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Rating action

Scope Ratings has today affirmed its AA/Stable issuer rating on French pharmaceuticals manufacturer Sanofi SA. The short-term rating continues at S-1+ and the senior unsecured debt rating remains at AA.

Rating rationale

The affirmation mainly reflects Scope’s view of greatly improved operating trends and cash generation in the last 12 months providing good deleveraging potential. This is based on very strong demand for newly approved dermatology/ inflammation drug Dupixent, which is more than compensating for declining sales in Sanofi’s formerly largest product Lantus (anti-diabetics). At the same time, newly adopted, rigorous cost discipline and about EUR 10bn in divestiture proceeds for the 21% stake in cooperation partner Regeneron, helped to elevate group cash generation significantly at the end of the first half 2020, in a year-on-year comparison. Scope therefore believes credit metrics are very likely to improve greatly in 2020 compared to the year before. This is despite a mixed picture regarding performance of certain products in the first six months of the year as the coronavirus crisis unfolded while group results were still resilient. For the second half of the year, Scope expects Sanofi’s vaccines segment to perform strongly, assuming a certain normalisation of patient access and hospital services in most countries. This is not so much due to a potential new Covid-19 vaccine approval but rather to a pent-up and generally increased demand for travel as well as traditional influenza vaccines as an expression of most populations’ higher safety priorities in the wake of the present crisis. As one of the leading global vaccine producers, Sanofi is very likely to benefit considerably, in Scope’s view.

The ratings continue to be supported by 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 health care and for Dupixent. In addition, the group’s enlarged product portfolio of seven blockbuster drugs (generating more than USD 1bn of annual revenues) further supports the ratings. The rating also benefits from Sanofi’s proven, long-term track record of stable operating profit generation, translating into equally stable cash generation. The group’s recent acquisitions – Synthorx and Principia – for a combined consideration of about EUR 6bn are relatively minor bolt-on deals for a big-pharma player and do not challenge the ratings in light of the positive operating trends detailed above.

As regards business risk profile (rated AA-), Scope believe the innovative pharmaceuticals industry has relatively little cyclical exposure and good protection via high market entry barriers. With regard to Sanofi’s competitive position, the group’s anti-diabetics global market position around its leading drug Lantus – although already off-patent – supports the rating. Sanofi is still one of the leading players in this segment globally, despite recent sales pressure. The group also holds strong market positions in vaccines and rare diseases, where it is similarly among the leading players worldwide. Following portfolio restructuring over the last few years, the group has become less diversified with a stronger focus on high-margin pharmaceuticals. A smaller degree of diversification is still provided by its critical size in consumer healthcare as well as vaccines. It remains to be seen whether the group can increase market shares in oncology (supported by its two recent acquisitions) as well as in inflammation and immunology around leading drug Dupixent. The rating is further supported by Sanofi’s expanded range of seven blockbusters supporting profitability. Scope estimates that the group’s underlying innovative pharma EBITDA margin is around 33%, excluding generics and over-the-counter divisions and adjusting for restructuring charges. This is equivalent to a high single A category in a big pharma context. Sanofi’s pipeline depth has declined in the last few years, with the late-stage segment now containing seven new molecular entities and one new vaccine (down from a total of 12 in 2018).

Scope believes that Sanofi’s financial risk profile (rated AA) is slightly stronger than its business risk profile from a ratings perspective. This is despite credit metrics’ significant deterioration in 2018 due to the acquisitions of Bioverativ and Ablynx, combined with the Lantus patent expiry. While this led to temporarily depressed credit metrics in 2018, they recovered quickly in 2019, supported by a much improved patent expiry protection profile, mainly helped by the significant rise in Dupixent revenues. In addition, metrics have also been supported by management’s cost control programme, which has already benefited cash generation in the last 12-18 months. Continuation of the group’s historically proven conservative financial policy by new management has brought Sanofi’s credit metrics very close to levels in line with present ratings, namely free operating cash flow/Scope-adjusted debt of 40%. This is despite the negative impact of the coronavirus crisis, particularly in the second quarter of the year.

In detail, relatively strong free cash generation in the first six months of 2020 was supported by resilient revenues in the face of the crisis (-3% year-on-year) as well as by cost control, leading to a negligible operating margin impact relative to the first half of 2019. This good performance, given the circumstances, also reflects greater asset management efficiency, which mitigated the impact of the crisis. Consequently, free operating cash generation in the first half of 2020 was up in a year-on-year comparison. Deleveraging is usually difficult to achieve for Sanofi in the first half of the year, due to the dividend payout which falls within the period. However, 2020 greatly benefitted from the EUR 10.5bn Regeneron divestiture gain. Based on this, and the fact that the acquisition of Principia Biopharma Inc for about USD 3.7bn was executed in the third quarter, we believe that more significant deleveraging is likely for the full year 2020, assuming a good vaccines season and a normalisation of the hospital business. We do not expect additional sizeable acquisitions in the remainder of 2020, while the confirmed absence of share buybacks in 2020 is an additional support to the ratings.

Outlook and rating-change drivers

The Outlook is Stable and reflects our expectation that Sanofi can reach and continue to maintain a funds from operations/Scope-adjusted debt ratio of 60% as well as a free operating cash flow/Scope-adjusted debt ratio of 40% following the 2019 recovery from depressed 2018 credit metric levels. A higher rating could be the consequence of a stronger financial risk profile, with credit metrics improving towards a net cash position. Alternatively, an improved business risk profile via higher profitability and improved diversification (with better product concentration rates) could result in a positive rating action in future. A negative rating action could result from the above ratios falling back to levels below 60% and 40%, respectively, on a sustained basis.

Long-term and short-term debt ratings

Senior unsecured debt is rated at the same level than the issuer rating, in line with our corporate methodology.

The short-term rating of S-1+ reflects Sanofi’s sound credit quality and is supported by adequate internal liquidity.

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 these ratings and rating outlooks (Corporate Rating Methodology, 26 February 2020; Rating Methodology: European Pharmaceuticals, 10 January 2020) are available on https://www.scoperatings.com/#!methodology/list.
Information on the meaning of each rating category, including definitions of default and recoveries can be viewed in the “Rating Definitions - Credit Ratings and Ancillary Services” published on https://www.scoperatings.com/#!governance-and-policies/rating-scale. 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. Guidance and information on how Environmental, Social or Governance factors (ESG factor) are incorporated into the rating can be found in the respective sections of the methodologies or guidance documents provided on https://www.scoperatings.com/#!methodology/list.
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: the rated entity, public domain 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, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.
Lead analyst Olaf Toelke, Managing Director
Person responsible for approval of the rating: Werner Staeblein, Executive Director
The ratings/outlooks were first released by Scope on 7 September 2017. The ratings/outlooks were last updated on 19 September 2019.

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
© 2020 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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