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Rating action

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

Rating rationale

The issuer rating still mainly reflects Scope’s view of Sanofi’s strong operational and financial performance in a challenging macroeconomic environment.

As regards the business risk profile (assessed at AA-), the group’s competitive position continues to benefit from the strong focus on speciality care, specifically immunology and rare diseases, a growing market in which Sanofi is already global leader. Sanofi’s immunology drug Dupixent is a cornerstone in treating chronic type-2 inflammatory diseases and keeps adding significant patient pools as more treatments are approved and diseases remain under-served. The drug’s sales reached EUR 8.3bn in 2022, with a guidance of EUR 10bn in 2023. As multiple sclerosis treatment Aubagio and former flagship anti-diabetics product Lantus reduce in significance due to patent expiry, Dupixent is accelerating its ramp-up, with sales estimated to peak at more than EUR 13bn annually over the medium term. Sanofi also maintains a leading position in flu vaccinations and is even gaining momentum quickly via paediatric vaccines. The general medicines and consumer healthcare divisions continue to deliver consistent growth. Sanofi’s rating also benefits from the improved late-stage pipeline of 10 new molecular entities as well as the further assessment of Dupixent in multiple late-stage projects. Growth will also benefit from the launches in 2023 of hemophilia drug efanesoctocog (Altuviiio) and paediatric Respiratory Syncytial Virus (RSV) preventative nirsevimab (Beyfortus).

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, especially immunology, with continuing R&D investments. The critical exposure to consumer healthcare, general medicines and vaccines continues to provide good diversification.

From 2023, Sanofi will combine vaccines and pharmaceuticals manufacturing under its Biopharma segment. The aim is to trigger efficiencies, eliminate duplication and increase flexibility. Its consumer healthcare division has also progressed well in implementing its stand-alone model to drive a significant improvement in performance.

Sanofi’s profitability has improved as a result of the portfolio restructuring. The shift towards speciality care products and improving efficiencies is increasing the gross margin. Sanofi’s seven blockbusters continue to be highly profitable. Scope estimates the group’s underlying innovative pharma EBITDA margin at around 35%, excluding generics and consumer healthcare and adjusting for headcount-related restructuring charges. In 2022, its business operating income margin was 30% as per Sanofi’s definition, the group EBITDA margin was 31% and cost savings reinvested in growth drivers reached EUR 2.7bn. The in-built efficiency and margins of Dupixent will help to dampen the effect of the continuing macroeconomic challenges. During 2023-2025, Sanofi will seek to achieve a business operating income margin of more than 32% by 2025, through new launches, rising Dupixent profitability and further portfolio streamlining.

Sanofi’s financial risk profile (assessed at AA+) is slightly stronger than its business risk profile. Credit metrics strengthened significantly in 2022 thanks to operational progress and 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. The most recent acquisition was Prevention Bio for USD 2.9bn in March 2023. To accelerate the R&D pipeline, Sanofi may deploy more cash towards transactions that secure access to external innovation. Leverage in terms of Scope-adjusted debt/EBITDA is expected to stay at around 1.0x and Scope-adjusted funds from operations/debt is expected to remain at above 70%. Scope-adjusted free operating cash flow/debt is also expected to remain above 60%. Scope’s base case assumes no large acquisitions but bolt-on acquisitions of around EUR 5bn in 2023 and EUR 2bn yearly afterwards.

In December 2022, Sanofi bid around USD 25bn to acquire biotech company Horizon Therapeutics, but declined to submit a higher offer against Amgen’s USD 27bn. Scope deems that this bid was opportunistic and that future acquisitions of this magnitude are unlikely. However, it also signals Sanofi’s willingness to prioritise growth through M&A over building up a net cash position. In any case, Sanofi can absorb such deals given its available cash cushion, synergies and the EBITDA that the target would contribute.

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 12.2bn at YE 2022, supported by reliable free operating cash flow generation and undrawn committed credit lines of EUR 8bn).

Among the supplementary rating drivers, financial policy is the most important for Sanofi. Management is committed to a strong investment-grade rating and disciplined capital allocation policy.

The rating assessment includes high regulatory and reputational risks inherent to the pharmaceutical industry (credit-negative ESG factor). At the same time, Sanofi has a long record of providing drugs that contribute to human health and well-being (credit-positive ESG factor).

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

Outlook and rating-change drivers

The Outlook is Stable and reflects Scope’s expectation that Sanofi can maintain Scope adjusted debt/EBITDA at around 1.0x.

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

Given the company’s ample headroom to a lower rating, a negative rating action is remote. A negative rating action could result from deteriorating credit metrics such as Scope-adjusted funds from operations/debt falling back below 60% or Scope-adjusted free operating cash flow/debt reaching 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.

The affirmed short-term debt rating of S-1+ reflects Sanofi’s sustained credit quality, supported by adequate internal liquidity and strong access to external funding through capital markets and bank debt as signalled by the bond issuances and available credit facilities.

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, (General Corporate Rating Methodology, 15 July 2022; Pharmaceuticals Rating Methodology, 10 January 2023), are available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
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, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 7 September 2017. The Credit Ratings/Outlook were last updated on 20 April 2022.

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

Conditions of use / exclusion of liability
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