EUR 4351.14 For Business Accounts Only

Diabetes Headwinds Offset - Upgrade to HOLD

We previously forecasted that the diabetes franchise would perform worse than consensus expectations. Whilst this did play out as we expected, several offsetting factors helped to deliver earnings in-line with consensus. We do not see any material earnings risks through the remainder of 2017, hence upgrade Sanofi to Hold. We are cautious L-T due to the risk of downgrades for EU Lovenox, Soliqua & gross margins.

Cost Savings & Vaccines Helped to Offset Diabetes - Sanofi has delivered material cost savings to the bottom-line which helped deliver margins ahead of our expectations. In addition, Vaccines had a strong H216 and we expect this to continue into 2017. The headwinds from diabetes have been mitigated by these tailwinds.

Downside Risks Dissipated for 2017 – Given the diabetes headwinds appear to have been navigated for 2017 and we expect ongoing strong cost control, we see minimal risks to earnings for the remainder of 2017 and potentially 2018.

Pipeline Set to Contribute – Whilst diabetes has been the main driver of earnings momentum, the pipeline has come into view and sales from Dupixent, Praluent and Sarilumab should all start to contribute and improve that momentum.

Risks Still Exist – Whilst 2017 risks are minimal, we believe the longer-term has several uncertainties where consensus has assumed an optimistic base case. We believe EU Lovenox and Soliqua estimates may be too high. Consensus has gross margins expanding despite a negative mix headwind and Praluent & Dupixent litigation is still a major concern.

Price Target Increased to €79/share – We value Sanofi on a relative PE basis and believe SAN should trade at a 10% sector discount. This is due to slower EPS growth (5% 2017-21 vs. the sector at 7%) and the L-T risks to our earnings forecasts.