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Rating action

Scope Ratings has today affirmed the AA issuer rating of French pharmaceuticals manufacturer Sanofi SE, the Outlook is Stable. The agency also affirmed the S-1+ short-term rating and the AA senior unsecured debt rating.

Rating rationale

The affirmation mainly reflects Scope’s view that the strong improvements in operating trends and cash generation in H1 2019 will extend into the second half of the year and allow for a strong deleveraging. This is necessary following the 2018 deterioration in credit metrics, chiefly due to the Ablynx and Bioverativ acquisitions (totalling EUR 12bn) but also to the slowdown in the vaccines business in H1 2018 and the ongoing patent expiry pressure on Sanofi’s key blockbuster anti-diabetics drug, Lantus.

Credit metrics are therefore likely to recover to levels commensurate with the current rating by 2019, only one year after the acquisitions. Deleveraging will be supported by a much improved demand for vaccines (H1 2019 sales up by 22.5% year-over-year), slower-declining sales of products subject to patent expiry (mainly Lantus), and rising sales from newly approved products (mainly immunology drug Dupixent and acquired products such as haemophilia drug Eloctate and rare-blood-disorder drug Alprolix; both from Bioverativ). Scope expects the net effect to be very positive in 2019, thus supporting management’s claim of a new growth phase for the group. Moreover, the new CFO is likely to focus more on cost control and cash generation, which supports the ratings.

The ratings continue to be supported by Scope’s perception of the anti-cyclical and protected pharmaceutical industry as well as Sanofi’s solid competitive position in anti-diabetics, rare diseases, multiple sclerosis, vaccines and consumer healthcare. Another credit-positive factor relates to the group’s five blockbuster drugs, each generating more than USD 1b of annual revenues. Sanofi’s long track record of stable operating profits, and translating these into equally stable cash generation, also benefits the rating.

Sanofi’s financial risk profile is slightly stronger than its business risk profile. This is despite the significant deterioration in credit metrics during 2018 due to the Bioverativ and Ablynx acquisitions, combined with the Lantus patent expiry. While this depressed credit metrics in 2018, Scope expects a rapid recovery in 2019, supported by the very strong performance in H1 2019. If the new management continues to pursue the conservative financial policy, Sanofi’s credit metrics are likely to reach levels needed for the present ratings, namely a free operating cash flow/Scope-adjusted debt (FOCF/SaD) ratio of 40%. In detail, the strong free operating cash flow in H1 2019 was supported by good like-for-like revenue growth of 4.1%, which led to robust profitability. As a result, free operating cash flow more than doubled from the level in the same period in 2018, when the figure was depressed by low vaccines demand. Cash generation was stronger in H1 2019 in a year-on-year comparison despite higher restructuring payments.

Scope expects significant debt reduction during H2 2019; deleveraging is usually hampered in the first half of the year by dividend payouts. The new CEO’s conservative approach and focus on cost control are likely to aid deleveraging, and Scope therefore expects neither a higher dividend nor sizeable acquisitions for the remainder of 2019. On the other hand, this is also too early to judge, as the CEO was appointed just a few days ago.

Rating-change drivers

• Positive: increasing margins and free cash flow; credit metrics moving towards a net cash position
   
• Negative: larger M&A to erode credit metrics on a sustained basis; inability to maintain at least a funds from operations/SaD of 60% and an FOCF/SaD of 40%

Stress testing & cash flow analysis
No stress testing was performed. Scope performed its standard cash flow forecasting for the company.

Methodology
The methodologies used for this rating and rating outlook (Corporate Rating Methodology; Rating Methodology: European Pharmaceuticals) are available on www.scoperatings.com.
Historical default rates of the entities rated by Scope Ratings can be viewed in the rating performance report on https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. Please also refer to 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 definitions of default and rating notations can be found at https://www.scoperatings.com/#governance-and-policies/rating-scale.
The rating outlook indicates the most likely direction of the rating if the rating were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The rated entity and/or its agents participated in the rating process.
The following substantially material sources of information were used to prepare the credit rating: public domain, the rated entity, and Scope internal sources.
Scope considers the quality of information available to Scope on the rated entity or instrument to be satisfactory. The information and data supporting Scope’s ratings originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the rating or outlook action, the rated entity was given the opportunity to review the rating and/or outlook and the principal grounds on which the credit rating and/or outlook is based. Following that review, the rating was not amended before being issued.

Regulatory disclosures
This credit rating and/or rating outlook is issued by Scope Ratings GmbH.
Lead analyst: Olaf Tölke, Managing Director
Person responsible for approval of the rating: Werner Stäblein, Executive Director
The ratings/outlooks were first released by Scope on 7 September 2017. The ratings/outlooks were last updated on 18 September 2018.

Potential conflicts
Please see www.scoperatings.com for a list of potential conflicts of interest related to the issuance of credit ratings.

Conditions of use / exclusion of liability
© 2019 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Analysis GmbH, Scope Investor Services GmbH and Scope Risk Solutions GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstraße 5 D-10785 Berlin.

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