Rating action

Scope Ratings GmbH (Scope) has today affirmed its issuer rating of AA on Sanofi and changed the Outlook to Positive. Scope has also affirmed Sanofi’s AA senior unsecured debt ratings as well as its short-term rating of S-1+.

Rating rationale

The affirmation mainly reflects Sanofi’s strong operating performance during 2020, as expected by Scope, based on improving exposure to growth drivers (Dupixent, rare diseases, vaccines) and an enhanced late-stage pipeline. All of this lends itself to good deleveraging potential in the immediate future. In addition, management’s drive for efficient resource application has helped improve credit quality, which Scope reflects in its rating action. Scope believes that continued good cash generation in the coming years will not be spent on large-scale acquisitions or excessive shareholder remuneration. Therefore, credit metrics should improve further from already-high levels reached in 2020.

Scope believes Sanofi has become slightly less diversified over the past 24 months and more focused on its core growth drivers. However, the group should eventually stay more diversified than some of its US peers by remaining committed to its consumer healthcare and general medicines exposures.

As regards Sanofi’s business risk profile (rated AA-), Scope believes the group’s competitive position is supported by its strengthened focus on vaccines and rare diseases, both areas in which Sanofi is already a leading global player. Immunology (Dupixent) adds to this at a time when Sanofi’s former anti-diabetics flagship exposure is continuing to erode following the Lantus patent expiration. In addition, Sanofi’s rating also benefits from its improved late-stage pipeline containing 11 new molecular entities (up from eight previously), as well as the further assessment of Dupixent in 10 additional late-stage projects. The drug now has a strong likelihood of generating more than EUR 10bn in revenues in peak sales. Profits are shared with cooperation partner Regeneron. After portfolio restructuring over the last few years and in light of management’s new ‘play-to-win’ strategy, the group has become slightly less diversified with a stronger focus on high-margin pharmaceuticals. A degree of diversification is still provided by critically sized consumer healthcare, general medicines and vaccines exposure. It remains to be seen whether the group will succeed in increasing its market shares in oncology (helped by its two recent acquisitions) as well as in inflammation and immunology around leading drug Dupixent.

The rating is further supported by Sanofi’s range of seven blockbusters, boosting profitability. Scope estimates that the group’s underlying innovative pharma EBITDA margin is around 34%, excluding generics and over-the-counter divisions and adjusting for headcount-related restructuring charges. This is equivalent to a high single A category in a big pharma context. The group continues to be well diversified, in Scope’s view. This pertains to: i) its group structure, now resting on the three pillars of innovative pharma, vaccines and consumer healthcare; and ii) diversification in pharma, with significant exposure to six treatment areas including vaccines.

Scope believes that Sanofi’s financial risk profile (rated AA+) is slightly stronger than its business risk profile from a ratings perspective. Scope has upgraded Sanofi’s financial risk profile as the rating agency believes it is likely to improve further, based on significant progress in 2020. Credit metrics strengthened significantly in the past year, thanks to Sanofi’s operational progress, described above, as well as the availability of sizeable divestiture proceeds. As a result, discretionary cash flow generation (after M&A and shareholder remuneration) doubled to EUR 6.7bn in 2020, paving the way for considerable deleveraging compared to 2019. As expected by Scope, new management’s continuation of the group’s historically proven conservative financial policy has contributed to the progress achieved in 2020. This was evidenced by the group spending only about half of the 2020 divestiture proceeds of EUR 11.3bn on acquisitions (Synthorx, Principia) in the year. Thus, Sanofi’s credit metrics have recovered significantly from their temporary deterioration in 2018 caused by the patent expiry on Lantus and two acquisitions. Management’s financial discipline and focus on the group’s operational funding was also supported by the stable dividend and the decision not to allocate funds to share buybacks.

In Sanofi’s case, supplementary key ratings drivers do not affect the rating. While in Scope’s view management’s financial policy has clearly proved conservative, the agency has not applied an explicit uplift for this factor given the group’s full distribution of profits in the past. Sanofi is no regular acquirer of large companies. It was quite active in 2018 with mid-sized deals in a pharma context but there was also a disposal (European generics) at the same time.

The rating assessment includes a negative rating driver with regard to the generally high regulatory and reputational risks in the pharma industry (ESG factor). 

Outlook and rating-change drivers

The Outlook is Positive and reflects Scope’s expectation that Sanofi will be able to improve credit metrics further from the relatively high levels reached in 2020. This should be supported by more operating progress and the absence of larger-scale acquisitions.

A higher rating could be warranted by the group’s credit metrics improving towards a net cash position. Alternatively, a strengthened business risk profile with higher profitability and enhanced diversification (via better product concentration rates) could also result in a positive rating action in future.

A negative rating action, with a return to a Stable Outlook, could result from key credit metrics returning to funds from operations/Scope-adjusted debt below 60% and free operating cash flow/Scope-adjusted debt of 40% on a sustained basis.

Long-term and short-term ratings

All senior unsecured debt is rated at AA, the level of the issuer rating. Sanofi’s short-term debt rating has been affirmed at S-1+, supported by the group’s strong sustained liquidity profile.

One or more key drivers of the credit rating action are considered ESG factors.

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

Methodology
The methodologies used for these Credit Ratings and/or Outlook, (Corporate Rating Methodology, 26 February 2020; Rating Methodology: European Pharmaceuticals, 10 January 2021), are available on https://www.scoperatings.com/#!methodology/list.
Scope Ratings GmbH and Scope Ratings UK Limited apply the same methodologies/models and key rating assumptions for their credit rating services, while Scope Hamburg GmbH’s methodologies/models and key rating assumptions are different from those of Scope Ratings GmbH and Scope Ratings UK Limited.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other 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 Credit Rating performance report at https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. 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 Ratings’ definitions of default and Credit 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 factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://www.scoperatings.com/#!methodology/list.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information 
The Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Ratings: public domain, the Rated Entity and Scope Ratings’ internal sources.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting the Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data. Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and/or Outlook and the principal grounds on which the Credit Ratings and/or Outlook are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures 
These Credit Ratings and/or Outlook are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlook are UK-endorsed
Lead analyst: Olaf Tölke, Managing Director
Person responsible for approval of the Credit Ratings: Henrik Blymke, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 7 September 2019. The Credit Ratings/Outlook were last updated on 9 September 2020.

Potential conflicts
See www.scoperatings.com under Governance & Policies/EU Regulation/Disclosures for a list of potential conflicts of interest related to the issuance of Credit Ratings.

Conditions of use/exclusion of liability
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