Scope Ratings (Scope) today assigns an issuer rating of AA and a short-term rating of S-1+ to French-based Sanofi S.A., one of the largest pharmaceutical groups worldwide. Senior unsecured debt issued by the group has been rated AA. Outlooks are Stable.

The issuer rating mainly reflects Scope’s perception of Sanofi’s core industry, innovative pharmaceuticals, as well as the French group’s solid competitive position in anti-diabetics, rare diseases, multiple sclerosis, vaccines and consumer healthcare. Other credit-supportive factors include a product portfolio with five ‘blockbuster’ drugs (generating over USD 1bn of annual revenues), strong credit metrics, and long record of stable operating profits translating into equally stable cash generation. The rating is limited by Sanofi’s low operating margins in a peer context, and high product concentration rates in innovative pharmaceuticals.

Business risk profile

Sanofi’s business risk profile is supported by the innovative pharmaceutical industry, with its relatively low cyclical exposure and high barriers to entry. The group’s strong competitive position also underpins the rating. While this position is largely founded on Sanofi’s global business around leading diabetes drug Lantus (now off-patent), the group is also a global leader in vaccines and the treatment of rare diseases. Sanofi has closed the gap with other global heavyweights in consumer healthcare manufacturing following a recent asset swap with Boehringer Ingelheim, improving Sanofi’s diversification above that of most of its pharmaceutical peers. The rating is further supported by Sanofi’s range of five high-profit blockbusters.

Scope estimates the group’s underlying innovative pharma EBITDA margin at above 30%, excluding generics and over-the-counter divisions and adjusting for restructuring charges. While this is not high compared with levels among some of the group’s peers, it can be explained by Sanofi’s relatively aged product portfolio and substantial exposure to emerging markets, where prices are generally low. Scope believes genericisation is controllable for Sanofi: even though Lantus is losing sales gradually, newly approved products such as Toujeo, Praluent and Dupixent are ramping up revenues.

Sanofi continues to be well diversified. This is reflected in its group structure (now resting on three pillars: innovative, vaccines and consumer healthcare) and diversification in pharmaceuticals (substantial exposure to six treatment areas including vaccines). Nevertheless, Sanofi’s product concentration rates in innovative drugs are comparatively high, chiefly due to Lantus. This is, however, expected to moderate in future.

Financial risk profile

Scope considers Sanofi’s financial risk profile to be slightly stronger than its business risk profile. The group has an excellent track record of stable operating profits and cash flow. Coupled with a conservative, credit-oriented financial policy, this has allowed the group to keep key credit metrics in the high AA category. While Sanofi’s funds from operations (FFO) covered 61% of Scope-adjusted debt (SaD) in 2016 – slightly weaker than in the year before due to a lower EBITDA – its free cash flow (FCF) in 2016 was very strong, at almost EUR 6bn (+3% year on year) or around 50% of Scope-adjusted debt. This is substantial within a ‘big pharma’ context.

Sanofi’s management pursues a full-distribution policy, having kept net financial debt within a narrow corridor of EUR 6bn-8bn since 2012. While the group’s annual free cash flow ranged between EUR 5bn and EUR 6bn in each of the last three years, most of it was distributed via dividends (about EUR 4bn per year), with share buybacks and acquisitions accounting for the remainder. Share buybacks are conducted opportunistically. In 2016 and 2017 for instance over EUR 4bn from the Boehringer disposal will have been partially returned to shareholders.

Scope expects credit metrics to improve in 2017 as higher operating cash generation is likely to be used for debt reduction. The gradual decline in Lantus sales is expected to be more than offset by Sanofi’s multiple sclerosis blockbuster, Aubagio, and higher profit contributions from consumer healthcare and vaccines in 2017. Scope expects free cash flow to dip temporarily in 2017 due to stronger cash absorption from working capital than in 2016.

Outlook

The Outlook is Stable and reflects Scope’s expectation that Sanofi will be able to maintain an FFO/SaD ratio of above 60% as well as an FCF/SaD ratio of above 40% in the foreseeable future. A higher rating may be warranted by a strengthening of the group’s financial risk profile with credit metrics moving towards a net cash position. Alternatively, an improved business risk profile via higher profitability and better diversification, chiefly led by lower product concentration rates, could also result in an upgrade. A negative rating action may also be undertaken should FFO/SaD fall below 60% on a sustained basis.

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Legal and regulatory disclosures

Important information
Information pursuant to Regulation (EC) No 1060/2009 on credit rating agencies, as amended by Regulations (EU) No. 513/2011 and (EU) No. 462/2013

Responsibility
The party responsible for the dissemination of the financial analysis is Scope Ratings AG, Berlin, District Court for Berlin (Charlottenburg) HRB 161306 B, Executive Board: Torsten Hinrichs, Dr Stefan Bund
Rating prepared by: Olaf Tölke, Lead Analyst
Rating committee responsible for approval of the rating: Werner Stäblein, Committee Chair
The rating concerns an entity which was evaluated for the first time by Scope Ratings AG.
The rating outlook indicates the most likely direction of the rating if the rating were to change within the next 12 to 18 months. A rating change is, however, not automatically ensured.

Information on interests and conflicts of interest
The rating was prepared independently by Scope Ratings but for a fee based on a mandate of the rated entity. The issuer participated in the rating process.
As at the time of the analysis, neither Scope Ratings AG nor companies affiliated with it hold any interests in the rated entity or in companies directly or indirectly affiliated to it. Likewise, neither the rated entity nor companies directly or indirectly affiliated with it hold any interests in Scope Ratings AG or any companies affiliated to it. Neither the rating agency, the rating analysts who participated in this rating, nor any other persons who participated in the provision of the rating and/or its approval hold, either directly or indirectly, any shares in the rated entity or in third parties affiliated to it. Notwithstanding this, it is permitted for the above-mentioned persons to hold interests through shares in diversified undertakings for collective investment, including managed funds such as pension funds or life insurance companies, pursuant to EU Rating Regulation (EC) No 1060/2009. Neither Scope Ratings nor companies affiliated with it are involved in the brokering or distribution of capital investment products. In principle, there is a possibility that family relationships may exist between the personnel of Scope Ratings and that of the rated entity. However, no persons for whom a conflict of interests could exist due to family relationships or other close relationships will participate in the preparation or approval of a rating.

Key sources of information for the rating
Prospectus; website of the rated entity/issuer; valuation reports, other opinions; annual reports/semi-annual reports of the rated entity/issuer; current performance record; detailed information provided on request; annual financial statements; data provided by external data providers; interview with the rated entity; external market reports; interview with the issuer; press reports/other public information.
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Methodology
The methodologies applicable for this rating (Corporate Rating Methodology and Rating Methodology: European Pharmaceuticals) are available on www.scoperatings.com. The historical default rates of Scope Ratings can be viewed on the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope’s default rating, definitions of rating notations and further information on the analysis components of a rating can be found in the documents on methodologies on the rating agency’s website.

Examination of the rating by the rated entity prior to publication
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