Sanofi (SAN) Earnings Call Transcript & Summary

Good morning, and good afternoon to everyone. Thank you for joining us to review today's announcement. Please note, there are no slides to accompany this call today. Before we start, I would like to remind you that information presented on this call will contain forward-looking statements, that involve known and unknown risks, uncertainties and other factors that may cause actual results to differ materially. I refer you to our Form 20-F document on file with the SEC and also our Document de Référence for a description of these risk factors. With that, let me introduce our Chief Financial Officer, Jean-Baptiste de Chatillon, who will make some introductory remarks on the strategic rationale and timelines for this important new initiative. After this, we will move straight into Q&A. Jean-Baptiste?

Thank you very much, Felix, and good morning, good afternoon to everyone. Today, so we announced our plan to create a new European leader in pharmaceutical API manufacturing. So the new standalone company would be based in France and is expected to bring together 6 of Sanofi's API plants across Europe, those with a high level of third-party sales and they will be put in the company together with associated commercial and development activities. So new entity would have around 3,100 employees and would supply a broad portfolio of around 200 APIs to customers in 80 countries. So based on 2019 estimated sales, it would rank #2 in the global API industry, which is, as you know, quite fragmented. And this industry is highly dependent on Asian suppliers today. So by 2022, the newly created European champion is expected to reach sales of approximately EUR 1 billion, and the decision will be taken early 2022 on a possible IPO, subject to market conditions. So the rationale. So rationale for this strategic project is twofold. First, it's consistent with the play to win priorities that we have announced during our Capital Market Day. It also reflects our conviction that the strong new European API leader we are creating would be well positioned to capture new growth opportunities in an attractive global marketplace. So let me explain both of those points in a little more detail. First, as you heard back in December, Sanofi has introduced a new strategic framework to drive innovation and growth. Our priorities include focusing the portfolio, leading with science, accelerating efficiency and reinventing how the company works. When we think about focus, API manufacturing is a critical part of our supply chain, but Sanofi has extra capacity that is used to supply third parties. Just under half the sales of the 6 API plants in the new company are to external customers. So consequently, we have decided to optimize our API footprint while maintaining critical supply agreements with the new standalone entity. Second, we believe as a European API leader, the new entity will have the capabilities and resources to capture substantial growth opportunities in API manufacturing and, in particular, to be a strong European-based alternative to Asian suppliers. To give you some background, we believe the API market is currently worth around EUR 120 billion, excluding biologics, and is growing at around 6% per annum. It is highly fragmented with around 600 players only 1 company has a market share over 1%. Importantly, the majority of supply comes from Asia, including more than 40% from China. This situation has resulted in increasing shortages of critical medicines in recent years, putting patients at risk. Furthermore, the industry has yet to see how the coronavirus situation will impact the global supply chain. But clearly, this has increased concerns about the heavy reliance of the pharma industry on API supply from Asia. Against this backdrop, we believe there will be strong demand for energized standalone European API champion with the right resources, quality and skill set. In addition, with the right balance sheet and an empowered management team, we would expect the new company to be in a position to evaluate inorganic growth opportunities to consolidate the fragmented industry. So moving on to the process. We plan to establish a new company as a standalone entity in 2021, subject to the usual social process. You should note that we do not expect this to have an impact on employment. Indeed, the creation of the new entity is, we believe, the best way to safeguard long-term employment. Furthermore, we will establish an equity plan and -- for the employee involved. The new company will benefit from a 5-year renewable supply agreement with Sanofi, so that we do not experience any disruption in our own supply chain, and it will be free to build its business externally. In early 2022, we plan to take a decision on a potential IPO of the business on Euronext Paris, which would, of course, be subject to market conditions. I can confirm that Sanofi's intention is that the newly listed company would be debt free, so that it is free to pursue its own strategy and raise capital, if needed, without existing debt constraints. Additionally, Sanofi plans to remain a cornerstone investor with an envisaged 30% minority stake in part to secure supply, but also to underscore Sanofi long-term commitment to the new entity and also to capture some of the value creation that I'm quite sure will be created in this new entity. Lastly, in terms of the financials, we do not expect this initiative to have a meaningful impact on Sanofi's 2022 BOI margin and free cash flow target. This is part of our CMD commitment. It is the execution of the plan. To be precise, we expect a neutral to slightly positive impact on our BOI margin after IPO, and our free cash flow would be largely unaffected as the loss of BOI contribution will be offset by a reduction in annual CapEx of just under EUR 100 million per year, and also by lowering working capital. To be clear, the motivation of this strategic project is to simplify and focus Sanofi and to unleash the potential of the new company. So I would now be happy to answer your questions.

We will now open the call for questions. [Operator Instructions] Operator?

[Operator Instructions] And your first question comes from Jo Walton from Crédit Suisse.

I wonder if you could tell us where the revenues for this business are booked at the moment. And what sort of operating margin you would expect it to have? When you look at these sites, do they have any particular area of expertise? Because you talked about there being drug shortages out there. Are there any drug shortages coming from Asia that you, in Europe, have been able to take advantage of? Because when we try to value these companies, we try to think of whether they are -- whether they have a unique set of skills. And finally, could you give us some idea of what the book value for the assets that you would be getting rid of would be, please?

Yes. Thank you very much, Jo. Yes. The existing sales which is like, as I said, less than half the projected EUR 1 billion, 2022 is currently booked in Genmab. And yes, we have the experience, if I take irbesartan, if I pronounced properly, that we are producing in one of our plants. There was a big crisis in some Asian suppliers, and we were able to, as Sanofi, to go on with the continuity for patients. Thanks to our high-quality irbesartan manufacturing. So it's a bit early to talk evaluation of this new company. But I wanted to make sure through this call, such rather a clear understanding that it's part of our new strategy. It's part of our execution, and it will benefit, both Sanofi x this new company and the activity within this new company.

And anything that is unique in terms of the skills that you have, I don't know, particular? You obviously can make irbesartan, but that was a drug that was your own anyway. Anything that you antifungals or something that is surprisingly unique to you that can't be made or isn't made in Asia?

Yes, Jo. I repeat, we are not on the vendor due diligence or on the pre-IPO path right now. But yes, we have done a full study. Within the portfolio, there are some niche products, which are with high skill set on the company, which is now providing third parties as a very high rating amongst its clients as being highly quality reliable on mastering the technique that are required for this API industry. Well, I could go -- we will go in the future into more details. But if I could speak of the all-legal nucleotides or the prostaglandins biochemistry that we -- that are mastered in our company. But honestly, this is not the point today.

And your next question comes from Richard Vosser from JPMorgan.

First question, just on the COGS savings that you might be able to realize from the transaction for Sanofi. And maybe at the same time, talking about the utilization of these facilities. Are they underutilized, so therefore, there are a drag on the gross margin of the overall business? And then second question, it sounds like these facilities are mainly producing small molecule products, small molecule API, chemical API. So are there any biologic capabilities within these facilities maybe in Frankfurt, Lantus, I'm not sure. And just added to that, can you do the full fill/finish procedures through these -- so you can make the API, but also make the pills and the full fill/finish on there as well?

Yes. Thank you. There is no bio facilities, it's pure chemistry. The COGS impact will be like a neutral impact over time, because currently, we are not the best owner because inside our pharma activity it's not the main focus and it's not at the level of competitions, where it will be within 2 to 3 years time. So the COGS impact will be neutral. The inventory impact is around EUR 600 million of inventory right now within this perimeter. So as I said, there's no major financials impacting Sanofi through this operation. Of course, it will help the net debt reduction, but this is not the major thing. The major thing is, let's get focused on what is consistent with our strategy in terms of research and development and manufacturing in bio and be really true to this commitment. So COGS, I answered; bio, no. Frankfurt, it's only the chemistry piece, which is -- which would be included in this activity, and that's it.

And your next question comes from Peter Verdult from Citigroup.

Peter Verdult, Citi. Just a couple of clarifications, Jean-Baptiste. Just on your prepared remarks, do we assume that the BOI margin is just slightly lower than group currently? And did you say that the business that you're going to spin out effectively, you booked EUR 500 million of sales in Genmab -- or sorry, in [ Gen med ] sorry, last year? And then just the last clarification, just a repeat of Richard's question. Can we assume the capacity utilization of these 6 plants is low? Any comment you are willing to give there would be helpful.

We are being accretive over this. I confirm that the BOI will be slightly -- the impact would be slightly accretive.

Okay. And then just to repeat and clarify to make sure my question got answered. Did you say earlier on the current business you're booking, you've booked EUR 500 million of sales in 2019 in terms of API sales. Is that correct -- the correct number?

Yes. A bit less than that because the EUR 1 billion is the 2022 figure. So we are below that currently. It's more around EUR 400 million.

And then just to repeat Richard's question, maybe to push you a bit harder, on those 6 sites, I mean, clearly, you want to improve efficiency for Sanofi's manufacturing network or footprint. Would it be fair to say that capacity utilization is lower than at the group average for these 6 sites right now?

Those sites have a capacity, which allows us to grow significantly. So yes, they have capacity to do more.

And your next question comes from Jean-Jacques Le Fur from Bryan Garnier.