Sanofi Nears Buyout Deal with PAH Specialist Actelion

Potential deal values Actelion at about $29.6 billion or $275 per share

s1French pharmaceutical giant Sanofi SA (NYSE: SNY) is said to be nearing a $30-billion takeover deal with Swiss biopharmaceuticals company Actelion Pharmaceuticals Ltd, as reported by Reuters on December 16th, 2016. This development follows a move by drug behemoth Johnson & Johnson (NYSE: JNJ) abandoning the race to acquire Actelion after making two separate bids for the lung disease specialist. A potential deal between Sanofi and Actelion could be announced as soon as next week, according to Bloomberg, sparking an 8.35% surge in Actelion’s shares prices to 214 Swiss francs ($208), while Sanofi’s was down 2.42% at 74.17 Euros on December 16th, 2016.

Actelion’s asking price of $275 per share could value the company at roughly $30 billion, and equates to 13 times Actelion’s sales and 30 times earnings before interest and taxes, making the perceived deal valuation somewhat on the higher side, especially given that Actelion’s pipeline contains only a handful of ongoing Phase 3 trials. Sanofi is likely to offer Actelion shareholders cash plus contingent value rights, a type of security that pays out only if experimental drugs reach certain commercial milestones, which exposes Sanofi to some risk of drug failures.

In recent years, Actelion has long been seen as a takeover target. However, Actelion’s co-founder and CEO Jean-Paul Clozel, who holds a 3.5% stake in the company, has repeatedly said he wants it to remain independent. In 2011, Clozel rallied shareholders against activist investor Elliott Management’s campaign to put the biotech firm up for sale, after which Actelion’s shares have more than tripled, sparking a spurt in its valuations.

What’s in it for Sanofi?

The potential deal would mark Sanofi’s largest transaction since 2011, when it bought rare disease specialist Genzyme for $20.1 billion. The potential deal assumes significance given that big drug companies such as Pfizer Inc. (NYSE: PFE) and Sanofi have prioritized rare diseases, because advances in understanding the molecular roots of disease have led to new treatments and health insurers have been willing to pay the high costs because few of their members require such treatments.

s2Actelion was founded in 1997 by husband-and-wife team Jean-Paul and Martine Clozel and other former Roche Holding Ltd’s employees. In 2000, Actelion went public and its valuation has climbed sharply since then. Actelion’s bragging rights is that it makes drugs treating pulmonary arterial hypertension (PAH), a life-threatening form of high blood pressure in arteries connecting the heart and lungs. It also plans to expand in drugs for multiple sclerosis and clostridium difficile, a condition which can lead to life-threatening inflammation of the colon, but regulatory approvals are still some years away. Actelion’s PAH drugs Opsumit and Uptravi are expected to generate more than $4.6 billion in combined 2020 sales, up from an estimated $1.4 billion in 2016.

In 2015, Actelion reported revenue of 2.05 billion Swiss francs and a profit of 551.9 million Swiss francs. For the first nine months of 2016, Actelion reported about 1.785 billion Swiss francs ($1.8 billion) in sales and employs about 2,500 people. Over the past few months, Actelion was able to avert a decline in revenue after its best-selling PAH drug, Tracleer, lost patent protection, through robust sales for its new PAH drugs Opsumit and Uptravi. On the flip side, Tracleer, which generated $539 million in sales during H1 FY16, is set to face competition from generic drugmakers in 2017.

Sanofi faces pricing pressure in US

s3Meanwhile, Sanofi has been attempting to diversify its drugs portfolio as it faces pressure on prices for its insulin products for treating diabetes in the US and has been scouting for more acquisitions. Sanofi and major drug companies are bracing for a tougher drug pricing environment in the U.S. in 2017, especially since US President-elect Donald Trump has pledged to clamp down on elevated drug prices, even while the rapidly increasing older population is intensifying pressures on the US health system. Moreover, the market for diabetes drugs, which is worth more than $70 billion globally, is expected to face intense competition from biosimilars.

To add to its woes, Sanofi is faced with formulary exclusions and mandatory discounts for long-acting insulin drugs in recent months. Major insurers such as UnitedHealth Group Inc. (NYSE: UNH), the largest health insurer in the U.S., CVS Health Corp. (NYSE: CVS), and Express Scripts Holding Company (NASDAQ: ESRX) are changing reimbursement terms for long-acting insulin drugs to include lower-priced options in their 2017 formulary, in order to reduce costs for their members.

s4UnitedHealth said that it will no longer cover Lantus, the blockbuster insulin drug sold by Sanofi, and will instead cover Basaglar, a cheaper biosimilar insulin sold by Eli Lilly and Co. (NYSE: LLY), under its Tier 1 coverage.

Sanofi’s Lantus, whose Q2 FY16 sales fell 11.2% to €1.46 billion, is facing intense competition from many biosimilars launched in the market in recent months. While Sanofi has reaffirmed its sales expectations despite the exclusion of Lantus from the 2017 drug coverage, it is still predicting a 4% to 8% annual decline in diabetes drug sales over the next two years. Faced with a slump in demand for Lantus, Sanofi is relying on new treatments including its Toujeo insulin to help make up for the Lantus revenue shortfall.

Lastly, the prices for traditional treatments like basal insulin drugs have fallen by more than 20% to $215 per prescription in 2016 in the US, after reaching a peak of $271 per prescription in 2014. While the fall in insulin drug prices is a boon for patients and pharmacy benefit managers, the growing costs ploughed into R&D, commercialization, and marketing of these drugs is expected to hurt Sanofi’s bottom-line in the future years.

Johnson & Johnson abandons Actelion chase

s5Initially, Johnson & Johnson had offered to buy Actelion for $26 billion in an effort to keep its portfolio geared at treating PAH. Actelion’s products cover every stage of PAH, giving it unique market share and pricing power within its niche. In particular, PAH drugs Actelion’s Opsumit and Uptravi are each expected to generate $2 billion in peak annual sales. For Johnson & Johnson, Actelion’s PAH portfolio would presumably have been a great addition at a time when biosimilar competition is expected to chip away at sales of J&J’s anti-inflammatory Remicade, a drug with more than $6 billion in annual sales.

After its initial bid was rejected, Johnson & Johnson then reportedly upped its bid north of $27 billion. However, this bid was also abandoned by Johnson & Johnson after sources suggested that Actelion was looking for closer to $30 billion. Moreover, Johnson & Johnson mostly shuns larger acquisitions since they are considerably tougher to integrate with the company’s more than 250 subsidiaries.

Finally, given the premium pricing for the potential deal, Johnson & Johnson felt that there is not much promise in Actelion’s drug pipeline and ongoing phase 3 trials. For example, ponesimod, an experimental treatment being examined in relapsing multiple sclerosis in the OPTIMUM trial, would need to really stand out to get ahead of Swiss pharma giant Novartis International AG’s (NYSE: NVS) Gilenya.

Meanwhile, merger mania for big pharmaceutical companies continues unabated!

Stock Performance

s6Sanofi’s stock stood at $38.74, gaining 0.52%, at the close on Monday, December 19th, 2016, having vacillated between an intraday high of $39.28 and a low of $38.67 during the session. The stock’s trading volume was at 1,697,122 for the day. The Company’s market cap was at $103.89 billion as of Monday’s close.

s7Johnson & Johnson’s stock stood at $116.02, gaining 0.12%, at the close on Monday, December 19th, 2016, having vacillated between an intraday high of $116.66 and a low of $115.94 during the session. The stock’s trading volume was at 5,874,371 for the day. The Company’s market cap was at $315.66 billion as of Monday’s close.

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