Deals

Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

Sanofi has seen off Johnson & Johnson in the fight to acquire Swiss drugmaker Actelion Ltd. That should worry the French pharmaceutical company's shareholders.

Scared Shareholders
Sanofi shares slipped after reports the drugmaker was in talks with Actelion
Source: Bloomberg
Intraday times are displayed in ET.

Actelion isn't obviously worth more to Sanofi than to J&J, and Sanofi has less firepower to deploy on a big acquisition. The risk is Sanofi's management feels that it needs to do a deal. That is usually a recipe for overpaying.

Something Needs to Be Done
Sanofi trades at an 18 percent discount to peers on an enterprise value to estimated revenue basis
Source: Bloomberg

J&J, which had been prepared to offer more than $28 billion for the Swiss company, withdrew from talks late on Tuesday citing disagreements on price. Actelion then said it was in discussions with another party -- Sanofi, according to Bloomberg News -- about a "strategic transaction." That could mean either a takeover or an alliance involving a pharma giant taking a stake.

A purchase would hand Sanofi three niche, though successful, pulmonary hypertension drugs. These would bring sales, but not synergies. The drugs' manufacturing is already outsourced, and Sanofi would probably want to retain their specialist sales forces.

The scope for financial benefits lies in shutting down Actelion's R&D operation, which costs about 500 million francs ($495 million) a year. There might be some tax savings if Sanofi can exploit Actelion's Swiss domicile. It could also shrink the head office.

Take a rosy view, and all this could boost Actelion's expected operating profit to 2 billion francs in 2018 from 1.1 billion francs today. After tax, that would give Sanofi a return of only 6.3 percent. To get to returns that would cover Actelion's 9 percent cost of capital would require sales of the drugs to really pick up. Yet many analysts are concerned about the competitive threat from rival treatments.

Mind The Gap
Sanofi shares have struggled to keep up with European drugmakers over the last three years.
Source: Bloomberg

Sanofi already has about 10 billion euros ($11 billion) of net debt. An all-cash deal would push that to 36 billion euros, three times the combined companies' forecast Ebitda this year. Synergies would help bring leverage down over time -- but indebtedness would put Sanofi offside for other deals.

As for a strategic partnership, that would be costly without generating all the benefits of a full takeover.

Why do a deal? Sanofi may think Actelion can get it through a soft patch. Any debt-funded acquisition is going to boost earnings per share when borrowing costs are still cheap. Plus the group faces a number of uncertainties: Lantus, its key diabetes drug, is set to be challenged by a cheap alternative from Eli Lilly & Co. Litigation by U.S. peer Amgen Inc. could erode the value of a Sanofi cholesterol treatment, and a new dermatitis and asthma drug is awaiting regulatory approval.

Actelion's revenue would provide a cushion against all this. But buying diversification for the sake of it doesn't fit with Sanofi's primary M&A strategy of focusing on deals that drive value creation and reinforce priority areas like oncology. And it's no justification for overpaying.

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

To contact the author of this story:
Chris Hughes in London at chughes89@bloomberg.net

To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net