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Rating action

Scope Ratings GmbH (Scope) has affirmed its AA issuer rating on French pharmaceutical company Sanofi S.A. and revised the Outlook to Stable from Positive. Scope has also affirmed the AA senior unsecured debt rating and S-1+ short-term rating.

Rating rationale

The rating action reflects delayed deleveraging towards a net cash position in the short-term. Sanofi can still use its financial headroom for bolt-on-acquisitions that would delay the deleveraging and comply with the company’s focus on growth. The issuer rating still mainly reflects Scope’s view of Sanofi’s strong operating performance during 2021 based on the improving exposure to growth drivers (Dupixent and flu vaccines) as well as the enhanced late-stage pipeline.

As regards Sanofi’s business risk profile (assessed at AA-), Scope believes the group’s competitive position is supported by the stronger focus on speciality care, specifically rare diseases, a growing market in which Sanofi is already global leader. Immunology drug Dupixent, Sanofi’s main driver of growth, is having a stellar performance: sales reached EUR 5.3bn in 2021 and are guided to peak at more than EUR 13bn. Dupixent has been counteracting the continued erosion of Sanofi’s former flagship anti-diabetics products Lantus following its patent expiration and also Aubagio’s sales decline. Sanofi’s rating also benefits from the improved late-stage pipeline containing 10 new molecular entities as well as the further assessment of Dupixent in multiple late-stage projects. After portfolio restructuring over the last few years and in light of management’s ‘play to win’ strategy, the group has become slightly less diversified with a stronger focus on the high-margin therapeutic areas of immunology, oncology and neurology, with continuing R&D investments. Some diversification is still provided by the critically sized exposures to consumer healthcare, general medicines and vaccines. Important milestones include efforts to establish a stand-alone model for consumer healthcare, the investment on a technology platform for mRNA vaccines and the listing of EUROAPI in May 2022 to create a global Active Pharmaceutical Ingredient (API) player.

The shift towards speciality care products and improving efficiencies is increasing gross margin while lowering operating expenses. Sanofi’s seven blockbusters continue to boost profitability. Scope estimates the group’s underlying innovative pharma EBITDA margin at around 34%, excluding generics and consumer healthcare and adjusting for headcount-related restructuring charges. Scope also highlights that the Russia-Ukraine conflict is impacting the global supply chain for pharmaceutical companies including Sanofi.

Sanofi’s financial risk profile (assessed at AA+) is slightly stronger than its business risk profile. Credit metrics have strengthened significantly in the past years thanks to operational progress and sizeable divestiture proceeds. As a result, discretionary cash flow generation (after M&A and shareholder remuneration) has paved the way for considerable deleveraging, supported by a disciplined financial policy.

Robust cash generation is allowing Sanofi to finance bolt-on acquisitions without weakening leverage, like it did in 2021 with Transate Bio, Kadmon, Kymab and Kiadis takeovers. Funds from operations/Scope-adjusted debt is expected to remain at above 70% and free operating cash flow/Scope-adjusted debt at above 50%. Scope’s base case assumes no large acquisitions but bolt-on acquisitions of around EUR 2bn yearly. Our assumption about net cash position seems to be delayed due to continuing organic and potential inorganic investments needed to accelerate growth on focus areas.

Sanofi’s liquidity profile is much stronger than that of other large European corporates thanks to its low balance sheet financial debt and ample available cash (about EUR 7bn yearly on average, reliable free cash flow generation and committed lines maintained at EUR 8bn).

Supplementary key drivers do not affect Sanofi’s 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. Corporate governance is credit-neutral.

The rating assessment includes the high regulatory and reputational risks inherent to the pharmaceutical industry (credit-negative ESG factor).

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

Outlook and rating-change drivers

The reversion of Sanofi’s rating Outlook to Stable from Positive reflects the delayed deleveraging towards a net cash position in the short term (compared to Scope’s expectations in 2021) and the uncertainties about the usage of Sanofi’s financial headroom over the next few years. Sanofi can still use such headroom for bolt-on acquisitions, which would delay the ability to deleverage to a net cash position.

A positive rating action could be warranted if the usage of Sanofi’s significant financial headroom became clearer and Scope had more visibility that the company can move closer to a net cash position by YE 2024. Alternatively, an improved business risk profile via higher profitability and improved diversification could result in a positive rating action.

Given the company’s ample headroom to a lower rating, a negative rating action is deemed remote. A negative rating action could result from deteriorating credit metrics such as the FFO/SaD falling back below 60% or FOCF/SaD falling below 40% on a sustained basis.

Long-term and short-term debt ratings

The rating on senior unsecured debt has been affirmed at AA, in line with the issuer rating. Sanofi’s short-term debt rating has been affirmed at S-1+, supported by the group’s strong sustained liquidity. 

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, 6 July 2021; Pharmaceutical Rating Methodology, 10 January 2022) are available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
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-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. 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-governance/definitions-and-scales. 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://scoperatings.com/governance-and-policies/rating-governance/methodologies.
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: Azza Chammem, Senior Analyst
Person responsible for approval of the Credit Ratings: Sebastian Zank, Executive Director
The Credit Ratings/Outlook were first released by Scope Ratings on 7 September 2017. The Credit Ratings/Outlook were last updated on 19 May 2021.

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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