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Can Sanofi (SNY) Sustain the Solid 1H Momentum in 2H17?

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Sanofi, Inc. (SNY - Free Report) performed quite well in the first half of 2017 and looks well poised to carry on the momentum in the second half.

While earnings per share beat the Zacks Consensus Estimate in the first quarter, it met the same in the second. Earnings rose 4.9% on a reported basis in the first half of 2017 and 2.7% at constant currency rates (CER) on a year-over-year basis.

First halfnet sales rose 8.7% on a reported basis and 5.5% at CER.  In Jan 2017, Sanofi swapped its Merial Animal Health businesses with Boehringer Ingelheim’s Consumer Healthcare (CHC) business. Reflecting this exchange and full consolidation of Sanofi’s European vaccines operations, sales rose 2% at constant structure and CER. We remind investors that Sanofi terminated its Sanofi Pasteur MSD joint venture with Merck& Co., Inc. (MRK - Free Report) in Europe in December last year.

A strong performance by Genzyme’s Specialty Care (Genzyme) and Vaccines units is making up for an accelerated decline in the diabetes franchise to support the top line.

In fact, at the second quarter conference call, Sanofi raised its previously issued profit outlookbacked by a better-than-expected performance in the first half and cost discipline despite a tough U.S. payer environment hurting sales in theDiabetesunit.

Sanofi expects 2017 business earnings to be broadly flat at CER. This outlook compares favorably with the previous expectation of flat to down 3% at CER.

So what will work in Sanofi’s favor in the second half?

Continued strong performance of the Genzyme unit, especially the multiple sclerosis drugs, Aubagio and Lemtrada and the rare disease drugs like Myozyme/Lumizymeand Fabrazyme is a positive. The Vaccines unit is also expected to perform well. Sales (including emerging markets) rose 14.3% at CER in the Genzyme unit and 24.5% at CER in the Vaccines unit in the first half of 2017.

Meanwhile, Sanofi, at the second quarter conference call, sounded quite optimistic about the sales prospects of its newly launched drug Dupixent for treating atopic dermatitis. The drug, which was launched in the U.S.in March 2017, generated sales of €26 million in the second quarter, backed by strong demand.Management waspleased with the drug’s uptake. We are optimistic on sales prospects of Dupixent, which could prove to be an important growth driver for the company. Other than Dupixent, other new drugs like Kevzara, launched in the U.S. in June 2017,and Soliqua, a once-daily titratable fixed-ratio combination of Lantus and Lyxumia, launched in the U.S. in January 2017,should also bring in higher sales in the back half of the year.

However, management expects U.S. diabetes franchise sales to decline faster in the second half due to the impact of formulary exclusion at CVS Health Corporation (CVS - Free Report) and UnitedHealth Group and difficult comparisons from last year.U.S. diabetes sales declined 19.1% in the first half of 2017.

Sanofi’s Diabetes franchise is under significant pressure with key product, Lantus, facing increasing competitive pressure at the payor level and biosimilar competition in several European markets and Japan.

In the cardiovascular franchise, it also remains to be seen if sales trends of Sanofi’s anti PCSK9 therapy, Praluent improve in the second half. Uptake of PCSK9 inhibitors like Praluent and Amgen, Inc.’s (AMGN - Free Report) Repatha have been slower than expected due to significant payer utilization management restrictions in the U.S. and limited market access in Europe. Praluent’s uptake could remain limited until guidelines supporting broader use of the treatment are issued and phase III cardiovascular outcome study data are out.

Also generic competition will continue to hurt sales of many key drugs in Sanofi’s portfolio including its blockbuster drug, Plavix.

Despite these challenges, we believe that new drug approvals, a solid pipeline and aggressive savings will pave the way for growth in the second half.

What Do the Numbers Say?

So far this year, Sanofi’s share price has risen 22%, better than a 7.8% increase for the industry.

The strong quarterly results and the back-to-back product approvals this year have led to an uptick in estimates as well. Sanofi’s earnings estimates for 2017 went up 2.5% while that for 2018 moved up 1.5% in the past 30 days. Sanofi’s earnings performance has also been pretty impressive, with the company reporting positive surprises consistently. The average earnings beat over the last four quarters is 5.10%.

Sanofi carries a Zacks Rank #3 (Hold). You can seethe complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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