Health

Max Nisen is a Bloomberg Gadfly columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.

In a deal worth as much as $25 billion, Sanofi is looking to trade its increasingly ill-fitting Merial animal-health unit for Boehringer Ingelheim's consumer brands. This is the second massive asset swap for the industry this year. Given the clear advantages of swaps over more traditional M&A in some cases, it shouldn't be the last.

Swapproval
Investors like Sanofi's efforts to trade Merial for Boehringer Ingelheim's consumer business
Source: Bloomberg
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This follows GSK's $20 billion swap in March of a portfolio of cancer drugs for Novartis' vaccines and the majority stake in a joint venture combining their consumer businesses. When announced, that deal was hailed as an innovative path for the industry, and a more surgical alternative to big buyouts, which often start with exhortations to the gods of synergy and end up destroying value. But that was the only comparable asset swap in the industry before the proposed Sanofi deal. In the meantime, pharma M&A has been on its way to a record $493.1 billion worth of deals announced so far this year.

This swap would make Boehringer the second biggest animal-health company in the world. And it would kill a flock of birds with one stone for Sanofi. It simplifies the company's structure, sheds an animal-health business already earmarked for disposal and bulks up Sanofi's consumer business cheaply -- with a 4.7-billion-euro cash windfall, to boot. The appeal of big asset swaps lies in their ability to rapidly and precisely transform a business, which is why other pharma firms will likely give swaps a look. 

Sanofi shareholders were enthused -- a fairly novel experience after a rough year filled with bad news for blockbuster diabetes treatment Lantus, which faces a steep patent cliff after losing U.S. exclusivity this year.

Rough Sledding
Sanofi's best selling drug is projected to lose billions in sales over the next few years
Source: Bloomberg

The swap is further evidence that big pharma is shifting away from a model it followed for decades, where mega-mergers left the biggest companies with major divisions in not just most pharmaceutical areas, but in animal health, vaccines, consumer items, medical devices, and more. 

In a world that increasingly disdains conglomerates, there's less appeal for, say, Sanofi in having an animal-health business that has little synergy with its other businesses. So there's been a wave of spinoffs, sales and, now, asset swaps, as companies try to become global leaders in a few areas rather than also-rans in many. This is particularly important now that pricing power matters more than ever, in the face of generic competition and government pressure on costs.

A consumer business is generally much more stable and free of the patent cycle; Sanofi's is growing more rapidly than its animal-health business. If the deal goes through, Sanofi says it would likely have the biggest global market share in the extremely fragmented consumer health care market, ahead of Bayer. Boehringer Ingelheim's consumer sales are estimated to be 1.6 billion euros this year. 

Chasing Bayer
Adding Boehringer's 1.6 billion Euro consumer business could help Sanofi top Bayer in consumer sales.
Source: Bloomberg

Sanofi was kicking around the idea of a spinoff or a sale of Merial, but a swap lets it avoid the long and laborious process and uncertain payoff of those approaches. It may not be getting the best possible price: Zoetis, a 2013 Pfizer spinoff and the only big, publicly traded animal-health only firm out there, trades at an enterprise-value to 2015 sales multiple of 5.5. Boehringer's deal appears to value Merial at 4.6 times sales, according to a Bloomberg Intelligence analysis.

But Sanofi would get Boehringer's consumer unit at a 4.2 multiple to its 1.6 billion euros in 2015 sales. Bayer's 2013 purchase of Merck's consumer business -- which helped turn it into the current consumer market share as of 2014-- was at a 7.5 multiple. By that measure, Sanofi seems to be getting a bargain.

These look like mighty friendly terms, for both Sanofi and Boehringer. Asset swaps are complex to negotiate and execute and may not be for firms concerned only with maximizing the near-term return on a business. While swaps are unlikely to supplant M&A in an industry fond of dealmaking, they're undeniably part of big pharma's playbook now.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Max Nisen in New York at mnisen@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net