Feb 25 (The following statement was released by the rating agency)
Fitch Ratings has affirmed France-based healthcare company Sanofi SA's (Sanofi) Long-term Issuer Default Rating (IDR) and senior unsecured rating at 'AA-' and its Short-term IDR at 'F1+. The Outlook is Stable.
The affirmation reflects Sanofi's ability to weather the US patent expiry of Plavix (expired May 2012) and Avapro (expired March 2012), excellent market positions in the global pharmaceuticals, vaccines and animal healthcare markets, its well-placed late stage R&D pipeline, strong financial profile as well as its broad product range and strong geographical diversification. These positives are partly offset by the future patent expiry of its top selling drug Lantus (in 2015) and the number of setbacks the company has faced in its late stage pipeline in 2013. Sanofi retains ample financial flexibility. We do not expect it to be highly acquisitive, which should enable it to maintain steady credit metrics.
KEY RATING DRIVERS
Strong Market Positioning
Sanofi's ratings are supported by its solid competitive position as a leading player in the global pharmaceuticals industry (as the fourth largest pharmaceutical company by pharmaceutical sales calculated by Fitch) as well as leadership in the over the counter, vaccines and animal healthcare markets. Due to its size, Sanofi will continue to benefit from economies of scale in terms of R&D and sales force and from some market power with regards to market participants.
Broad Product and Geographical Diversification
Sanofi benefits from a solid product diversification. At end-2013 the reliance on its top pharmaceutical product Lantus (anti-diabetic drug) was 17% of group sales, and its reliance on the top-five products was 33% of group sales. This diversification helps the company to cope with negative developments regarding single products and segments. Sanofi is also well geographically diversified and strongly positioned in emerging markets (these account for 33% of end-2013 revenues). Emerging markets are increasingly important as Fitch expects them to be one of the major growth drivers for the industry.
Well Placed Late Stage R&D Pipeline
Sanofi's R&D late stage pipeline had a strong H113 with four approvals followed by a weaker second half (one approval). In total, during 2013 the company cleared five new molecules for marketing in Europe or the U.S. However, this strong number of approvals has been partly offset by the removal of projects.
The company also faced a number of setbacks, deciding to discontinue four projects already in their late stage pipeline. Fitch considers Sanofi's pipeline adequately full and balanced, but not industry leading. This profile is adequate for the current ratings especially given the strong number of approvals obtained in the first half of 2013.
Manageable Patent Expiry Profile
As evident in the 2013 results, the group has been affected by the 2012 patent expiry on major products, including that of the blood-thinning drug Plavix and Avapro, used to treat high blood pressure and kidney problems in the US. This has led to a material reduction in product-related payments from Bristol-Myers Squibb Company ('A'/Negative), which co-markets the drug.
Sanofi does not have any significant sales at risk until 2015 when its top selling diabetes drug, Lantus expires. Given the strong diversification into non-branded prescription drugs, recent number of approvals and financial headroom within its current rating Fitch expects that Sanofi will be well placed to withstand the patent expiry of Lantus as it has done in 2012/2013 for Plavix and Avapro.
Steady Profitability Post Plavix and Avapro Expirations
Sanofi's operating profit margin declined to 28.3% in 2013 from 32.8% in 2012; largely due to the patent expiries of Plavix and Avapro. For 2014 and 2015, Fitch projects profitability to remain relatively stable given the expectation of further cost savings from the restructuring programmes which will be partly re-invested in Sanofi's key growth platforms, especially given the number of new molecular entities approved in 2013.
Stable Credit Protection Measures
We expect Sanofi's debt protection measures will remain steady, in line with the levels we calculate on the basis of preliminary 2013 figures. Funds from operations (FFO)-adjusted net leverage should remain around 1.2x on the back of positive free-cash-flow (FCF) despite Fitch's conservative assumption that Lantus would face generic competition as soon as in 2015. The current ratings factor headroom for up to EUR2.5bn in share buy-backs and/or bolt-on acquisitions. In addition, Fitch projects Sanofi's FFO fixed charge cover to improve above 14x by 2016 (2013: 12.1x).
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
- Major debt-financed acquisitions or share buybacks, which result in FFO adjusted net leverage greater than 2.0x (2013E (based on Fitch estimates):1.2x) on a continuing basis
- FFO net fixed charge cover below 9x (2013E:12x) on a continuing basis
- Operating EBITDAR margin below 31% (2013E: 32.3%)
Positive: Future developments that may, individually or collectively, lead to a positive rating action include:
- A 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% (2013E: 21%) and FCF margin above 10% (2013E: 7%)
LIQUIDITY AND DEBT STRUCTURE
At end-2013 cash and other cash instruments totalled EUR8.3bn. This is more than sufficient to cover the EUR4.2bn short-term debt including any amounts outstanding under the group's commercial paper (CP) programmes. Sanofi has access to additional liquidity through its committed bank debt facilities. At 30 June 2013 these totalled EUR10bn, of which EUR3bn mature in December 2014, EUR0.25bn in July 2015 and EUR6.75bn in July 2017.