Sanofi 2Q13 – Diabetes Division up 13%; Lantus up 15%; first reported Lyxumia sales of ~$1 million; U300 glargine submission expected 1H14 – August 4, 2013

Sanofi reported 2Q13 financial results on August 1 in a call led by CEO Chris Viehbacher. Total Diabetes Division revenue in 2Q13 totaled €1.6 billion ($2.1 billion), up 16% operationally, 13% as reported year- on-year (YOY), and up 5% sequentially – impressive growth continues as this represents Sanofi Diabetes' 10th consecutive quarter of double-digit growth. Performance was once again driven by strong Lantus sales, which totaled €1.4 billion ($1.8 billion), up 18% operationally and 15% as reported. For the first time, Sanofi reported results for Lyxumia, its once-daily GLP-1 agonist (Sanofi launched Lyxumia in Germany and the UK in March 2013). In 2Q13, Lyxumia sales totaled €1 million (~$1.3 million), and management noted that 18 weeks after launch in Germany, Lyxumia had captured >10% of the GLP-1 market by volume. According to Sanofi's slides, this nearly matches that of BMS/AZ's once- weekly Bydureon. Lyxumia received approval in Japan in June, and Sanofi is preparing for launch there. In the US, Lyxumia remains under FDA review (based on Sanofi's December 2012 submission, a December 2013 decision is possible). If Sanofi is able to break the “primary care barrier” in GLP-1 with Lyxumia as Aventis and then Sanofi did in insulin with Lantus, that would open up an enormous door for more patients to benefit from GLP-1 therapy. As a reminder – while under 30% of patients in the US alone take insulin, nearly 50% are not at their glycemic target, according to Diabetes Care, suggesting a major opportunity for a combination of drugs to help patients get and stay in control (presumably, some percentage of patients could have better results with GLP-1 and basal insulin than basal insulin alone or inadequately managed MDI). Apidra, Sanofi's rapid-acting insulin, also had a strong quarter with sales reaching €68 million ($89 million), up 25% operationally and up 21% as reported – the quarter was positive as the comparison was fairly easy, given Apidra's supply issues last year. From our calculations, BGStar and iBGStar sales totaled ~€12 million (~$16 million), up 33% as reported from 2Q12. The remainder of Sanofi's Diabetes Division sales came from Amaryl (down 10%) and Insuman (down 3%).

Turning towards Sanofi's pipeline, management recapped the EDITION I results for its U300 insulin glargine formulation that were presented at ADA and the topline EDITION II results that were announced at the same time whereby U300 glargine conferred equivalent glycemic control as Lantus with 21% fewer nocturnal hypoglycemic events – these results were better than expected. Topline results of EDITION III and IV are still expected in 2H13. Consistent with management's previous estimates of regulatory submission in 2014, management announced that it expects to submit its U300 glargine in 1H14 in the US and EU. As a reminder, Lilly/BI announced in July 2013 that they had submitted their new insulin glargine formulation in the EU as a biosimilar. Disappointingly, management did not mention the Lyxumia/Lantus combination device, on which it had promised more information on during its ADA Diabetes Update, but disclosed very little save for an expectation for 1H14 phase 3 initiation. Management also did not mention its biosimilar insulin program, which remains in phase 1. Lastly, management confirmed that topline phase 3 data for alirocumab (the company's PCSK9 inhibitor for hypercholesterolemia) are still expected in 3Q13 (it will be the first company with a PCSK9 inhibitor to report phase 3 results).

FINANCIAL UPDATES

• In 2Q13 worldwide Diabetes Division sales (Lantus, Apidra, Amaryl, Insuman, BGStar, iBGStar, and Lyxumia) grew a strong 16% operationally and 13% year-on- year (YOY) as reported to €1.6 billion ($2.1 billion). As management remarked during the call, this is Sanofi Diabetes’ 10th consecutive quarter of double-digit growth. This comparison was fairly difficult given the 14% operational and 23% reported growth in 2Q13. In 2Q13, Lantus accounted for 87% of Diabetes Division, which was the same as in 1Q13 and up slightly from 86% in 2Q12. In a quarter where Sanofi’s overall business was lackluster, management pointed to the Diabetes Division as one of the single points of optimism for the company (we recommend viewing CEO Viehbacher’s video about the quarter at sanofi.com).. Management expressed confidence that continued launches for Lyxumia (the company’s once-daily GLP-1 agonist) and potential future contributions of its new U300 insulin glargine formulation (which it expects to submit in the US and EU in 1H14) would continue to drive strong growth in Diabetes.

*USD estimates assume a conversion rate of €1 to $1.3056 USD; ROW consists of Japan, Canada, Australia, and New Zealand.

• Lantus sales in 2Q13 exceeded €1 billion for the seventh consecutive quarter, coming in at €1.4 billion ($1.8 billion), increasing 18% operationally and 15% as reported from 2Q12. This was a strong increase, though a somewhat easy comparison against 10% growth in 2Q12 in US dollars - the comparison was tougher against the Euro as growth increased 27% in 2Q12 in Euros. Management remarked that 5% growth in Western Europe was still impressive given the economic context there. In the US, SoloSTAR use represented 56% of total Lantus sales, up from 52% in 2Q12, indicating that conversion to SoloSTAR is continuing. Management suggested that the US delay of Novo Nordisk’s ultra-long acting Tresiba (insulin degludec) would help ensure Lantus’ growth in the near future. At the end of May 2013, Lantus held ~80% share of the long-acting insulin analog segment with Novo Nordisk’s Levemir holding the remaining share. Novo Nordisk will report 2Q13 results on August 8, 2013.
• Lantus once again out-performed Merck’s Januvia franchise, suggesting that Lantus will come out again as the top-performing diabetes drug in 2Q13. As background, the Januvia franchise reached $1.5 billion in revenue for 2Q13, rising 5% YOY – a rebound from its 1Q13 decline of 1%.

*USD estimates assume a conversion rate of €1 to $1.3056 USD; ROW consists of Japan, Canada, Australia, and New Zealand.

• Sanofi reported sales of Lyxumia for the first time; 2Q13 sales totaled €1 million (~$1.3 million), and Lyxumia now holds ~10% of the German GLP-1 market share by volume. Sanofi launched Lyxumia in Germany and the UK in March. It is the fourth GLP-1 agonist on the global market behind BMS/AZ’s Bydureon and Byetta and Novo Nordisk’s Victoza. Lyxumia has launched fully in Germany, whereas Sanofi is pursuing a step-wise approach in the UK where marketing has commenced. A full commercial launch is expected later in 2013. In Germany, Lyxumia had gained 8% of the GLP-1 market share by volume in June and 10% in July, 18 weeks after launch (which was roughly equal to the market share of BMS/AZ’s once-weekly Bydureon at that time). Furthermore, Lyxumia received approval in Japan in June 2013, and this approval includes use in combination with basal insulin. Lyxumia is the first GLP-1 agonist in Japan to be approved for this indication. Management noted that this is the first time Sanofi is able to launch a drug in Japan prior to the US. With pricing and reimbursement pressures still in full force in Europe, we believe that Lyxumia’s healthy penetration in its initial launch phases could be indicative of its future success.
• Years back, Aventis (and later, Sanofi, after the acquisition) broke the “primary care barrier” for insulin with Lantus, and from what we have seen on the functionality of the Lyxumia pen, it seems Sanofi could aim to do the same in GLP-1. At Diabetes UK 2012, we had the opportunity to see the pen: it has only one measured dose and a pull/push action, so there is no twisting or dialing. At first, patients use a green pen with a once daily 10 mcg dose, and then move to a 2o mcg maintenance dose (in a purple pen). Lyxumia is given prior to breakfast or dinnertime. The label allows for adding Lyxumia to orals and to basal insulin. The Sanofi team is promoting use with insulin as a way to obtain better A1cs and weight gain than basal insulin alone, and as an alternative to adding mealtime insulin. We will be curious whether patients (and HCPs) prefer Lyxumia’s simple two-step titration, or Victoza’s flexibility for easier titrating with a dial that allows for dose selection at 0.1 mg increments up to 1.8 mg (albeit all doses beyond 0.6, 1.2, and 1.8 are off-label).
• Management also highlighted Apidra, Sanofi’s rapid-acting insulin, as it is continuing its recovery after supply issues were resolved in 2012. Apidra sales reached€68 million ($89 million) in 2Q13, a 25% operational increase, a 21% increase as reported from2Q12 and a 3% sequential increase. At the end of 1Q13, Apidra held only 5% share of the short- acting insulin analog market, while Lilly and Novo Nordisk roughly split the remaining share (with Novo Nordisk coming out slightly ahead). For comparison, 2Q13 sales of Lilly’s Humalog grew 2% YOY to $629 million. Novo Nordisk will report financial results for Novolog on August 8.

*USD estimates assume a conversion rate of €1 to $1.3056 USD; ROW consists of Japan, Canada, Australia, and New Zealand.

• While Sanofi does not directly report BGStar and iBGStar sales, we estimate 2Q13 sales to be ~€12 million (~$16 million), coming almost exclusively from Western Europe. These figures represent a 33% YOY reported increase and a 9% sequential increase.
• • While not discussed on the call, as we understand it, Walgreens intends to stop carrying the iBGStar. We have not heard whether other retailers are following suit. As of today, Walgreens and the Apple Store are both still carrying the iBGStar, though Walgreens at a substantially reduced price ($7.50 from its regular $75; the price at the Apple Store is $100).
  • As a reminder, during AACE 2013, representatives at the Sanofi booth noted that during the conference, Sanofi received 510 (k) from the FDA for the use of the iBGStar and its software with the iPhone 5 and iPod Touch 5. Patients can now officially use a 1”x 2” adapter (already sold by Apple) to bridge the 30-pin connector on the current iBGStar with the smaller portal on the iPhone 5. During the 4Q12 Sanofi management expressed disappointment that the iBGStar was not compatible with the iPhone 5 – while the adapter is a solution, we’ve heard that the size of iPhone/adapter/iBGStar complex makes it more challenging to use (i.e., to tilt it at the correct angle to take a blood sample).
• Worldwide Amaryl sales decreased 2% operationally (10% as reported) year-over- year to €99 million ($129 million). Consistent with FY2012 and 1Q13, the reduction in sales was driven by poor performance in all regions except Emerging Markets. Specifically, Sanofi cited generic competition in Japan as a driver of negative growth.

*USD estimates assume a conversion rate of €1 to 1.3056 USD; ROW consists of Japan, Canada, Australia, and New Zealand.

# US sales were €0 in 1Q13

• Total worldwide Insuman sales were down 3% (operationally and as reported) to​ €32 million ($42 million). For the first time in over a year, the product did not see strong growth in Emerging Markets (the lowest growth in the last year was 29% in both 2Q12 and 3Q12 (on both an operational reported basis), while the highest was 38% in 1Q13 both operationally and as reported). The 27% sequential decline in Emerging Markets sales was unexpected (sequential growth was 0% in 1Q13 and 22% in 4Q12); management did not discuss this performance outcome during the call and we look forward to understanding more about these regions that have prompted significant growth in the past.

A: On Diabetes, I would argue that investing at the standstill would not really correspond to 16% growth  in sales. So, I think we continue to invest, because we believe this to be one of the biggest markets anywhere in the world. We have an opportunity to launch some new products, notably with Lyxumia, and we’re preparing to prelaunch U300. It is true that there is a higher spend elsewhere, but remember there are also segments in this market. We’re not really competing with the people who are duking it out in the DPP-4 market as an example. Even in the GLP-1 class, Victoza really is an add-on to orals, whereas Lyxumia is looking at use in combination with Lantus. So, we’re not necessarily even going after the same patients on the GLP-1s. Yes, Novo has put some more money behind Levemir, but we’ve been beating Levemir in our market share for years and years now, and I don’t think that’s going to change. I think you’ll see some investments certainly in the emerging markets because of the huge opportunity there. We have Insuman and our AllStar reusable pen launching, but I think when you look at the sales growth there, the Diabetes investment is certainly accretive to the bottom line. As it is, if you actually benchmark us, we are actually probably the most effective investment company in this industry. If you look at the level of sales, the spend that we have, we are probably getting a better return to the point where you could potentially make an argument, in some markets at least, that we have an underinvestment in that market, but again I believe in the investment we make will be earnings enhancing.

Q: A quick one on R&D and PCSK9. Roche announced last week that it would deemphasize their PCSK9 because of IP issues [Editor’s note: in Roche Q&A, management denied that this was the case – please see http://www.closeconcerns.com/knowledgebase/r/626cc479for details]. What is your take on that development or IP questions?

A: On Roche and the PCSK9, I think we would argue they were just simply late to the game here. We certainly don’t see any issues with our PCSK9, IP, or any other front. This is largely a race, at this point, with Amgen and ourselves. You’ve got other companies like Pfizer who are coming in with a slightly different approach who will come later in the game, but with a potentially different molecule. So, now we are absolutely bullish on our PCSK9. I think one of the things that people might forget in all of this, one of the biggest questions is how many people really want to get injected for high cholesterol? And one of the most interesting things is that we obviously have a big experience with our diabetes population here. And in actual fact, if I look at the rate of recruitment that we have had and a lot of the patients that we said we have done, there is actually quite a high willingness on this front. So, I actually think that there is going to be quite a significant product. I mean, we have to get through phase 3, but we’ll have our first three results late in the third quarter. Remember, there is a group of people walking around on the planet that have a genetic mutation that actually simulates this drug and so I think we also have a reasonably high level of confidence on the safety and tolerability of the drug.

-- by Jessica Dong, Manu Venkat, Nina Ran, and Kelly Close