2017 credit ratios better than expected
Sanofi’s key financial credit metrics in 2017 were substantially better than Scope’s expectations and against 2016 levels despite challenging operating developments, including Lantus price pressures, the slow ramp-up of Praluent and Soliqua, and the Dengvaxia label update requiring unused stock buyback. From a small deterioration in 2017 group EBITDA (-2% to EUR 9.5bn year on year) and a decline in operating cash flows versus 2016 levels, the group generated lower, though sizeable, free cash flow of more than EUR 5bn in 2017. This was distributed fully in that year through EUR 2.2bn of dividends and share buybacks (EUR 2.9bn in 2016). In addition, over EUR 4bn of disposal proceeds (mainly from the asset swap with Boehringer Ingelheim) helped reduce net financial debt by about EUR 3bn year on year, an improvement on Scope’s estimate of EUR 1.6bn. The impact on key credit metrics was very positive:

• Funds from operations (FFO) to Scope-adjusted debt (SaD) of 93% (62% in 2016; 69% expected by Scope)
• SaD to Scope-adjusted EBITDA of 0.8x (1.2x in 2016; 1.0x expected by Scope)
• Free cash flow (FCF) to SaD of 65% (47% in 2016; 43% expected by Scope)

Two acquisitions for 2018
Amid a strategic transformation of the group, Sanofi announced two mid-sized acquisitions in early 2018 totalling almost EUR 14bn: Ablynx (rare blood disorders) and Bioverativ (rare diseases). While Scope considers these acquisitions to be positive for Sanofi’s already very strong business risk profile, the immediate effect on the financial risk profile will be significantly negative as both will be fully debt-funded due to the companies’ low cash flows. For 2018, Scope expects the FFO-to-SaD ratio to fall to about 50% and the FCF-to-leverage ratio to decline to about 35%. This will fall short of Scope’s ratio guideline for Sanofi of 60% and above 40% respectively, but we believes that at least the latter measure can recover in 2019.

Financial policy – rating implications
Sanofi’s financial risk profile is likely to recover in both 2018 and 2019 supported also by roughly EUR 2bn of disposal proceeds expected for its European generics activities later this year. As such, Scope expects Sanofi to hold off on share buybacks to improve credit metrics further in the next two years. In this context, Scope believes future deleveraging of about EUR 2bn-4bn per year is possible given the fixed dividend, assuming no further divestitures and acquisitions. Scope believes the current rating does not offer much flexibility for large, debt-funded acquisitions.

This publication does not constitute a credit rating action. For the official credit rating action release click here. On 7 September 2017, Scope assigned Sanofi SE an issuer rating of AA. Senior unsecured debt issued by the company is rated AA. The short-term rating is S-1+. The Outlooks are Stable.