Fitch Affirms Sanofi at 'AA-'; Outlook Stable
Sanofi's IDR remains supported by its solid market position as a leading player in the global pharmaceutical industry (ranked fourth-largest in Fitch's global rated pharma universe based on 2014 pharmaceutical sales) as well as diversification into consumer healthcare, vaccines and animal health. Due to its size, Sanofi will continue to benefit from economies of scale in the field of R&D, marketing and distribution, and with its dealings with regulators.
The rating also reflects on Sanofi's strong financial profile characterised by moderate financial leverage, supported by strong cash generation and liquidity as the company currently emphasises shareholder returns over corporate activity and M&A.
Sanofi's pharmaceutical division is currently evolving following the US patent expiry of its key diabetes drug. The company is counterbalancing the associated loss of sales with new product launches in the field of diabetes, rare diseases and specialty pharma as well as vaccines. The Stable Outlook reflects Fitch's assumption that Sanofi will be able to substitute loss of sales with these new product launches and will be able to defend profitability, protecting its conservative financial risk profile.
KEY RATING DRIVERS
Evolution of the Pharma Division
Fitch expects sales in the pharmaceutical division to remain under pressure following the patent expiry of Sanofi's top selling drug, Lantus (19% of FY14 group sales), in key markets including the US, leading to currently high sales at risk for the group at 13.5% (Fitch defined). However, Sanofi is in the process of introducing a Lantus replacement, in addition to launching new products in diverse treatment areas such as cholesterol, specialist pharma, and vaccines. Fitch assumes that these new treatments should help mitigate the anticipated softer performance in the diabetes division, and ultimately lead to a more diversified pharma business profile, if well executed.
Innovation Drives Treatment Diversification
Fitch views Sanofi's pipeline as promising in the field of specialty pharma, vaccines and oncology, where it has announced a deepening R&D cooperation with its US partner, Regeneron, focusing on immuno-oncology and related combination therapies. Key R&D milestones for Sanofi in 2015 so far were the EU authorisation of Cerdelga (treatment of Gaucher's disease) as well as Praluent (cholesterol, approved in the US in July and EU in September 2015). The anticipated launch of the first dengue fever vaccine later in the year will also be a key milestone for the group.
Pressure on Profitability, Cash Flows
Fitch expects Sanofi's profitability and free cash flow (FCF) to be softer in 2015, due to the expected changes to the drug mix in its pharma division and associated launch costs for new treatments. As revenue and profitability evolution is a key rating driver, profitability could be compressed as we expect the industry-wide debate around drug pricing to intensify. This leads to an EBITDAR margin trending towards the 31% level defined by the agency as a negative rating sensitivity. However, Sanofi has initiated an internal restructuring programme to mitigate some of the pressures on profitability. At present the rating assumes the company will maintain steady profitability and enhance its FCF generation after 2015.
Steady Credit Metrics
Fitch expects continued reasonable financial risk for Sanofi, in line with its 'AA-' rating underpinned by strong funds from operation (FFO) generation over the four-year rating horizon. However, we expect FCF generation to be slightly depressed (at 2.7% of sales) in FY15 due to an anticipated swing in working capital relating to new treatment launches, albeit expected to reverse thereafter. Given that 2015 is a transitional year for the company characterised by a string of important product launches and patent expiries, we assume a return to FCF margin above 5.0% over FY16.
The rating case assumes therefore a FFO fixed charge cover trending towards 13x over the four year rating horizon, with FFO adjusted net leverage projected between 1.4-1.8x. We expect both measures to remain within the parameters for the assigned 'AA-' IDR.
Fitch expects further focus on the group's strategic development under the new CEO, noting Sanofi's noticeable absence from recent sector M&A (its last material transaction was the Genzyme acquisition in 2011). It has been focussed on bringing its promising late stage pipeline to market and managing the product lifecycle of key drugs.
Nevertheless, we believe that following consolidation in the industry, focusing on scale economies and R&D risks, Sanofi might review the strategic positioning of some of its businesses and associated capital allocation. However, the wide diversification of the group should offer a variety of strategic options for development, which we view as a positive factor supporting the business risk profile.
Fitch assesses Sanofi's liquidity as strong with readily available cash at EUR6.3bn as of end-2014 (as defined by Fitch) and undrawn committed term bank facilities totalling EUR8.0bn, which are not subject to financial covenants, covering near-term maturities of EUR4.0bn in FY15 and FY16 comfortably. Sanofi has demonstrated continuing access to debt capital markets placing EUR2.0bn of notes in September 2015, lengthening its maturity profile and lowering the average cost of debt.
Fitch's expectations are based on the agency's internally produced, conservative rating case forecasts. They do not represent the forecasts of rated issuers individually or in aggregate. Key Fitch forecast assumptions include:
- Static near-term sales performance from the Pharmaceutical Division as the diabetes franchise faces competitive pressures particularly in the US and new drugs take time to be established on the market; Fitch expects the near-term top line growth driver to come from the Vaccines and Animal Health divisions.
- Broadly stable EBITDAR-margins at around 31% over the four-year rating horizon.
- R&D spending modelled constraint at just under 15% of sales.
- Spike in FY15 working capital assumption to support product launches; normalisation thereafter.
- A degree of FX volatility (partly linked to emerging market and USD exposure) resulting in continued FX translation risks.
- Capex assumed at a maximum 5.0% of sales.
- Annual acquisition or shares buy-back spending of up to EUR3.5bn.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Major debt-financed acquisitions or share buybacks, which result in FFO adjusted net leverage greater than 2.0x on a continuing basis.
- FFO net fixed charge cover below 9x on a continuing basis.
- Top line erosion due to slower than anticipated product launches and/or stronger decline of off-patent drugs leading to an operating EBITDAR margin below 31%.
- FCF margin below 5.0% on a sustained basis.
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- Sustained industry leading profitability and cash flow generation combined with a commitment to financial ratios in line with a higher rating (i.e. FFO adjusted net leverage about 1.2x and FFO net fixed charge cover of about 16x on a continuing basis).
- Reduced reliance on a single product combined with a stronger late stage pipeline.
- Improvement in cash flow generation: FFO margin (after restructuring costs) growing to 25% and FCF margin above 10%.