Sanofi's Eyes May Be Bigger Than its Budget

Good targets aren't as cheap as they seem.
At Closing, June 18th
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Shopping at a sale frequently begins with the best of bargain-hunting intentions and ends with lengthy receipts and regret. 

French pharma giant Sanofi is apparently on an acquisition hunt. It's looking for deals in the $20 billion range and is focusing in part on the red-hot rare disease space, according to comments made by the head of the company's Genzyme unit to the FT. It's likely deal-hungry because it needs to boost growth as its blockbuster diabetes franchise faces competition. But even with depressed biotech valuations, that $20 billion limit may make it tough to actually land an orphan drug company that can help fix its troubles any time soon. Sanofi may need to further open its wallet or narrow its aspirations. 

Slow Growing

Sanofi's near term growth prospects look pretty limited at the moment.

Source: Bloomberg

Targeting rare-disease drugs makes sense. With their high prices, they're some of the highest-margin treatments on the market. Sanofi's operating margins are falling, hitting a low of 26.8 percent in 2015, down from 39.7 in 2010. Danish diabetes rival Novo Nordisk posted a 45.1 percent margin last year, and the large-pharma median was 28 percent.

On the face of it, it's a great time to go bargain-hunting. Rare-disease-focused companies such as Vertex, Alexion, and BioMarin are worth much less than they were at the biotech market's bull-run heights last year:

Rough Year

Rare disease stocks have joined the rest of biotech by plunging in value since the summer of 2015

Source: Bloomberg

But if Sanofi thinks it's shopping in a discount bin, it may still be in for some sticker shock.  

Attractive orphan companies such as Baxalta, Dyax, and Synageva are already spoken for. Two of the most appealing rare-disease targets still available, according to Bloomberg Intelligence and based on sales potential, are Alexion and Vertex. Even at today's depressed values, these companies still cost $34 billion and $22 billion, respectively -- exceeding Sanofi's target price range. If Sanofi is willing to lever up, then it could pull together as much as $27 billion in cash for a deal without impacting its credit ratings, according to a BI analysis.

But actually landing one of these two companies would likely take much more than their current valuation -- meaning a deal would either take a lot more borrowing or a substantial equity component. Sanofi's shares are down 27.3 percent over the past seven months, making that particular currency less valuable.   

For one thing, there's already at least a slight recovery afoot in the industry; the Nasdaq Biotech Index is up nearly 9 percent from its February 11 low. There's no particular reason for either Alexion or Vertex to accept a low-ball offer, unless they think the chances of a sustained upturn are remote. 

Both companies could fetch premiums. Vertex has been mentioned as a potential target for Johnson & Johnson and Gilead, raising the odds of a bidding war. Alexion, meanwhile, has a growing blockbuster in Soliris, which is expected to exceed $5 billion in sales in 2020. It also has two other recently approved medicines and a robust pipeline.

Shire's rare-disease-drug focused acquisition of Baxalta in January came at a 37.5 percent premium to Baxalta's price before Shire's (renewed) pursuit became public. Mylan's more recently announced $7.2 billion deal for Meda was at a 92 percent premium. That one certainly didn't seem to reflect a bargain-bin environment. If substantially cheaper deals do happen as big pharma continues to prophesy, then they'll more likely be pipeline-oriented, for smaller development-stage companies facing a cash crunch.

A high-margin, rare-disease acquisition sounds great. But math and market dynamics likely mean Sanofi will either have to seriously stretch its limit for a premium orphan asset or focus on its pipeline.

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

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    Max Nisen in New York at

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    Mark Gongloff at

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