Nov 23 -
Summary analysis -- Sanofi ---------------------------------------- 23-Nov-2012
CREDIT RATING: AA-/Stable/A-1+ Country: France
Primary SIC: Pharmaceutical
Mult. CUSIP6: 80105N
Mult. CUSIP6: 801060
Mult. CUSIP6: 8010M2
Mult. CUSIP6: 8010M3
Mult. CUSIP6: 8010M5
Credit Rating History:
Local currency Foreign currency
22-Mar-2005 AA-/A-1+ AA-/A-1+
20-Sep-2004 A+/A-1 A+/A-1
The ratings on France-based pharmaceuticals group Sanofi reflect Standard & Poor's Ratings Services' view of the group's "excellent" business risk profile, supported by its well-diversified group structure, and its "modest" financial risk profile, according to our criteria.
Sanofi's key business strengths include its critical mass in research and development and marketing, which we view as key success factors for the pharmaceutical industry. This has enabled it to build up a substantial drug development pipeline, which includes 17 new molecular entities and vaccines in late-stage development or already submitted. This compares well with the group's international peers, in our view. The ratings are also supported by our view of the group's exposure to highly diversified and sizable treatment areas, underpinned by a product portfolio including five blockbuster drugs (with sales of more than $1 billion in 2011). The ratings are tempered by generic competition after loss of patent protection on some leading high-margin drugs, which has suppressed sales growth over the past two years, in our opinion.
Our view of Sanofi's "modest" financial risk profile takes into account the group's strong free cash flow generation, and relatively conservative approach to shareholder value in a peer group context. However, the $20 billion mainly debt-funded acquisition of U.S.-based Genzyme Corp. (Genzyme) led to significantly weaker financial metrics in 2011, reflecting a weakened financial policy.
S&P base-case operating scenario
We anticipate slightly positive group sales growth in 2012, on the basis of constant currencies. This mainly reflects continued strong sales growth from flagship Diabetes drug Lantus as well as satisfactory growth contributions from the Vaccines, Animal Health, Over the Counter (OTC), and Generics divisions. Our base-case scenario for 2012 also reflects weaker sales expectations mainly for Lovenox (thrombosis) and Taxotere (oncology) following patent expiry, although this is partly offset by growth in emerging markets. We expect Sanofi's portfolio of newly approved drugs such as Jevtana, Zaltrap (both oncology), Multaq (cardiovascular), Apidra (diabetes) and Aubagio (multiple sclerosis)to contribute to sustained positive growth at group level in 2012 and beyond, as is the case for the Genzyme portfolio of drugs which have experienced strong growth year-to-date due to a return to production of Cerezyme and Fabrazyme following regulatory approval of the group's Framingham site after earlier quality issues had been addressed.
Despite patent expiry for high-margin blockbuster products such as Plavix and Avapro, we anticipate 2012 EBITDA margins at about 34%, little changed from a year earlier, on the basis of our adjustments and estimates. This translates into 2012 EBITDA of about EUR12 billion compared with EUR11.3 billion in 2011. The increase is expected to be mainly a result of significantly lower restructuring charges in the course of the year, compared with about EUR1 billion in 2011. We believe that this profitability level is satisfactory for Sanofi given its diverse group structure including its lower-margin Generics and OTC businesses relative to its generally high-margin large Ethical Pharmaceuticals division. For 2013, our base-case scenario assumes flat growth due to lower expected sales of blockbuster drugs Lovenox, Plavix, Eloxatin (oncology) and Avapro (hypertension), likely to be offset by continued strong growth from Lantus, newly approved drugs, and the group's emerging markets franchises, which are likely to grow by 10%-15%. In addition, we expect the group's other non-ethical pharma divisions (animal health, vaccines, and consumer healthcare) to continue generating positive growth rates in 2013. Due to our expectation of further loss of high-margin mature-drug sales, we expect a lower EBITDA margin of 32% in 2013.
S&P base-case cash flow and capital-structure scenario
We forecast that Sanofi will achieve funds from operations (FFO) (adjusted by Standard & Poor's) to net debt of about 65% in 2012, compared with 63% in 2011. This reflects our assumption that FFO will be slightly lower than its 2011 level of EUR10.1 billion, following high tax and restructuring payments. We assume that net debt will decrease by about EUR1 billion to about EUR15 billion by the end of 2012, compared with the level of a year earlier, on the basis of Sanofi's strong cash flow generation. We assume cash outflows of EUR3.5 billion for dividends and EUR1.2 billion for share buybacks. This allows for an additional EUR1.5 billion in spending on acquisitions in 2012 in our base-case scenario, though this might appear too high given just EUR348 million spent in the first nine months of 2012. This would result in discretionary cash flows of about EUR1.5 billion in 2012 and about EUR1 billion in 2013 on the basis of the above assumptions. Accordingly, we believe that the group's credit metrics are likely to stay above levels we consider commensurate with the ratings.
The short-term rating on Sanofi is 'A-1+'. We assess the group's liquidity profile as "strong". This is underpinned by coverage of future cash uses by sources of almost 2x on average for the next two years. We further assume high free operating cash flows of about EUR7 billion per year and surplus cash of about EUR4 billion. We believe short-term debt maturities, though higher at about EUR6 billion at mid-year 2012, are not likely to increase further in the remainder of 2012 and full-year 2013. The group has two commercial paper programs, a EUR6 billion French program, and a $10 billion U.S. program, which remain largely undrawn and backed by committed bank lines of EUR10 billion.
The stable outlook reflects Sanofi's strong market positions and enhanced diversification, which are important for robust future free cash flow generation. Although the sizable Genzyme takeover fully exhausted the group's flexibility within the ratings, we note that the board's financial policy has kept credit metrics firmly in line with levels that we see as commensurate with the present ratings, namely FFO to net debt of more than 60% in 2012. Given the board's supportive financial policy and the group's resilience in a challenging business environment, we expect a slight improvement in credit metrics in 2012 and 2013. The ratings could be raised if the group's financial policy were to lead to future FFO to net debt of more than 60% on a sustainable basis. Although unlikely, the ratings could come under pressure due to a significant fall in the group's EBITDA margin by five percentage points to below 28% in 2013. Such a decline could be caused by low sales growth, possibly as a result of stronger generic substitution.