Q4 2009 Earnings Call Transcript
February 10, 2010 8:00 am ET
Sébastien Martel – VP, IR
Christopher Viehbacher – CEO
Hanspeter Spek – President, Global Operations
Wayne Pisano – SVP, Vaccines
Jérôme Contamine – EVP and CFO
Marc Cluzel – EVP, Global R&D
Laurence Debroux – SVP and Chief Strategy Officer
Sébastien Berthon – Exane BNP Paribas
Graham Parry – Bank of America/Merrill Lynch
Jo Walton – Credit Suisse
Eric Le Berrigaud – Raymond James
Philippe Lanone – Natixis Securities
Alexandra Hauber – J.P. Morgan
Norris Shirhan [ph] – ICAP
Jean Jacques Le Fur – Oddo Securities
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I must remind you that today's conference would contain forward-looking statements. And these statements will involve known and unknown risks and uncertainties and other factors that could cause actual results to differ materially. We can find details on – about those factors in our Form 20-F on file with the SEC as well as in our Document de Référence.
Today with us is our management team with our CEO, Christopher Viehbacher; Hanspeter Spek, President of Global Operations; Wayne Pisano, Senior Vice President of Vaccines; and, Jérôme Contamine, our Executive VP and CFO.
The presentation will be followed by a Q&A session. And at this stage, I will actually hand the conference over to Chris.
Thank you, Sébastien. Good afternoon, everybody, welcome to Paris. In some ways, it seems a lot long ago than one year that I think I stood up and presented the first set of results for Sanofi. And it's certainly a pleasure to think back now after, certainly, my first year in office. And I think a lot's changed. I think a lot's changed in the industry, and a lot has changed very positively within the company.
So what's changed in the industry? I think one of the things that's getting interesting is that the famous cliff is now getting on to the spreadsheets. This is no longer something that they'll stay in the future. We're now into '11, '12, '13, and beyond. And I think the entire industry is starting to recognize that really share price is not being driven by our quarterly results anymore, but more of the long term.
I was talking to one of the bigger biotechs out of the J.P. Morgan conference. And it's incredible, we don't have any patent expiries before 2017, but we've already got people asking us how we're going to replace our patent cliff in 2017, and this element where the cliff gets anticipated. And what people are really looking for is this sustainable growth. And so, it's great and we need to have regular quarterly earnings. But I think the whole industry is now recognizing we need to address this issue beyond the cliff.
I think we are innovative the last year. We put out a floor guidance for 2013, which was really meant to have people focus on the fundamentals of Sanofi-Aventis and to really dispel some of the myths. Like for instance, if we can commit to the same level of profit as we did in sales in 2008, now it was also the commitment that we didn't believe that margins would erode on a net basis as we move into more diversified businesses. And I think we've seen some other companies now put some of those numbers out for the 20 – post patent cliff period.
I think we're all looking much more seriously at research and development. When I came into the company, my view of where we were as an industry is that up to now, we'd really only been doing tweaking, not real fundamental change. I go back to some of the research I did before coming into the company, which indicated that there were two things related to innovation. One is that there has to be some element of disruptive thinking, and two is that big companies not yet in our industry, but in other industries, are not very good in innovation, partly because we do everything to avoid anything disruptive, including disruptive thinking.
So I think there's a real rethinking of the model, how much we're investing in it. A lot is going to be dependent on how you execute on that. I think a lot of is people related, if not structurally related. And people with come up with different solutions. But I think as we get close to the cliff, as we see that some of the tweaking hasn't worked, I've certainly some of our own colleagues, and we are certainly doing the same.
It clearly is a global market. This was a business where the investor base really focused on the US. We can buy those weekly scripts, sometimes some of you got really keen in buying the daily scripts, and we got analogs everywhere. It's a business that was very easy to value. And now, actually, we're seeing markets in China, in India, in Latin America are real true growth drivers. Although I would say, when I talk to CEOs in other businesses, everybody's excited about emerging markets, whether you're in cement, whether you're in transportation, whether it be in electronics. And I sometimes think that actually in the healthcare sector, we still haven't really appreciated what kind of economic revolution is really going on in some of those markets.
I remember five years ago, we had huge issues of image. We can go back to the days when we sued Nelson Mandela. But I mean, we have issues on some of the marketing programs here. And there were litigations and product withdrawals. And if there's one thing that at least has come out of the – positively out of healthcare reform in the US, and your guess is as good as mine if anything else will come out of it, but I think we were not the bad guys. When we worked our way through, leading up to healthcare reform, we at the industry were very conscious that we did not want to be perceived as being the cause of the problems. And I think as we learned through healthcare before. Even though we have Democrats in power, in the White House and Congress, who are not the traditional allies of pharmaceutical industries, we weren't the bad guys. And I think it goes some way to demonstrating what this industry has done. It's starting to repair its image. And as I like to say, I thank the tanks [ph] for their contribution to us having a better image.
And we also have the economic crisis. That economic crisis – it's funny when you sit down with financial journalists who spend about 90% of their time covering the economic crisis. If they want, it's great to sit down and talk to someone in pharmaceuticals because you're not talking about the crisis for once. And it's true that as an industry we haven't yet really been hit by the crisis. I mean as I look at social security deficits in Europe, I wouldn't get too excited for very long. This will have a boomerang effect on us at some point.
But there have been a few hidden current issues. With the economic crisis, the IPO market really definitively dried out, for example. And with that, it became obvious that the only way for certain investors to really exit from some biotechnology investments, for example, was through Big Pharma. And so you're seeing some changes in the valuations and the ability to access assets in the biotech's face. And I remember getting asked by a number of our investors at the earlier part of this year about how we saw 2010. And I said, "Well one of the factors that's for me interesting is, does the IPO window open up again?" And I wasn't terribly optimistic at the time. There were others who were. Everybody I talked to today believes that that's not going to happen any time soon, which actually opens up opportunities in our industry.
So what happened with Sanofi-Aventis over the past year? I think I stood up in front of most of you last year and said, "If you thought about Sanofi-Aventis, you thought about Plavix, and you thought about Acomplia." One has just been withdrawn, and the other was about to go away. And there wasn't an awful lot of real understanding about the rest of the company. And the phrase that I use very often in 2009 was, "It's not the 20% of the business that goes away that's really interesting about Sanofi. It's the 80% that stays."
And on the basis of those very strong fundamentals, we identified a strategy really to go out there in long term and sustainable growth, to move away from the boom-bust cycle of small molecule patents based in Europe and the US. Under that, we grew the five growth platforms. But we're not only just promising growth, but because of the inherent nature of these businesses, huge capital investments, deep competencies, deep trust and confidence in brands that you build natural barriers to entry that go beyond patents. And those are the times of businesses that we wanted to be a part of in order to stabilize a little bit the inherently risky and volatile nature of the pharmaceutical business.
And I think I was also extremely transparent this time last year, I stood up and I've said, "We did not have enough new products in our portfolio to replace those things that we're going to lose to generics." This was a revelation to none of you. But it was an important admission so that we could actually get on. We're taking a much more radical view at what we want to do with research and development. And it became a strong rationale for entering into an external growth strategy. Because if we don't have enough, then we need to go and do deals. I look on the list here, 33 partnerships and acquisitions, EUR6.3 billion in actual cash flow out the door, a little more if you include Chattem, which we did before, but for which the cash flow will flow later.
On R&D, we went through the portfolio and governance, and I'll cover that in a minute. We developed a new R&D organization, which we're actually now able to rollout just this week as we concluded, particularly in France, some of the social consultation. We identified a program of cost reduction not just to reduce costs, but because we are shifting resources, reallocating resources, getting into different businesses, getting into different businesses with different cost structures. We had to become leaner, more nimble, and certainly more empowered when we look geographically. And so we identified that cost reduction program. And we have some new blood in our leadership, and I'll talk about that in a minute.
It's great to talk about strategy. And it's great to talk about the long term. Sometimes you hear people talk about the long term just because the short term is not so good. And that's a trap. Our first message is, "Yes, we're focused on building a long term business, but we haven't forgotten our obligations short term." And I think you see where the 13.1% increase in earnings per share are causing the change rates that this is a very strong performance. We got a nice little gift from the US government at the end of the year when an agreement was signed between France and United States on taxation, which added about 1.5 points of growth. So the underlying growth rate is pretty much in line with the guidance that we had given at the end of Q3, sales at 5.3%, also very credible performance.
This is a slide I think is something we're going to use on a constant basis. For now, the orange bucket on the right side of the slide contains only Plavix in Europe and Eloxatin. Later in the year, we'll be able to add tax up there. We'll certainly see the Plavix effect for a full year. We'll see the Eloxatin effect for a full year. Do we see something for Ambien CR? No. Do we see anything for Lovenox? No. What is true is that we know that between now and 2012, the inevitable is going to happen. We will lose sales to generics.
But I don't spend my days looking at the market share for Plavix. I look at Plavix as an area under the curve cash pile that we have to reinvest in the business in new sources of growth. And when I look at the left side, there you have those five growth platforms that we defined last year. And look at the growth rates, 19%, 19.4%, 19.2%, 26.8%, and these are EUR100 million businesses. You got EUR7.4 billion on those business in emerging markets growing at 19%. I mean EUR7.4 billion growing at 19% is pretty sexy. And we've got some new products being launched.
Today, those five growth platforms represent over 50% of the sales. And that green bucket is really what the future Sanofi-Aventis looks like. Because as we lose those generic products, that business is the one that carries through. Is it always going to go at 19%? Maybe not because as the base grows bigger, it will be harder to do. But a number of those businesses we have set ourselves targets for doubling on, emerging markets, diabetes and vaccines, for example. Now, of course not all of that growth is organic growth, and I think we've been very good at doing the bolt-on acquisitions, and Jérôme will take you through what's organic and what's been acquired.
So let me just take some of those just to a few things. Emerging markets is something that Sanofi has a clear leadership advantage in, and yes, everywhere you're going to go and all these results announcements you're going to hear a lot about emerging markets. But we've been in those places a lot longer than some other types of business. In India for over 50 years, been in China since 1982, first foreign company that set up in China. And the interesting thing about that is you develop actually deep relationships with a government, that you have solid management, you've got training capacities to find yourselves selling and marketing people, you've got a range of products.