generic erosion of Plavix in Japan, which started in June 2015. And obviously, this impact will begin to annualize in the second half of this year.

Slide 14 summarizes our progress on delivering the 2020 strategic roadmap. Q2 was a challenging quarter as we had signaled, but we reported final results that were consistent with our full year guidance. We continue to reshape our portfolio with the signing of the CHC asset swap with Boehringer Ingelheim in June, and we expect to close this deal by the end of the year.

We also announced earlier this month that we have entered into a confidentiality agreement with Medivation, under which we are allowed to have access to due diligence and confidential information. We are certainly pleased to have the opportunity to engage with Medivation, but I emphasize that we will remain financially disciplined throughout this process.

However, I would ask participants on the call to respect the sensitivity of this situation and to keep questions limited to our second quarter performance.

On our major launches, our performance has been a bit more mixed. Toujeo is performing well and Praluent is progressing, but the uptake of Dengvaxia has been delayed, as I have discussed.

We have also advanced our innovative pipeline. Adlyxin, our GLP-1 receptor agonist, was approved by the FDA this week. And in May, LixiLan received a positive vote from the FDA advisory committee, and we anticipate approval in August.

And to go into a little bit more detail on our pipeline, I would like now to turn the call over to Elias Zerhouni, our President of Global R&D. Elias?

Well, thank you, Olivier, and welcome to all of you on the call. I'd like to turn to slide 16 and really share with you probably one of the most significant Phase III results we've had this quarter.

And that is the CHRONOS study, which is the 52 week data for dupilumab in severe -- moderate to severe atopic dermatitis. As you can see, the EASI-75 results are consistent at 16 weeks and maintained at 52 weeks on top of corticosteroid therapy, with significant clearing of the -- or near clearing of skin lesions in about 35% to 40% of patients, as you can see.

And this really give us, again, comfort that the TH2 mechanism that we have been really addressing with dupilumab is a powerful mechanism, independent of steroid actions, that we will see again the -- hopefully in asthma. And as announced here, we are going to start the Phase III study in nasal polyposis in the first quarter of 2017 to expand the reach of dupilumab in different disease areas.

Now turning to slide 17, I'd like to just give you a brief update on the news flow that you are going to experience over the next quarters. I think the -- when you look over the next 12 months, it will be a pretty rich news flow.

There will be additional regulatory approvals for Dengvaxia throughout the world. In diabetes, Adlyxin, as you heard, was approved in the US this week. And in May, LixiLan also received a positive from the FDA advisory committee, and we anticipate approval in late August.

Now, for sarilumab, the FDA accepted for review our BLA in rheumatoid arthritis, and the PDUFA date is set for October 30th of this year. And in Europe, sarilumab was filed earlier this month.

Then lastly, I'd like to highlight again that we continue to expect the second interim analysis for the ODYSSEY OUTCOMES data for Praluent during the fourth quarter of 2016.

And finally, I want to highlight that we will be starting Phase III programs on six important assets in the second year of the -- half of this year. And note that the olipudase alfa, which is the -- for Niemann-Pick B, which we used to call Niemann-Pick B and its acid sphingomyelinase deficiency, has already started in the third quarter. And our pivotal trial for our partnered PD-1 immuno-oncology antibody checkpoint inhibitor with Regeneron started in the second quarter.

So, with that, I'll turn it over to Jerome Contamine to go over the financial results of the quarter.

Well, thank you, Elias, and good morning, good afternoon to everyone. So, before starting on slide 19, let me just remind you once again that my comments are based on aggregate Company sales, which still include animal health, as we know, while under IFRS rules Merial is treated as discontinued operations as of January 1st, 2016.

Now let's have a closer look at our second quarter P&L. As already mentioned earlier, aggregate Company sales were EUR8.9 billion in the quarter, a slight decrease of 0.2% at constant exchange rate. Gross profit was EUR6.3 billion, an increase of 0.2% over last year, which I will explain in more detail in just a minute.

Operating expenses were up by 4.1%, in line with the mid single digit guidance we provided earlier this year and reflecting our investment behind both of newly launched products and our MS franchise, as well as advancing our late stage pipeline.

The anticipated increase in operating expenses on stable Company sales resulted in a 5.8% decline in the business operating income to EUR2.3 billion. A lower tax rate of 24% partially offset high operating expenses, leading to a business EPS decline at a small 2.1% as contact exchange rate, or EUR1.31 per share.

I take this opportunity to confirm that we expect the tax rate to be, for the full year, between 24% and 25%, and most probably on the low end of this range.

Now on slide 20, let me provide you with more details on the improved gross margin and increase in operating expenses. First, we are pleased to see initial positive impact on gross margins from efficiency programs and savings. The savings are firstly coming from the simplification of our worldwide organization and a more focused portfolio around our specialty products.

Specifically, last quarter these positive effects have more than offset the negative factors, including the impact of our US diabetes activity and the vaccines mix, resulting in an increase in gross margin to 70.8%. On the full year basis, we continue to expect gross margin to be above 69% and below 70%.

Now looking at operating expenses, R&D spend grew 4.5% to EUR1.3 billion, mainly reflecting investments behind a new -- our new immuno-oncology alliance with Regeneron and also, as I said, some increase behind our late stage Phase III studies.

SG&A expenses were up 3.9% to EUR2.65 billion, as we deployed resources behind the global launches of Praluent and Toujeo while preparing the launch of our immunology franchise. For the full year, we continue to expect operating expenses to grow at a similar rate as 2015 at constant exchange rate, so around 4.5% to 5%.

On slide 21, as Olivier mentioned earlier, we experienced a continued FX headwind in the second quarter, which contrasts with the strong FX tailwind we had in 2015. This effect decreased reported aggregate Company sales by EUR382 million, representing a negative 4.1% impact in the second quarter.

The main drivers were the adverse evolution of the US dollar as well as several emerging market currencies, more than offsetting the positive effects from the Japanese yen. The currency impact on business EPS was EUR0.07 per share, or 5 percentage points.

I now turn to slide 22. Our net debt increased by approximately EUR1.3 billion over the same period last year. Seasonally, the second quarter is when we have our highest net debt level due to the payment of our annual dividend.

The increase in net debt was also impacted by increased net share repurchase activity, as well as some business development spend which mainly occurred in the first quarter.

Moving to my last slide, let me conclude by reiterating our outlook for 2016. Taking into account our performance during the first half of the year, we expect 2016 business EPS to be broadly stable versus 2015 at constant average exchange rates, barring major unforeseen adverse events. And when applying June 2016 average exchange rates to the remaining quarters of the year, the impact from ForEx on reported business EPS is expected to be around minus 4%.

I will now turn the call over to Olivier for his conclusion.

Thank you, Jerome. So, to conclude on slide 25, while you can see that the financial results in the second quarter reflected the anticipated headwinds, the Company continues to implement its 2020 strategic roadmap.

We have continued to reshape our portfolio with the signing of the CHC asset swap agreement with Boehringer Ingelheim. And as I noted before, our performance with launches was a bit more mixed. Toujeo reached EUR141 million in sales in a competitive market and now captures about 6.1% of the basal insulin market in the US.

On Praluent, the gradual uptake of the brand is underway globally, and we have increased our US market share. And on Dengvaxia, unfortunately the uptake has been impacted by a limited number of public immunization programs confirmed to date in endemic countries. Also, we have advanced our innovative pipeline forward to -- for future growth.

So, overall I am pleased with the operational performance in the second quarter and, in particular, the benefits that we are beginning to see from our simplified and more efficient organization around the five global business units.

So, now I'd like to be -- I'm happy to answer the questions. We are happy to answer the questions that you may have.

We will now open the call to your questions. As a reminder, we'd like to ask you to limit your questions to two each.

(Operator instructions.) Tim Race, Deutsche Bank.

Thank you for taking my questions. Yes, it's Tim Race here from Deutsche Bank. So, my two questions are, first of all, if we start off on Lantus -- the diabetes franchise generally, I know you can't talk about the US, but could you talk about biosimilars in the rest of the world, particularly in Europe, what you're seeing so far in terms of the impact? I know that there has been very divergent performance, whether it's been in Germany or Slovenia, etc. And it'd be interesting to know how you're coping with that and how they're taking share, where they're taking share, and why they're taking share, and also what the competitive dynamics you're seeing with Tresiba are in those markets as well as the same time.

And then the next question just on Dengvaxia, could you confirm that you're not changing your peak guidance for Dengvaxia and your peak expectations? And do you expect 2017 to be slower than perhaps people or consensus currently forecast? Thank you.

All right, very good. Thank you very much, Tim. So, diabetes, Europe, and the impact of the biosimilars there, Peter?

Yes. So, thanks, Tim, for the question. So, as you have learned from the numbers, actually our European diabetes franchise is doing extremely well. Despite launch of biosimilars, despite competition with Tresiba, and also of course some price decreases we had to accept on Lantus, actually we still had a value growth of 1.2%.

And in volume growth, our franchise of glargine is actually growing by 9% for a basal market that is growing 6%. So, to give you the big picture, it's actually a very decent performance, I would say, in Europe.

Now to answer precisely your question, if you look at the EU5, the impact of Abasaglar is actually pretty limited. The share conglomerated for those five countries, the EU5, is actually only 1.3%. There is a bit of an outlier, which is Italy. For the rest, those countries are actually pretty limited.

It is true that some Central and Eastern European countries have reached higher shares. And Slovakia there is an outlier with a 13.8% market share for Abasaglar. To give you some other numbers, you have -- sorry, it's 17% for Slovakia, Czech Republic 4.6%, Poland 5.4%.

And actually, the driver of that is primarily co-pay differences between Lantus and the biosimilar at the patient level. We have, of course, also taken in some cases the decision to revisit our pricing strategy to make sure that, in terms of the patient co-pay, we are at level playing field.

So, all in all, we are of course monitoring this very closely, but I would say relatively little impact so far.

All right. Tim, on your second question, as you know we do not give peak sales forecasts for individual drugs. And as you know, we have guided that the group of the six key new products could generate peak sales of EUR12 billion to EUR14 billion by 2025. And clearly, Dengvaxia is among the six. Beyond that, we are not providing more detail.

Now, as I said on Dengvaxia, sales can fluctuate significantly depending -- because we are depending on emerging countries' government orders, so it can fluctuate according to local political and economic situations, local budget restriction, and of course that leads to the size of vaccination programs which will be implemented across those countries.

So, for 2016, as I said, we have only a limited number of public immunizations. We started with the Philippines, as you remember, in Q1, and we had about EUR20 million for a campaign of vaccination of one million schoolchildren which went very well. And we've got the second order for 500,000 people from Parana state in Brazil. We hope to continue to get other states. As you know, you have larger states also in Brazil.

But it's difficult to predict exactly how this will unfold during the 20 -- the rest of the year. So, our position is at this point Dengvaxia is probably unlikely to meet Sanofi's or our prior sales expectation for 2016.

Operator, next question?

Florent Cespedes, Societe Generale.

Good afternoon, gentlemen. Thank you very much for taking my questions, two quick ones, the first on emerging markets. Could you share with us where you still see challenges ahead and where you see some upside in the short term? And could you elaborate a bit on the situation in China, the performance in China, which seems to be a little bit weaker this quarter? Is it due to some payment patterns in vaccines?

And my second question is on consumer. What could reenergize this franchise? Because you flagged that Doliprane did better in France following a DTC campaign. So, do we have to understand that you have to invest more or it's just the recovery of the emerging markets that will help? Thank you.

Okay, very good. So, the first question on upside in emerging markets short term, that's for Olivier. Olivier?

Yes. So, thank you, Florent, for your question. So, we have been performing very consistently in the last quarter in the emerging markets. We continue to show steady growth.

We have been growing 6.7% for the total quarter in the emerging market. Our growth is very steady across the geographies, growing in Latin America 5.7%, growing in Eurasia 4%, growing in Asia a little bit less.

We continue to see significant momentum in China, where on the pharmaceutical side of our business we grew 11.7%. And we continue to outgrow the market and to outgrow our peers.

Our portfolio, which is mainly addressing chronic diseases, well fits the need of China. We outgrow the market in the therapeutic categories where we are. And we bear the fruit of investments that we have been doing in the last three or four years with our country market strategy.

Overall, the performance in China was at 2.6% for the quarter but 11.7%, as I just mentioned, of the pharmaceutical market. We have been impacted on the vaccine side of the business, and I will let David Loew comment a little bit further on the vaccine campaign.

On the vaccine and what happened there, David?

So, in the emerging markets overall, we have seen a strong performance, growing 9.8%. This was driven mainly by the pediatric vaccines.

However, as you have heard before from Olivier Brandicourt, Dengvaxia is a bit lower than what we had expected. In China, we had the Shandong case where there were illegal sales activities and break of co-chain. Therefore, the Chinese authorities have intervened and asked the manufacturers not to pass any more through different levels of distributors.

There is now regulation that the manufacturers need to deliver directly to 200 points of central process control in China. We are setting up this logistical chain, and we anticipate that this unprecedented impact is going to last probably four to six months. After that, we see China coming back to normal again.

And on CHC, Florent, yes, we have mixed results. And you've seen -- I detailed, on one hand, the developed market. And you -- we have mentioned Doliprane in France, which responded well to DTC.

So, performance has been dragged down by what happened in emerging countries and more specifically, in fact, in Russia even more than Brazil, and of course the big impact of Venezuela, which we shouldn't see much more during the second half of this year.

But frankly, we are looking forward to put that BU together. So, you're talking short term. I would say starting in 2017, assuming that we can close the deal by the end of this year, we're very excited by putting those two portfolios together and putting the two teams together -- we're working on plans already -- and improving this overall performance.

In terms of margins, as you know, Sanofi margins are, on our side, around 30%, which is higher than what we think is on the other side. And we will bring all that together to the Sanofi standard. So, we feel very optimistic and enthusiastic about what this new view will deliver over time.

Thank you very much.

Thank you, Florent.

Tim Anderson, Bernstein.

Hi. This is [Wei Chan] in for Tim Anderson. We have two questions for you. The first is on immuno-oncology. So, Sanofi, very similar to other companies, is a bit of a latecomer in terms of IO. So, the first question really is does Sanofi intend to sort of build an IO portfolio internally, or are you considering acquisitions as the best way to grow there?

The second question is in regards to M&A. At the analysts' meeting in November, there was a suggestion that Sanofi could make acquisitions around EUR20 billion, or north of EUR20 billion, something along the lines of the size of Genzyme. So, the question is, is that still the plan? And then a related question to that is, in regards to larger M&A, is Sanofi willing to rule out a megamerger at this point? Thank you.

Okay. Thank you for your questions. On immuno-oncology, just a reference to what we did last year, you remember we expanded our collaboration, which was a very important move with our partners at Regeneron. That was only one aspect.

And I'm going to ask Elias to tell you also how much more than that we did in order to ramp up our position in immuno-oncology. So, Elias, can you --?

So, again, as I've said before to you and to Tim, as you know, immuno-oncology results so far, you have a 15%, 20% response. It's clear that to get to more than that you'll have to have combination therapy that address not only checkpoint inhibitors but also ways of activating the immune system. And so, that's what we're pursuing.

We believe that there is a huge space of possibilities for combinations, by monoclonal combinations, bispecifics, even trispecifics. And we have some significant plans both in terms of partnership with Regeneron to really launch as fast as we can the PD-1, for example, which is in pivotal trials in other combinations.

But remember also that we have internal assets because of our vaccine tradition, in immunology where we have a BCG vaccine. We have also the TGF beta program. We have other capabilities internally to accelerate the immune response which will be complementary to that.

And so, when you ask the question, we have a three way strategy. One is partnering with Regeneron. The second is combining with our internal assets and Regeneron assets and then coming with a new generation, what I -- we call the third generation that hopefully will put us not just as players in the field but hopefully as leaders between now and 2020.

Thank you, Elias. Wei, your question on M&A, just starting by the last question, large M&A today is not part of our agenda. And on midsize, our focus, in fact since November or a little bit earlier, has been to deliver on our 2020 roadmap. And in delivering that, we want to strengthen certain key therapeutic areas. You mentioned oncology. It's one of them, and we previously highlighted others.

M&A is one tool we can use and we will use to strengthen those different TAs. And we mentioned in the past up to the size midsize, up to the size of Genzyme at the time, which were around $20 billion. But it's bolt-on and/or up to midsize. That's what I would answer.

All right. Thank you very much, Wei. Next question, please?

Jo Walton, Credit Suisse.

Thank you. My two questions, firstly on Praluent, now that you have approval for Praluent in some markets outside of the US, I wonder if Peter could tell us a bit about how you look at the ramp rate for this drug ex US. Clearly, you don't always have the step edits and you have a completely different structure of financing ex US. So, I wonder if you could just tell us from your initial discussions with the authorities in the regions that you've now got Praluent approved.

Secondly, could you also just give us a bit more of a flavor, perhaps Jerome, of how you're faring in restructuring? That's something that Sanofi is somewhat belatedly coming to. I appreciate you'll presumably have another round of restructuring to do with the BI integration next year. But in the base business and what you're doing, perhaps you could give us some examples to help us understand exactly what this restructuring means in practice and what it might mean to your cost ratios. Many thanks.

Okay, Jo. Peter, are you ready for Praluent ex US?

Yes, sure. Hi, Jo. Thanks for the questions. So, actually if you look at the situation in Europe first, I would say we have quite some encouraging news flow in the last couple of weeks and months, actually.

If I take again the big five for Europe, UK, Praluent is now recommended by NICE, and the final guidance was issued in June 2016. In Germany, as you know, IQWiG is always a difficult hurdle to get over to. And just as reported, the IQWiG has -- had actually a couple of months ago decided that the PCSK9 class, in the absence of outcome data, did not have any additional benefit.

Yet the encouraging thing is that the G-BA, who ultimately decides on pricing and reimbursement in Germany, is working on what they call a group of high risk patients that could be treated in a so-called economic way with PCSK9. So, we are waiting for more precisions from Germany, and we expect in the coming weeks and months to get more precision on that.

France, we had a negative opinion of the Commission de la Transparence, and so there we have to come back when we have the CVOT study.

Spain, we had very good news. We are now in the national reimbursement list in Spain. But as you know, you then have to negotiate on the regional level.

And finally Italy, we are looking forward to launching the product in the fourth quarter.

And I not going to bore you too much with smaller countries in Europe, but I can also tell you, and we will confirm that to you in the next quarterly earnings call, that we have a steady flow of midsized countries in Europe where we get -- we crack the nuts one after one in terms of reimbursement.

Last but not least, we had the approval in Japan. We expect to have the Japan pricing in September. Again, you know the dynamics in Japan. You have the two week prescription limit, so of course a gradual uptake has to be forecasted for Japan. But I would say, all in all, a relatively good news flow.

Thank you, Peter. Jo, on the -- what you call the restructuring, and I guess you are referring to our EUR1.5 billion program cost saving which we mentioned in November. So, on this one, we're going to be on track. We are on track with the program.

We don't provide, of course, the phasing. And we mentioned at the time, which is still the case, that we will be backend loaded with that. It's still the structure we had announced at the time, which is basically two-thirds of cost savings will come from simplification and what would be a more focused portfolio, and the -- one-third would also come from investment prioritization. And we mentioned during our remarks that our gross margin has already benefitted from some of that restructuring.

Now, specifically on the BI, because it may be a good example, I'm going to ask Jerome to give you some insights.

So Jo -- thank you, Olivier. So, specifically on BI, I mean, as you may recall and you may know, what we are going to acquire from BI is assets country by country, which means that we are putting a lot of efforts as of today between the signing and the closing to prepare to the proper integration of these assets in each and every country and to right size our organization, both at country and at global level.

So, in a way, there is a lot of effort which is being done beforehand. Part of the efforts to improve the margin will then take place as a result of revisiting our overall strategy, including our purchasing strategy vis-a-vis advertising and having the right marketing approach.

And you may know -- you may recall that in a previous call related to the signing of this swap, we said that we would like to bring the overall consumer health business of Sanofi plus BI to the level where Sanofi is today, which is above 30% EBITDA margin.

Is it going to take place in 2017? It will be progressive. I would say more 2018, 2019 to really get to this level. And clearly it will be an effort as compared to where Boehringer Ingelheim is today.

When it comes to ratios, I mean, you remember that back in November we gave some guidance for 2018. And we said that on one hand we would benefit from these cost savings on refocus, as Olivier highlighted again. At the same time, we are reinvesting behind our launches, new products, and we are also investing behind R&D. And we cannot forget the guidance that we will increase our overall balanced spending progressively.

And altogether in 2018, we said that at minimum our ratio should be similar to 2015, everything being equal, both in terms of gross margin and OpEx. The good news is that -- as we said is that already our gross margin is in the 70% area. So, it shows that these efforts are paying off, and we are continuing to do that.

Thank you, Jerome. And just last, Jo, I want to add that we remain vigilant in identifying additional cost cutting opportunities beyond the program we have announced in November.

So okay, very good. Thank you. Next please?

Luisa Hector, Exane.

Hello. If I could start with diabetes and probably more on the US side, how much visibility do you have on your contracts for 2017? And how do you plan to position Adlyxin and LixiLan? And maybe you could also address some of the comments from the FDA advisory committee, where the pen design and the color of the -- of LixiLan was discussed in great detail, with some concerns there, I think, from the panel.

Okay. Thank you, Luisa. So, you start first and then the FDA panel with Elias.

Yes, all right. So, Luisa, on the contracting cycle for 2017, as you know these contracts have not been finalized. Of course, we have responded to the bids, and the contract documents are pending with quasi all major payers.

As some more color, of course as anticipated and in line with our assumptions for our guidance, these discussions, we could describe them as relatively intense, but we should have more visibility by the third quarter earnings call. We anticipate, of course, a net price erosion, but this is baked into our 2015/2018 guidance.

I would also take the opportunity here to remind you that the guidance is a CAGR guidance. It's not a year by year guidance. So, the minus 4% to minus 8% is not necessarily what you are going to see every year of that guidance.

And on Adlyxin/LixiLan, so of course we're very happy with the registration or the license of Adlyxin. I am not going to go too much in detail for competitive reasons in terms of the positioning of those respective products. But it's clear that lixisenatide is very synergistic with glargine, with Lantus' PPG effect and FPG effect.

So, we are looking forward to this launch and that's both for in the first injectable space as in the intensification space. We have the pivotal trials, LixiLan-L, LixiLan-O. And obviously we are looking forward to continue our discussion with the FDA on LixiLan and be able to launch the product in the next couple of weeks.

Thank you, Peter. Elias?

Yes. Thank you for the question. So, we're working, actually, with the agency to address the concerns that were expressed at the advisory committee which related primarily to human factors. I think there are -- we decided to have two pens because it does offer a wider range and serves more patients. It also allows us not to decrease the dose of insulin as much as what other products would offer.

I think it's -- in terms of the color, I mean, we have -- we're hopeful and confident that this will not be an issue, as they have been tested in terms of human factor studies. And as I said, we'll see towards the end of August, in terms of the PDUFA date, what comes out.

And we're working diligently. I can't comment on what the FDA will decide, but we're very hopeful in that regard.

Thank you, Elias. Next, please?

Graham Parry, Merrill Lynch.

Thanks for taking my questions. So, firstly on Praluent, could you give a bit more detail around the reduced step edits with US payers that you referred to and the percentage of covered lives that's affecting, and perhaps what the average number of statins that patients now need to fail on those plans to get on therapy would be, and to what extent outcomes data at the year-end could help with contracting for 2017, or is that really going to be a bit too late and we'd have to wait for 2018?

Secondly on the basal insulin 2017 contracting, a follow up from Luisa's question there. What percentage or proportion of your commercial contracts are already negotiated for next year on longer term contracts from prior years versus the proportion that are up for grabs or for renegotiation this year?

And then thirdly on Dengvaxia, just to go back to the question here on previous guidance, I know this predates you, Olivier, but Sanofi had previously said that this was a vaccine where they saw blockbuster status of over EUR1 billion in potential sales. I wonder to what extent you still feel comfortable with that comment. And to what extent is the slowdown here a slowdown of ramp versus lower demand than originally anticipated? And I'll stop there. Thank you.

Thank you, Graham. All right, a word, Peter, on step edit on Praluent.

Yes, Graham. Actually, I think that was at least five questions in one (laughter). I'm not sure I captured everything, but I'll try.

So, what we have seen in the second quarter is actually some further contracting with some very important Part D plans. So, that is number one. And then more by the end of the quarter, actually, we managed in two important Part D plans and one commercial plan to get rid of the Zetia step edit.

Now, this is an important point because, as you probably know, if you look at the PCSK9 eligible population, only very few patients today are treated with statins and Zetia. So, actually the step edit on Zetia is severely hampering the population.

To give you an idea, number of patients of the eligible population have -- receiving today endostatin and Zetia is only 4% to 5% of the population. And even in some step edits, you have to go to two statins and Zetia, and that's only 1% of the population. So, you can imagine that getting rid progressively of that Zetia step edit is an absolute key focus of our discussions.

On CVOT outcomes, probably Elias can comment on the interim analysis. But in case that would be overwhelmingly positive and we would stop the study, I would imagine that in the commercial piece, of course, we would start to negotiate even if the official cycle is done. But I think that if there is major medical news, we are totally capable and (inaudible) to of course not wait for another 12 months until the patients get the benefit of such a major event.

Then commercial contracting for glargine in the US, actually you know that some of those contracts are on a yearly basis. Other contracts are on a multiyear basis, even though, to be totally transparent, even multiyear contracts are not written in stone. And we have seen situations whereby payers would come back to us in case of new phenomena like, for example, launching of new products.

So, it goes either way. And that's basically what I can say to that.

Thank you, Peter. Graham, on your Dengvaxia question, so, again, I won't give you long term guidance. What we have in the past 12 months mentioned for 2016 was a potential forecast or achievement, so a performance of EUR200 million. We think it's not going to be achieved in 2016, as I said earlier, because of that -- what we qualify as a delay in getting these large immunization programs in Latin America. So, that's what I would say.

All right. Thank you very much. Next question, please?

Philippe Lanone, Natixis.

Good afternoon, two quick questions. First on the guidance, you had previously indicated that 2016 would be more of a backend loaded year, with first half more difficult and second half more favorable. You end up the first half with being up 1.5% in EPS. So, mathematically it should be better than the guidance for the full year. So, my question is whether you have some things that you see differently for the second half, maybe with the OTC being weaker, or if there is some other item that might change your views on the second half.

And also, in the mature products, some products are declining more rapidly, not only Plavix but also Avapro and Renagel. So, could you update us on the general situation for these two products?

Sure. So, I'll take the first one about the guidance. We have not changed our broadly stable business EPS guidance for the entire year.

You are right. H1, first half EPS growth was up 1.5%. So, what I can say is it's a good indication that the financial performance we have achieved during the first half were -- give us confidence in our ability to deliver the overall guidance.

However, more specifically to your question and why we're not changing, Praluent, again, has had a slower than expected launch, primarily due to significant US payer restriction. We are not entirely sure whether or not that's going to improve significantly during the second half.

We just talked about, right, the number we had mentioned for dengue, which I also -- where I also mentioned that it would be difficult to achieve in terms of number of public immunization programs. So, that impacts the performance for 2016.

So, overall I can say that we prefer to adopt a conservative approach, given this uncertainty around the launch, and the trajectory of these two launches.

So, is there another question? And then, of course the question on established products, Olivier?

Okay. So, Philippe, that is the answer to your two questions.

And with regard to Avapro, we had significant sales in Venezuela. And so, we are down 16% versus last year with the Venezuela. If we exclude Venezuela, we are down only 1%. So, there is no rupture here in terms of trend.

With regard to Renagel, we are excepting Generex competition. You know that the FDA had issued new guidelines at the beginning of the year, which might delay the entry of Generex. But we work under the assumption that they could come in the first quarter.

With regard to Europe, we -- due to Generex and the products that are -- due to Generex being marketed in some countries, we are down 30% in Europe year-on-year, and same in EMEA.

Thank you very much.

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

Peter Verdult, Citigroup.

Good afternoon. Thanks. Peter Verdult here from Citi. Could we just go back to two topics, oncology and diabetes? Maybe kicking off with you, Elias, could you just put a little more meat on the bones on the earlier comments regarding your organic efforts in oncology? Just wanted to know the latest on the CD38 program, and now that you've got a PD-1 in Phase II, just a sense of what the nearest combination IO assets are in the Sanofi pipe and what the relevant timelines are.

And then, Peter, on diabetes, correct me if I'm wrong, but over the year exclusivity has never been a feature of the US-based Lyxumia market. Given the changing dynamics, do investors need to start thinking about incumbents potentially seeking exclusivity going forward?

And then just very -- as an add-on to the last question, I mean, it seems to me that LixiLan, you've got an interesting commercial opportunity. But I just want to understand how -- the commercial performance of Lyxumia outside of the US, why are we different this time given the lack of CV benefit that you have versus your peers. Just want to understand whether you're going to bring all your eggs behind the LixiLan product versus the monotherapy. Thanks.

Thank you, Peter. Do you want to answer?

Okay. I'll start on the -- Peter, on the exclusivity question. So, this is of course very difficult to predict. We cannot rule out that a few payers will seek exclusive access for 2017. And by the way, this phenomenon is also assumed in our growth guidance.

But if you look at the overall patient pool that is on Lantus, that is doing well on Lantus, it is so big that it's not, I would say, intuitive to imagine that there will be massive contracting for exclusivity and therefore, in case we would not be the exclusive glargine, that there would be literally hundred thousands of patients to be switched. This is probably hard to imagine.

The question on LixiLan, Lyxumia, again, for competitive reasons I would not like to go very deep here. I remind you that when we launched Lyxumia in Europe, unfortunately we didn't get it through reimbursement for the classical reasons you know in Germany and France in the diabetes market.

But in those markets that we launched it with reimbursement, actually we gained easily between 10% and 20% market share. And in most cases, Lyxumia was indeed prescribed on top of Lantus, which was for us kind of a proof of concept, that from a messaging standpoint and from a clinical practice standpoint LixiLan is actually responding to an unmet medical need. And that's why also, of course, we had the positive vote at the FDA advisory committee.

So, as you rightfully mentioned, we are pretty excited on this opportunity and looking forward to the launch.

Thank you, Peter. Oncology?

Okay. Peter, thanks for the question. So, let me be a little more detailed.

Obviously, as you know, our CD38 is going into pivotal trials in the fourth quarter. We're really looking at that as a major opportunity, because not only is CD38 itself a active drug, but we also have good evidence that combinations will work extremely well, especially CD38/PD-1, which we're working on.

We also have antibody-drug conjugate programs in Phase II that are giving promising results that we will report on at a later date and continue.

In terms of organic growth between combinations, as I told you, we do have internally to Sanofi the only GM-CSF in the world that can be combined very effectively. And we are not only doing this within our own collaboration with Regeneron but with other partners outside of Regeneron and Sanofi.

Clearly, when you look at inorganic enhancements to the immunology/oncology strategy that we have, you should note that we've signed an agreement with BioEnTech, a German company in the mRNA field, because we have some ideas about exactly how you could combine that approach to maximize the immuno-oncology.

But I'd like to turn it over to David, who really, because of his specialty care focus, can probably comment even more on the strategic approaches that we have both in immuno-oncology and not immuno-oncology inorganic growth, as you know. David?

Thanks, Elias. So, I think the oncology strategy is one we're revisiting. This is an area that's of high importance for Sanofi as we go forward. The pillars are working with what we have.

Prostate, of course, just to highlight Jevtana, which is a drug which continues to grow in prostate cancer, it was up 8.8%. And so, we have a strong interest in deepening our involvement there.

Second is building out around a CD38. And as Elias said, this is a molecule that certainly has tremendous potential. We would be second in class there as we complete our development program. But the importance of that molecule to the treatment of multiple myeloma certainly seems to be growing in significance, and so we expect to play there and potentially in other hematologic indications. So, we'll see how that goes for that part of the development.

Immuno-oncology, again, I think Elias highlighted again our efforts there. But these are three clear areas where we'll look to build out a very targeted approach in oncology. We're not looking to be the biggest, but we're looking to play meaningfully.

Thank you, Elias. Thank you, David. Next question, please?

Vincent Meunier, Morgan Stanley.

Hello. Thank you for taking my questions. And sorry in advance if some of them have already been addressed, because I have been disconnected.

On consumer in the US in the context of a challenging environment in some EM markets, would you consider the US as a top priority? And would you update us on Cialis OTC?

The second question is on Praluent. Can you update us on the legal dispute against Amgen? And lastly on the Generex in Europe, what is bolt-on level of margins for that business? And would a divestment be dilutive? And if yes, by how much? Thank you.

All right. So, we are going to start with Praluent litigation with Karen. Karen, do you want to start? Then we'll go to consumer -- DX Europe with you, Jerome, and I'll answer the consumer US.

Well, on the Praluent litigation in the US, there's really not much to report since we were last here. As you know, we had the jury decision in March. And since that time, we've been working on post trial briefings. They were completed at the end of May, and we're in a position of just waiting for the judge to rule on the post trial briefings. And that can come any day, but we think likely, since May, it would be a matter of two to three months from May. So, something in the next quarter.

Thank you, Karen.

Thank you, Vincent, for your new question on the Generex. So, as you remember, I mean, we said back in November that we would put our strategy in the situation up under review and take a position within one year, so you could say by the end of this year.

In terms of profitability, I mean, as compared to the competition our Generex business is pretty profitable and is really doing well, I mean, the loss of force in terms of streamlining the organization, both from the sales and marketing standpoint, but also, more importantly, from an industrial standpoint. So, it's an interesting business. Now it's clear that this is a medium size business in Europe, so you can think how you balance that versus other alternatives.

So, I will not speculate on what we would decide. And on your question on dilution, I mean, that it's all about. But if we were to decide to go further anyway, I mean, this will take time because, I mean, carving out this business takes always time, as we've seen for going -- carving out the old CHC business.

So, in all cases, I don't think that's something which is for -- to know. But the first thing is to decide upon having what we want to do subjectively. And I just reconfirm that so far this business is really among the best performing, I believe, in the -- for Generex in Europe, with a margin in the 20%, 25% range.

All right. Thank you, Jerome. So, consumer US important? Yes, of course, tremendously important for our CHC business. We've done traditionally and through Chattem, our unit in the US, we've done very well. We grew on average above market for many quarters, as you probably know.

This quarter was slightly different because the allergy season was weak in the US so we didn't achieve the same type of performance. But overall, again, very important, doing well, and planning to continue to do well there.

When it comes to Cialis OTC switch, we are working -- to be honest, we are working with the regulator to fine-tune the pathway. We continue to be optimistic about that switch, and I would say more to come.

Thank you. Operator, we'll take our last question.

Seamus Fernandez, Leerink.

Oh, thanks very much for the questions. Just on Praluent as my first question, most doctors we speak to think that a minimum benefit of 20% is necessary for the PCSK9's to really see a meaningful inflection in use. That's also consistent with your interim look and the timing of the interim look. Is there any reason why that 20% threshold might not be achieved at the interim but perhaps could be achieved at the final analysis? That's my first question.

The second question really is related to the question of your willingness to go up in price in competitive acquisitions or potential acquisitions and how you assess value versus strategic acquisitions. I'm just wondering, in the context of some of the current dynamics and how some of the companies are trading within the oncology space, are you seeing opportunities for other potential acquisitions, should value no longer be realized in the Medivation process? Thanks.

Okay. Praluent, Elias, the 20%?

Right. So, your question relates to what's the likelihood of achieving that 0.8 hazard ratio at 20%. That's what it means.

And obviously, as you know, there is a relationship between having a 75% interim analysis with the number of events we have and the hazard ratio that you would to -- that is currently in the population. If the hazard ratio is greater than 20%, the likelihood of the interim analysis being positive is much higher, obviously, but we don't know that.

The only indication we have is the long term safety study with a hazard ratio of 0.5. It gives us confidence that in fact there is an effect. On the other hand, you have to realize that the studies have to be -- are event driven, and it would be hard to speculate.

But there is no question that having a 20% hazard ratio over the interim analysis gives us a higher likelihood of having an interim that's positive. But that is not going to be determined by me. It's going to be determined by the independent board.

And we would like to see the outcome measured on every single component of the MACE index and not just on any one component so that we can be very, very sure that, if we have overwhelming efficacy at the interim, it will be very, very determinant efficacy for the medical field to truly make PCSK9 a major, major alternative for patients who cannot respond to maximal earlier standards.

Okay. Thank you, Elias. And Seamus, on your last question, we have KPIs like every other company when it comes to M&A. So, we are looking for a return over the cost of capital over a period of three or four years. Of course, the strategic value plays a role, no doubt, because that's a little bit included into your question. And as in the case we are looking at currently where we want to rebuilt oncology, of course that has an important value.

But as you know, historically our Company has been very, very disciplined when -- financially when it comes to M&A. And that will continue. So, that's what I would say.

All right. With that, thank you very much, everyone. And do you want to conclude anything, George?

Thank you, everyone, for joining our second quarter call. This will conclude the call right now.

Okay, perfect. Thank you.

Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.