Sanofi (SAN) Earnings Call Transcript & Summary

Good morning, good afternoon and good evening to everyone. I'm Arnaud from Sanofi IR team. It's a pleasure to welcome you to this call dedicated to accountings. I remind you that this call is to address specific accounting questions and not business-related questions. You can find a slide of this call on the Investor page of our website at sanofi.com. At the end of the slide deck in the appendix, you will find GenMed '21 quarterly sales by core and noncore assets as requested by many of you. Let me start with a few logistical things. [Operator Instructions] Moving to Slide 3. I would like to remind you that information presented in this call 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 SEC and also our Document d'Enregistrement Universel for a description of those risk factors. Slide 4. Our speaker on the call today is Laurent Gilhodes, Head of Group Controlling and Alliances. I'm also pleased to have our own notable Hervé Cardelli, Head of Consolidation and Statutory Reporting. Laurent will first review the impact of EUROAPI spinoff on Sanofi accounts and then discuss Regeneron mAbs alliance accounting. Laurent presentation will be followed by a Q&A session focused on accountings. Question will be addressed by Laurent and Herve. With that, I would like to hand over to Laurent.

Thank you, Arnaud. Good morning, good afternoon, everyone. So starting on Slide 6, please, next one. So here, you've got on the screen the most recent milestones of the EUROAPI spinoff. So on that one, you can see on March 17 the Board decided to submit for approval to the Annual General Meeting the distribution of 58% of EUROAPI's shares to Sanofi shareholders. The resolution was approved by the AGM on May 3. EUROAPI started its listing on May 6 in Paris. And on May 10, the EUROAPI shares were effectively distributed as planned. So if we move to Slide 7. So as a result of these milestones, assets and liabilities of EUROAPI were reclassified as held for sale at the end of the first quarter. But there is no restatement of comparative periods as it was not a separate major line of business. With the deconsolidation of EUROAPI, the industrial footprint of Sanofi is reduced by 6 sites and the group head count by approximately 3,300 people. Historical sales of EUROAPI with third parties were EUR 486 million in 2021. On Slide 8, Sanofi has ceased consolidating EUROAPI as of May 10. The stock market price on that date determined the measurement value for the distribution in kind of 58% of shares and for the 30% retained equity investment. The stake acquired by BPI was valued at a maximum value of EUR 150 million, leading to a total consideration amounts of EUR 1.3 billion. As a result, the pretax capital gain on the transaction amounts to approximately EUR 10 million, reported in other gains and losses, and therefore, excluded from the BOI. This amount is still subject to later adjustment of the final selling price on BPI stake on the settlement date on June 17. On slide -- on the next slide, please. So you can see here in the graph on the left the quarterly breakdown of the EUROAPI historical third-party sales in 2021. The deconsolidation of EUROAPI will be accretive to the gross margin ratio in 2022 by approximately 0.3 percentage points. This effect is the net effect between a positive impact of the derecognition of the third-party sales and partially offset by the market paid on the purchases from EUROAPI. The equity accounting for the share of profit and loss of EUROAPI is not included in the BOI segment results and is not included in the BNI or non-GAAP indicator. This leads to a slightly accretive impact in 2022 on the BOI ratio. So that's the last slide on EUROAPI deconsolidation. Now if we move to the second topic, and we can go directly to Slide 11. So on that slide, you've got the summary of the accounting of the mAbs alliance with Regeneron in Sanofi P&L by P&L lines. As a reminder, the mAbs alliance now includes Dupixent, Kevzara and Itepekimab as Praluent was a part of the restructuring of the collaboration in April 2020. So on this alliance, Sanofi consolidates 100% of the sales and the COGS worldwide. On the development costs, we are now at the stage where development costs are funded 80% by Sanofi, 20% by Regeneron, and the difference -- with a 50% in the development balance. SG&A expenses incurred by Sanofi are booked in our commercial expenses. And now if we did dive a bit more on the underlying, which is other operating income and expenses, you've got basically 3 components in that -- in the other operating income and expenses. The reimbursement of commercial expenditure incurred by Regeneron is 100%. Second piece is the profit sharing, which is calculated 50% in the U.S. profit and increasing rate from 35% to 45% on non-U.S. profit calculations. And the third component is the additional profit, which Sanofi is entitled to on Regeneron's profit share up to 10%, for the reimbursement of the cumulative development costs. Finally, as Regeneron is entitled to receive additional milestones depending on the level of sales of the alliance products, these milestones are capitalized and amortized in our P&L as amortization of intangible assets. And if we move to the final slide. So on this one, you've got here the information, which is available in our financial statements and the press release for half year and full year results with the breakdown of the 3 components in the other operating income and expenses line related to the mAbs alliance I referred to earlier. So this appendix is available in our financial disclosures. So on this, I will turn it over to Arnaud.

Okay. Thank you, Laurent. So let's open the call now for the Q&A dedicating to accounting.

So we will take the first question from Simon Baker at Redburn.

Two questions strictly on accounting. Firstly, I just wanted to make sure I'm understanding this correctly, on the link between the EUROAPI sales you report for 2021 and the industrial sales that you reported at the full year. They're not quite the same. I just wanted to understand if there were any other bits in there that we should be aware of. And then secondly, moving to the appendix. You've given us the sales numbers for 2021 for other core and other noncore. I wonder if you could give us the constant currency growth rates for those 4 quarters and the full year as well.

Thank you, Simon, for the question. So on the EUROAPI, what you see in our disclosures on the sales effectively in the category industrial sales, we are basically -- the EUROAPI sales we mentioned. But as well, we will continue to have supply sales for products that are manufactured in our clients and that are sold to third-party customers. So here, these activities will be retained by Sanofi. Typically, this could be related to supply sales as part of the MSA, as part of the divestiture programs we may have with acquirer. We've got situations like, for example, we supply Praluent to Regeneron for the U.S. market. So we will continue to have in that line industrial sales reported for the business Sanofi continues to retain.

Okay. So regarding the second question, we'll provide the [ constant currency rate ] later, okay? Now we'll move to the second question from Pete Verdult from Citi.

Pete Verdult, Citi. Just one question. Sorry to get gnarly. The reimbursement of development costs, I mean I think Regeneron's on the hook to pay at least EUR 2 billion to EUR 3 billion back over the course of the Dupixent lifetime. From our calculations, it always seems that they are paying a lot less than the 10% of -- the cap of 10% of quarterly profits back to you. So I was wondering, could you give us a sense as to what determines whether Regeneron pays you back nothing or the cap of 10%. I was trying to get a handle of what are the gating factors and what's the run rate been in the last few quarters.

Thank you, Pete. No, I think -- I mean, that's why I referred to the appendix you have in the financial disclosures. I think you can probably see that the amount, which is repaid on a quarterly basis by Regeneron, what we call the additional share of profit, it corresponds to basically the 10%, which is the profit -- or the share of the profit Regeneron is entitled to. So if you look, typically -- I take in 2021, Regeneron was entitled according to the profit share at EUR 1.2 billion. And you can see that the additional share of the profit for the reimbursement of the development balance was EUR 127 million. So you can see the correspondence. And that consistency should apply to all periods, at least since the time the JV is profitable.

So we have a new question from Jo Walton from Credit Suisse.

Just a couple. If we look at the Regeneron accounts, we will earn their disclosure of the alliance income. We also see a reimbursement for manufacturing, and you don't have that in your accounts. So I was just wondering whether that was an amount of money that we should keep a track of or not. Secondly, in terms of the reimbursement of commercial expenses, there used to be a sort of a rule of thumb that they paid 1/3 of the commercial expenses in the U.S. and you paid 2/3, and then we could crudely work out what the marketing spend was in the U.S. Can you just confirm that there's no specific amount they can opt in to do more or less? And therefore, there's nothing that we can specifically learn from tracking that level of expense. The thing that we should really be looking at is just the share of profit and loss and then make a note of the milestones that they talk about, but we know that they're capitalized for you. That's my -- and could I also just check, broadly speaking, is the cash out, give or take a bit of tax, roughly the same as the amount of money that you show as an expense in your other operating income? Just trying to check pretty much the cash versus the accounting element there. And then I would have a question, which is -- it is accounting related, but it's not in either of these 2 topics. In the U.S., we've seen that the SEC or the accounting standards people are getting concerned about the level of in-process R&D spending, the amount of money that seems to be effectively not passing through core income. Talking to people in Europe, those companies who've got very clean accounts tell us, oh, the Europeans aren't going to make any -- are going to make changes in Europe. And those that have got used more creative accounting tell us that there's absolutely nothing on the horizon coming in Europe. I'd be very interested in your view as to what do you think, whether there are any implications for European IFRS accounts over the next few years of what we've seen happen this year for U.S. GAAP accounts.

Thank you, Jo. So I will address 1 or 2, and I'll turn it over to Herve as well on the last 2. So the first one on commercial expenses, I think these commercial expenses are depending on the programs and activities run by each company, respectively. So they might -- I mean it depends on the operational plan. As you know as well, the Regeneron has the ability to obtain in additional geographies in terms of co-promotion, which would as well fall under that line because as Regeneron incurs costs in additional geographies, they would be reimbursed in the same line. So that could be a factor beyond the U.S. contributing to the evolution of the reimbursement of the commercial expenses to Regeneron. The other question I'd address is cash out should be consistent from the -- from what you've seen in the disclosure and the P&L impact. So on these 2 elements, I think, Herve, maybe you want to comment if you've got any comment on the alliance reimbursement on manufacturing with Regeneron, is that occurring now?

Yes. Thank you for your question, Jo. Under manufacturing reimbursement as they put it on Sanofi side, so we got all the impacts related to manufacturing in inventory. And when we sell the product, we record the sales on Sanofi side, the part of this manufacturing flow goes to COGS in Sanofi books.

And on the other question around potential consequences of the SEC decision recently in the IFRS.

Yes So we saw the SEC conclusion on the topic related to U.S. companies and related to non-GAAP upfront and milestone payments in connection with license on collaboration agreements or even payments through acquisition of entities, which under U.S. GAAP are expensed. So however, we do not anticipate any change by analogy for groups like Sanofi, who applies IFRS. We cannot extrapolate at this stage any impact from this new guidance, SEC guidance even for the amortization or impairment of intangible assets.

Thank you, Herve. So the next question comes from Seamus Fernandez from Guggenheim.

Great. So my question is actually just as we look at some of Regeneron's reports and try to true up their report of Sanofi pays to Regeneron as a share of profit and then what you guys report, it's a little difficult in terms of truing up the 2 models. It always looks like Regeneron is booking quite a bit more. And I just wanted to try to better understand where that disconnect on the accounting side might actually be occurring. If you guys have any insight that you could share in that regard just because it does -- it is something that we try to do but have been wildly unsuccessful in doing.

Herve, any comment on that?

So thank you for your question. We may have some difference between Sanofi and the Regeneron.First difference because we are not choosing the same GAAP. That could be one factor of difference. Another difference would be also that we have, I would say, a process of closing that is more maybe faster for Sanofi, and we can have some phasing between Sanofi and Regeneron. Except that, we should not have other differences between Regeneron and Sanofi for this accounting of alliance as it has been described by Laurent.

So I have a question -- a written question from Luisa Hector. So I -- do the collaboration agreement run into perpetuity? Or will those payments stop at patent expiry or biosimilar entree?

So I assume we are talking about the -- when we are talking about the overall collaboration and alliance again, it's based on the magnitude of the activities behind it, so both in terms of sales and investments. So this would be a function of the evolution of the business after. I believe, I think the logic is this will disappear as soon as the LOE hits. And so on that, I mean it will be a direct function of the LOE impacting, especially Dupixent because that's the largest contributor to that.

Thank you, Laurent. I think we have the last question from Peter Welford from Jefferies.

Just some clarifications actually on the Regeneron deal, please. And firstly, just with regards to the manufacturing, because obviously, I know you talked a lot on the last call about your shifts to make the manufacturing improvements, and I think fully by 2024. Just so we could understand that, does that mean that we should see a transition over time of Regeneron towards you doing more of the manufacturing in the Regeneron alliance? And presumably related to that, the benefits from this gross margin improvement with Dupixent, presumably that is reflected for the alliance as a whole and that is reflected in the P&L and therefore, shared with Regeneron as per the rest of the P&L. And then if I could just ask then as well, just so I could understand with regards to the opt-in. You mentioned this and you didn't go any further. But I just want to understand, has Regeneron so far opted in to any major geographies other than the U.S.? And just so I understand, what is the stage, if you could just clarify, that Regeneron has the right to opt in? Is that on approval? Or could they theoretically opt in at some later date once the product is on the market?

Okay. Thank you. So on the manufacturing improvements and as both networks are contributing to the production growth of the drug substance where we are expecting the major gains in terms of production costs, so the contribution will come on the quantities produced by both Regeneron and Sanofi, but the benefits will be visible in the gross margin of Sanofi as the product is sold by Regeneron to Sanofi for the sale at the point of -- for the production process and for the sale at the end. So the benefit will translate into the Sanofi gross margin. And after, Regeneron will get a portion of that -- these improvements as part of the profit share we mentioned earlier in the other operating income and expense line. So that the full benefit will be captured in the Sanofi gross margin, and the benefit will be shared with Regeneron as part of the profit share. So that's -- this is going to be effectively a progressive setup. And in order to -- I mean, getting some order of magnitude about what we're expecting in terms of COGS improvement for Dupixent, when we compare to the unit cost basis in 2021, we expect the COGS improvement on Dupixent in 2025 to add incremental gross margin in the range of EUR 600 million to the brand -- to the gross margin and approximately EUR 300 million incremental BOI to Sanofi after profit sharing with Regeneron and [indiscernible]. Again you see benefiting gross margin being shared with Regeneron to add a net impact to the Sanofi BOI. And as communicated before, we expect a positive effect on Dupixent profitability to be in the magnitude of an additional billion top line sales as volume expand.

Thank you, Laurent. So we have an additional question from Simon Baker.

Just a follow-up on Peter's question. Presumably, there has been a degree of investment in the process improvement and the process development. Is that cost booked in R&D and reimbursed in the same way as other R&D expenses?

So these costs are being shared between the 2 companies, and they are being incurred as project costs as we progress in the development on these programs. So they are effectively being captured as we progress in the -- in this process of ramping up the new process.

Jo from Credit Suisse has a new question.

This is probably a very silly question, but you say that your EUROAPI won't be included in the core segment results or in the financial side. There's sort of thing saying that noncore is excluded. Where exactly will you book the EUROAPI contribution? And it will always be noncore, will it?

In terms of P&L line in the IFRS P&L, it will be part of the other operating sorry, in the -- sorry, it would be part of the share of associate. It will be captured in the IFRS, but it will be an adjustment as part of our reconciliation from GAAP to non-GAAP. But in terms of P&L line, it will be part of the shares of associate. As we explained, it's -- being the noncore equity accounting associate, it should still remain and exclude it from all the line.

Thank you, Laurent. Pete, from Citi has a new question.

Just a few clarifications from the previous ones. I mean, Paul, last week in New York was talking about EUR 1 billion cost savings benefit from the new manufacturing process from Dupixent definitely coming in '24, maybe earlier in '23. Just want to understand how I square that with the EUR 600 million that you mentioned earlier. That's number one. Number two is again, just to follow up from Pete's question, Pete Welford, I was under the understanding that Regeneron did absolutely nothing promotion commercially-wise outside of the U.S. Can you confirm that's the case? And with respect to the U.S., just to clarify Jo's question, they can go up to 50-50. Where are we now in terms of the U.S. commercial effort? Is it a 50-50 between Regeneron and Sanofi? Or is it more 2/3-1/3?

Okay. So I think on the manufacturing element, I think you could keep in mind that there is a time between the time when the process is implemented in the plant and gets through industrial improvement and the time it impacts the company P&L because of the long manufacturing cycles for biologics and the fact that this will be carried through inventories for a period of time. So there is a slight time lag between when the process is implemented and when it does translate into the company gross margin. So I think that's probably the main explanation for your first question. On the other countries for Regeneron commercial activities, nothing is being disclosed by Regeneron beyond the fact that they have this ability to go in other countries. So I won't comment more on that -- on specifics on that based on the Regeneron disclosures. And I think on the U.S. commercial efforts, this has no impact as such on the -- at the end of profit share results. So that is a reimbursement for the cost income by Regeneron, but the profit share itself is based on the 50% I mentioned earlier.

Thank you, Laurent, Herve. I think it was our last question. So thank you, everybody, for the question and for the interest. Bye-bye. Thank you.