EUR 4635.28 For Business Accounts Only

Downgrade Risk

Our below consensus earnings and scenario analysis showing the downside risk to diabetes lead us to expect that Sanofi will continue to underperform. We show there is material downside risk to near-term earnings & even greater long-term risk as diabetes undershoots consensus. We also show that Sanofi has all the hallmarks of a value trap having spent much of the last 10 years trading at a significant discount to the sector.

2017 EPS Likely to Come Down – We are 5% below consensus EPS for 2017 and 18% below consensus in 2021. To put this into context, consensus EPS for 2017 has fallen 14% in just the last 12mths. Our 2017 forecasts are lower due to: Higher R&D for the REGN IO alliance, lower diabetes forecasts, slower Dengvaxia & Praluent take-offs and factoring in dilution to Pharma from removing higher margin Consumer Health

Sanofi Suffered a Poor US PBM Selling Season – The latest National Formularies have been published by the 3 biggest PBM’s and Sanofi have not fared well. CVS (26% of covered lives) have excluded Lantus and Toujeo, United Health (23% of covered lives) have removed Lantus from the formulary and Express Scripts (29% of covered lives) plan to reassess the basal insulins category “later this year to reflect anticipated launches”. We do not believe this bodes well for Sanofi.

Diabetes Pressures to Continue – In 2015 diabetes was the biggest category of US drug spend and cost twice the next largest category (pain/inflammation). We expect pricing pressure to be significant in the coming years. Diabetes accounted for 11% of all Medicare spend & 15% of Primary Care spend. In the Commercial plans, Diabetes accounted for 11% of primary care spend & 7% of all spend according to ESI.

Sanofi Could be a Value Trap – Whilst we agree Sanofi looks cheap on PE today, we show that SAN has looked “cheap” for much of the last 10 years & traded at a significant discount to the rest of Pharma largely due to bullish long-term guidance being provided, but rarely being met.

Dupilumab Upside Under-Appreciated – Our Atopic Dermatitis model suggests there is considerable upside to consensus on dupilumab. We currently forecast €3.5bn peak sales in AD alone and should we see positive data in Asthma then our forecasts would increase.

Valuation - Our €65 TP assumes Sanofi trades on a 20% sector discount in 2017. We believe there is further downside risk to our numbers given the pressures on US diabetes as our scenario analysis suggests.

Note: This initiation is also included within the "EU Pharmaceuticals - Opportunities Abound" report.