OREANDA-NEWS. The planned deal by Sanofi and AstraZeneca's latest acquisition reflect the emergence of two distinct trends in pharmaceuticals M&A, with potentially very different implications for risk and credit profiles, Fitch Ratings says. These themes - increasing scale in core businesses, and the acquisition of new compounds in the search for the next blockbuster drug - are likely to drive more deals in 2016.

Sanofi is in exclusive negotiations to swap its animal health business with Boehriner Ingelheim's (BI) consumer health business. The deal would be the first step in Sanofi's new strategy narrowing its focus onto innovative pharma, consumer and vaccines. It follows similar transactions, including Novartis and GlaxoSmithKline's 2014 asset swap, which consolidated Novartis' position in oncology and allowed GSK to dispose of its sub-scale cancer drug portfolio in favour of boosting the stronger vaccines and respiratory drugs side of its R&D pipeline. The impact of these deals varies depending on the structure and impact on diversification, scale and potential synergies. But we believe the overall impact on Sanofi's credit profile would be neutral to positive.

The consumer healthcare (CHC) business Sanofi will receive from BI has a good regional and product fit with Sanofi's existing CHC arm, particularly the focus on Germany and Japan, and selected Latin American markets. The acquired brand portfolio is solid, with around EUR1.6bn of annual sales, although recent growth in developed markets and CEE has been relatively soft.

If it goes ahead, the deal will sacrifice diversification in favour of scale, but the consumer business is less R&D and capital intensive. This will optimise capital allocation towards core businesses and support medium-term growth. We therefore see such greater focus and scale as positive for the business risk profile. The impact on the financial profile is likely to be neutral to marginally negative. The asset-swap structure means the transaction would be executed in a balance sheet-efficient way and would include a cash payment from BI. But most of the payment may end up being used for share buybacks, as management wishes to mitigate earnings per share dilution.

AstraZeneca's motivation for its USD4bn acquisition of a majority stake in Acerta Pharma is different. It is looking for deals to strengthen its science base and provide new drugs that could eventually replace three blockbusters that are losing patents. This also echoes recent deals, including AbbVie's USD21bn acquisition of Pharmacyclics.

In these deals, which are also increasingly focussed on biotech companies, risks can be significantly higher. Biotech firms have much narrower R&D focuses and smaller pipelines. In many cases, they do not yet have any approved drugs and their valuation is purely based on the potential of one or two promising molecules that are still in testing.

These higher risks contributed to our downgrade of AstraZeneca last week to 'A'/Stable. We had previously placed the rating on Negative Outlook following the earlier announced acquisition of ZS Pharma, saying the investment in R&D and manufacturing had left it with little rating headroom.