Jerome Contamine – Chief Financial Officer and Executive Vice President
Michael Leuchten – Barclays Capital, Research Division
sanofi-aventis (SNY) Barclays Global Healthcare Conference March 13, 2013 1:30 PM ET
Michael Leuchten – Barclays Capital, Research Division
My name is Michael Leuchten from the European pharmaceuticals team. It’s my pleasure to introduce Jerome Contamine, CFO of Sanofi. Jerome will do a presentation and then we’ll have a breakout session across the room — across the hallway. Jerome, over to you.
Okay. Thank you, Michael. So good afternoon, each of you. I am here with Anne Whitaker, who is our President from our operations in the — in North America; and George Grofik, who is the U.S. VP for Investor Relations. So with the 3 of us will clearly be at your disposal for the breakout session. So maybe just let me maybe give an update on where we stand in terms of implementation of our strategy. So if you remember now 4 years ago, when Chris Viehbacher took the helm of Sanofi, we were facing one of the toughest patent cliffs in the industry with more than EUR 5 billion — say, EUR 20 billion reasonable sales to be lost over the coming 4 years. And on top of that, the non-consolidated sales of Plavix in the U.S., which was sold and marketed by BMS, so partly by BMS, which also take another hit this time, not on the sales line but on the profit line. So clearly, we were facing one of the toughest patent cliffs. And what we did about this period of time, and I will try to get you through that again, but I think it’s always important to understand where we come from, it was both to cuts from the company to make it more efficient and more effective. We did a lot of cost savings but also comes from the way the company was operating. One of the area where we had to put the highest focus was R&D and I think we are probably still — there’s still a way to go but there have been clearly some improvements taking place over this period of time. But at the same time, we try to implement a different strategy. And this different strategy was, well, let’s not just be dependent upon innovation. A company of the size of Sanofi cannot just be dependent upon the success of innovation, which definitely is one of the drivers for our growth and value creation in this industry, but also it is extremely risky. Even more, as long as our R&D organization has proved to be, reasonably, let’s say, weak. But let’s look at developing platforms, which offer sustainable growth, because our analysis at that time was that while the industry as a whole was suffering from visibility, everybody was thinking, well, what’s going to happen beyond — behind the cliff? So the point of being able to develop a sustainable growth strategy is also typical of the strategy we have implemented over this period of time. Now we are really at the dawn of a new period, which is a new period of growth. Of course, because of the impact of patent expiries that we have also — or still seen in 2012, on a comparative basis, 2013 for the first half, we still look low on declining, but the underlying growth is there and that’s from the second half of 2013. We’ll see this growth overcoming the remaining impact of patent expiry. So in that respect, it’s a turning point. We feel in a good — on track to deliver the medium-term target that we’ve given now September 2011 when we had 1 day of — the so called Investor Day when we gave the medium-term target 2012, 2015 to grow top line 5% and to grow the bottom line faster than the top line.
At the same time, we are now in a period where we are preparing for new launches, so that’s, of course, a happy event, as we have had significantly more drugs being approved, both in the U.S. or in Europe, and 2013 is definitely also an area where the focus on launches will be much more important.
So today, we are executing a strategy around 4 pillars. The first is to grow a global health care leader with platforms, not independent platform, but synergistic platforms, having synergies, whether it is in R&D, in terms of marketing organization, geographic footprint or shared services, bringing new product innovative to market. And once again, we had 9 approval taking place in the last 12 months, either in the U.S. or in Europe, continuing but very — with high discipline to seize growth opportunities in terms of acquisition. We did a lot of acquisitions over the last period. I think, today, we are clearly being — we have been always disciplined. We have proved that we have been good at integrating these acquisitions. So we are looking, let’s say, carefully and — but also diligently at possible further bolt-on acquisitions. I will come back on that. And continue to adapt the organization. Again, adapt the organization is both cutting cost, saving costs, but also creating a new mindset to have linear operations, more reactive operations and to do forfeiture strategies, I mean, typically moving beyond the pill, looking at solutions for patients is also part of our agenda. All that should allow us to deliver sustainable long-term growth and definitely over the last — over the coming 3 years, having significant growth while increasing shareholder return.
So this table just tells you where we came from, in figures this time, and where we are today. Over this period of time where we have lost sales from patent expiry, at the same time we have been growing the rest of the business and we did acquisitions. So at the end of the day, the sales have increased by around 20%, from EUR 27.6 billion to EUR 39 billion. The good thing today is that our exposure to this big legacy drug business is now getting very small. I mean, in 2012, in terms of sales, and here I exclude Plavix U.S., this was just representing 3% of our sales. So this is what’s really at stake to lose. And on top of that, we may continue to lose here and there some exclusivity, for instance, in Japan, but the impact will be nothing sort of the same magnitude as what we have seen in the past year in Europe and in the U.S. And therefore, we expect to monitor that into the growing evolution of the group. So growth platforms that we have defined in 2008 are now representing 70% of our sales. I would say that probably, for the ones who have been following us for years, I mean, you would have been somewhat doubtful that this growth platform could represent such a large part of our overall sales as early as 2012, and we expect that to be above 80% in 2015.
Emerging markets. Well, over this period of time, and this includes acquisitions, but let’s say medium-sized acquisitions, we have grown the sales from EUR 6.5 billion to EUR 11 billion. That’s around 15% CAGR over 5 years, much beyond the 10% that we plan to expect to get for the coming year.
In terms of R&D, the pipeline has changed significantly. We were clearly lagging behind in terms of biological compounds in our portfolio. Now the biological NMEs, and here I don’t include vaccines, represents close to 50% of our overall R&D pipeline. Of course, the business EPS, as was reported, the impact of loss on highly profit-generative products and the shift of our business, but we managed to increase the EPS over this time. And the dividend has constantly been increased from EUR 2.20 to EUR 2.77 per share.
While this is a bit of detail of what I’ve just described, well, we like these drugs, because, and per the last time I presented, for the part which is on the right. And on one hand, the sales of growth platforms have basically doubled. This includes acquisitions, but organic growth we could say has represented half of this overall growth. At the same time, as you can see, we have lost on a yearly basis more than EUR 5 billion of highly profitable sales over the same period of time. And this includes Taxotere, this includes Aprovel, this includes products like Ambien or Eloxatin. So significant decrease, and once again, was this big patent cliff that we have been facing over this period of time. So basically, we are on the verge to lose 25% of our sales, close to 50% of our profit. We managed to largely compensate for that or more than compensate when it comes to sales.
I go a bit more and dig into 2012. As you see here, we have increased our sales by EUR 1.4 billion. The last factor is the fact that we benefited from positive headwind — or tailwind, I should say, from currency exchange impact, so this is not necessarily recurring. This is just reflecting the exchange rate of the euro versus a number of currencies in 2012. But if we exclude that, we had a slight positive increase in spite of a EUR 1.3 billion of sales from key genericized products being lost this year. And on top of that, the termination of our agreement with Teva on Copaxone on the disposal of their mix business. How do we get there? We get there through the growth of the growth platforms, plus 1 quarter of Genzyme sales, which we didn’t have in 2011, but we contributed in 2012.
So this is for sales. Now if I look at the impact of Plavix, Plavix U.S. lost its patent exclusivity in — on the 17th of May last year, so now it was close to 1 year ago. As you can see, the impact, as planned, and this is what we announced already in September 2011. The negative impact has been EUR 1.3 billion on the net profit basis in 2012. However, there is still EUR 800 million to go through in 2013. So we still have a step to go through entering the first half of 2013, which explained the guidance as we have given for this year.
Well, we managed to allocate union profit. I mean, of course, in this period of time, it was difficult to grow the profit even if we did it at 2010. But at the end of the day, our net profit in 2012 declined by 12.8% versus 2011 on a constant exchange rate basis, and we’re still EUR 0.60 above the 2008 level despite all these elements. On top of that, I must say that we have tried and we’ve delivered a bit beyond what we expected ourselves. So we gave, at the beginning of 2012 the view that the declines would be between minus 11% — minus 15% or minus 12%. And actually we ended close to the higher end of this range.
So now what about the future? So these are the performance of our growth platforms. Altogether, they grow to 10% in 2012. This includes the 1 quarter of Genzyme. So on the — including — if you want to make things pro forma comparable, it’s plus 7.8%. Emerging markets grew 8% and I will come back on that.
Diabetes solutions, this is Lantus but also Apidra, has been — had very strong performance in 2012, and hopefully will continue in 2013. Vaccines, without newer launches in this year 2012, have grown by 5.7%. Consumer health, where basically we were very small in 2008, has delivered EUR 3 billion sales, ranking us #3, on growing close to 10% in 2012. Animal health, low-single digit. And Genzyme, clearly recovering with a 17% increase of sales.
Other products, other innovative products is still a limited contributor. This was a weakness of Sanofi clearly, not to have new products to launch. We have a few new coming now, so clearly we expect this line to have — to be a higher contributor in the years to come.
So emerging market, and I know that there are a lot of questions around the emerging market. I think the characteristic is that we have defined emerging markets on a wide basis including Eastern Europe, now for 3 years, to all countries or all areas where we see that the ratio of health expense to GDP is below 5%. And in these regions, of course, the evolution of this region has not exactly been the same in 2012. As you see, 3 main regions have been growing above the 10% threshold, double digit. It’s Latin America, Asia, East Africa and Middle East. On the other hand, the Eastern Europe, Russia, Turkey have been just going by 2%, small 2%. In fact, this 2% is also here again a combination of no growth in Eastern Europe, which has been attracted by the Western Europe evolution, low GDP, control of public expense on reduction in prices of drugs. On the other hand, Russia has continued to grow above 10%.
This being said, now emerging market represents the first area of Sanofi with close to 32% of our overall sales. What is most importantly in this pie on the left is the fact that Western Europe has a declining part. We used to be around 33%, being extremely exposed to Western Europe in 2008. [indiscernible] develop post-emerging markets on our presence in the U.S., now this just represents 23.9%, and we expect it to go below 20% in 2015. So we think today that we have a balanced exposure in terms of the geographic split. The U.S. remained clearly an area of potential growth, in particular for innovation, also an area where price increases are more — I mean, able to be implement as compared to other areas even if it’s getting complex, but Anne is a specialist. Emerging market, Western Europe being more concentrated on the cost in growth areas and lower [indiscernible] product activity and the rest of the world being mainly Japan.
Diabetes. I mean, no need to say that this has been a success over the last years. For the eighth quarter in a row, we have been growing double digit our diabetes franchise. And the jewel is of course, Lantus which has been growing 19% last year. And well, we believe remains a good standard in terms of insulin treatment, basal insulin treatment as we’ve seen with one — on the one hand a fantastic, very important track record in 2012, as well the publication of the third ORIGIN study, which really could be considered a landmark study, as well as the publication of hypermetrical analysis confirming that there is no link between the use of Lantus and cancer. So all in all, you see that whether it is in the U.S. or in emerging markets, also in Japan, we have been growing high-double digit, above 20%. And even in Europe, despite of no price increase and even some price decrease in some countries like Germany, we have been able to grow in terms of value and even more in terms of volume.
Sanofi Pasteur, our vaccine business, has been growing 5.7%. As you heard, there is a high seasonality and cyclicity in our vaccine business so we had very strong growth in the first quarter, both driven by the flu vaccine season in the U.S., as well as extra sales of meningitis vaccines both in the U.S. and in Latin America, particularly in Chile. And at the same time, we are expanding in Asia with the first year of sales of our IPV vaccine in Japan, which is the one — the first one to have been approved in Japan and recommended. And basically, a nice recap of the sales of our pentavalent vaccine, Pentaxim, in China. We just got the approval to launch our hexavalent vaccine, which will be launched through our JV with Merck in Europe, which will be a competitor to the GSK vaccine.
Consumer health care. While we are now ranking #3, clearly, we start to be a significant player. Also, here in the U.S., definitely in the emerging market. We just acquired the worldwide rights to Rolaids, have been done by our affiliate in the U.S., Chattem, which is planning to relaunch Rolaids in 2014.
The Merial animal health business is a bit in an interim period. Frontline is resisting and having a rising in sales versus — against increased generic competition. So Frontline has still been doing close to EUR 1 billion sales in 2012. We expect to launch a new generation, a new product in 2014, and this should drive our overall growth up in 2014. In between, we are expanding growth on the vaccine side but also on the emerging market as we have been growing 14% last year. We did some acquisitions, 1 in swine vaccines, autologous vaccines, Newport here in the U.S., in Minnesota, and a small acquisition in India to get a footprint to sell our products in India.
Also, I like you to notice that this activity is not dilutive in our operating margin. The operating margin of Merial is the highest in the industry with close to 31%, and very similar to the margin that we get from the rest of our pharma business.
Genzyme, a turnaround clearly, on a turning point. Supply recovery is now being resumed. The Framingham plant has been approved in 2012. We’ve get the full supply of Cerezyme and Fabrazyme. We are growing the business, which has grown 16%, and we have created a new multiple sclerosis franchise, which has just launched Aubagio just a few months ago. Lemtrada has just been filed in E.U. and the U.S., and as you know, Lemtrada has got positive results for its Phase III trials. And we also got recently a second positive result for the ENCORE study on eliglustat which is a neural treating the Gaucher disease. And Genzyme has been also transforming patterns for the company, in particular in R&D. And also, in terms of focus on patient so we have leverage and presence of Genzyme in Cambridge, which is now getting the new research for Sanofi in the U.S.
Maybe I should not spend too much time on this slide, just confirming that we have been growing again on the double-digit base, the rare disease franchise. And as you can see from the top of that, we have got 9 regulatory approvals last year, which didn’t happen to Sanofi for years, with Zaltrap being approved in U.S. and in Europe; Aubagio being approved in the U.S., and we expect a CHMP opinion in the coming weeks; Lyxumia, which has been approved in the E.U. and we get the filing accepted by the FDA in the U.S. quite recently; AUVI-Q, which is having a fantastic pickup in the U.S.; Kynamro got approved recently, beginning of February. And we had some, let’s say, more life cycle management plus the approval of our IPV vaccine, our polio vaccine for Japan.
In 2013, we expect 6 new drugs or vaccines to be approved. Hexyon just got a positive recommendation from EMEA, for Europe. We have the Fluzone Quadrivalent IM for the U.S., and clearly, we have submitted, as you know Lemtrada, Lyxumia U.S. and Aubagio. So this give you more details on the coming milestones with 2 coming in as early as Q2, with Phase III results on JAK-2, otamixaban, as well as the first results of our — of the clinical trial of Phase III for our new formulation of insulin glargine. In Q3, we expect the first result of the first monotherapy study for our PCSK9 that we developed in cooperation with Regeneron. And there is some expected regulatory decisions, but maybe I don’t need to insist more on that.
So all in all, let’s say that beyond the growth platforms that I have described, we have a few launches, which are expected, providing, of course, we get approvals, some of them we got already. And here you can read it, 2012, 2013, 2014, with the JAK-2, possibly, and otamixaban and eliglustat. On in 2015, the new glargine formulation, as well as launch of the PCSK9 antibody and the dengue vaccine, which is planned to be launched in the second half of 2015.
On the cost side, we have continued to deliver and to generate further synergies on cost savings. So we had a new plan that we announced in 2012 to save EUR 2 billion by 2015. We have saved EUR 1.2 billion by the end of 2012. Part of it has been reinvesting the support of growth platforms, around research, around EUR 400 million. And in 2013, we expect to save another at least EUR 500 million, a large part of it, this time, will be reinvesting to support the new launches, So this year is, in that respect, an interim year where the net impact of cost savings should be more limited.
Continuing a strong free cash generation flow. We managed to bring our net debt below the EUR 10 billion threshold that we have fixed, which means that we have much more money to maneuver to both look for a source of bottom acquisitions but also to continue to increase our cash return to shareholders. Last year, we bought back on top of the increased dividend, EUR 800 million of share repurchase. And as you may have noticed, we have started to buy some shares since beginning of February for a total consideration by now of a bit more than EUR 300 million. So we continue to offer a solid dividend yield. We just repeat our commitment to increase our payout ratio from the 35% level where we were in 2009 to 50% payout ratio on the business net income to be paid in 2013. It’s now ’14, sorry, on the 2013 result.
In 2013, so dividend to be paid. We have increased this dividend by around 5%, and increasing the payout, as long as we did that, despite the fact that the profit has been declining as expected during this year.
So we focus on continuing to sustain regular growing dividend policy, and on top of that, do some opportunistic buyback to more manage our capital structure.
Finally, to conclude, we just confirmed our medium-term guidance. First of all, grow top line at least by 5%, including 2013, which means that we expect a further growth in 2014, 2015, where we don’t have any more patent expiry issue of the same magnitude as what we have in 2012 and still 2013 if you compared to 2012. Increase the operating margin over time, and, therefore, increase the business earnings per share faster than sales, so more than 5% growth in EPS. And I just confirmed that the payout ratio for 2013 results will be 50%.
Okay. So I think I have taken my time. And maybe, Michael, we should move. Is it the plan that we move to another room or…?
Michael Leuchten – Barclays Capital, Research Division
Yes. Sure. Thank you.