Sanofi finds M&A fix for its multiple itches

Reuters

2 days ago

LONDON, June 2 (Reuters Breakingviews) - Sanofi (SASY.PA), opens new tab is one European giant that's still focused on the United States. The $123 billion French drugmaker will pay up to $9.5 billion, opens new tab for Blueprint Medicines (BPMC.O), opens new tab, a U.S. group whose key product fights a rare blood disorder which causes painful skin rashes. Aptly enough, it scratches a range of itches.
Sanofi Chief Executive Paul Hudson has been in a tricky position. He needs to bolster his business to cope with a heavy reliance on eczema treatment Dupixent, which is expected to account for over a third of revenue this year, according to Visible Alpha data, but loses exclusivity early next decade. The strategy is to sell assets, like a stake in Sanofi's consumer drugs unit Opella, and invest more in new treatments.
Yet the group's research record is patchy, as evidenced by recent, opens new tab underwhelming data for a much-fancied respiratory drug. The added risk is that Sanofi's pristine balance sheet, with debt equivalent to just a third of this year's EBITDA according to LSEG data, gets frittered away on expensive deals. Small wonder Sanofi is now worth just over 10 times forward earnings, a discount to European peers like Novartis (NOVN.S), opens new tab or AstraZeneca (AZN.L), opens new tab.
Blueprint Medicines, however, may help assuage those M&A fears. Its key product, Ayvakit, is used to treat systemic mastocytosis, a condition that causes reactions like hives and even organ damage. Its niche status probably means it shouldn't be affected by the U.S. government's efforts to force drugmakers to cut prices by selling directly to consumers, JPMorgan analysts reckon. And, given Ayvakit is already approved and on the market, Sanofi is less exposed to the risk of failed trials, a key danger in biotech M&A.
True, Blueprint does bring risks. Analysts expect Ayvakit sales to roughly quadruple by 2030 to over $2 billion, but as of now it makes operating losses. A rival treatment from Cogent Biosciences, with trial data expected this year, could lead to greater competition.
All the same, there's a way to adequate returns, if shareholders are prepared to wait. In 2031, as per Visible Alpha forecasts, Blueprint could generate operating profit of $1.2 billion. That's obviously some way off, but it's also a near-11% post-tax return on his $9.2 billion outlay, after factoring in cash and assuming no cost savings. The pharma sector's cost of capital is less than 9%, according to NYU Stern School of Business estimates. If Hudson can find other viable targets, Sanofi's depressed shareholders may find more to cheer about.
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