Does Sanofi Need to Turn to M&A to Bulk Up Its Oncology Assets?

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It's hard to say that there's anything particularly wrong with Sanofi (NYSE: SNY  ) today. Like most of its big pharma peers, revenue growth remains a challenge (sales were down 7% as reported in the third quarter and up less than 1% in constant currency), and investors are worried that generics, biosimilars in this case, will chew into Sanofi's lucrative diabetes franchise. Even so, the shares are near an all-time high, and investors who've owned these shares for a few years aren't exactly hurting.

Even so, one of the pillars of the bear thesis is that Sanofi hasn't done enough to position itself in some of the more attractive markets within branded pharmaceuticals. Sanofi's deal with Regeneron for its anti-PCSK9 antibody was a pretty good deal for Regeneron, and Genzyme's rare disease drugs contribute less than 10% of the total revenue base.

Most specifically, though, Sanofi is weak in arguably the hottest area in pharma: oncology. Given recent pipeline failures and weak positioning in immunotherapies, it's worth asking if Sanofi may turn to M&A to appease investors worried that Sanofi's fortresses in diabetes and vaccines and emerging opportunities in cholesterol and multiple sclerosis aren't enough.

Recent setbacks frame the issue

Sanofi has had some bad news of late when it comes to its oncology portfolio. The company shuttered development of fedratinib due to safety concerns, four months after iniparib failed to demonstrate efficacy in yet another clinical trial. With that, there are no phase 3 programs right now and quite frankly little optimism about the phase 2 PI3K inhibitor and monoclonal antibody programs, particularly after MM-121 (partnered with Merrimack Pharmaceuticals) failed. Worse still to some investors, Sanofi's oncology program lacks the buzz that Bristol-Myers Squibb, Roche, and Glaxo have generated for their immunotherapy programs.

While Sanofi continues to spend considerable sums on R&D, Wall Street is not famous for patience. Couple that with recent comments from Sanofi's CEO that the company was intending to spend money on M&A in 2014 and it's not hard to connect some dots. Speculating on M&A is always dicey (there are at least 10 rumors for every actual deal), but it is worth investigating whether Sanofi could quickly turn around its fortunes in oncology with a deal.

Who might Sanofi consider?
Although companies can earn significant internal rates of return buying small and unproven biotechs, arguably the best risk-reward candidates are companies with unencumbered late-stage drug candidates. "Unencumbered" is a key word here, as Sanofi would have to share substantial revenue with other big pharma players were it to acquire Pharmacyclics or Medivation.

Celgene (NASDAQ: CELG  ) stands out right from the get-go, as this is the largest cancer-focused biotech out there -- large enough, in fact, that it blurs the line between biotech and pharma company. Celgene has a lot going for it, as expanded indications for Revlimid and Abraxane and the fuller sales development of Pomalyst should fuel double-digit growth across the next decade. Celgene would massively boost Sanofi's position in the oncology market, but at a great cost. Celgene already sports a market cap above $68 billion, and it's hard to see a deal getting done for less than $80 billion -- a deal so big that even with potential synergies it really would be more of a merger than an acquisition.

Seattle Genetics (NASDAQ: SGEN  ) is also a mixed prospect, but for very different reasons. Not only is the company's lead drug Adcetris partnered with Takeda, there are growing safety worries about the drug. I believe further risk-benefit studies will ultimately support the use and expansion of Adcetris, but it increases the risk. Seattle Genetics does have a strong position in antibody drug conjugation technology, but its wholly owned pipeline outside of Adcetris is very early stage. It would likely require less than $7 billion to get a deal done, though, so it's not impossible.

Here things start to get more interesting in my opinion. Clovis (NASDAQ: CLVS  ) is developing oncology drugs specifically aimed at subsets of patients with particular genetic variants -- a strategy that I believe skews the risk-reward more favorably. Its two lead candidates (CO-1686 and CO-338) target large, multibillion-dollar opportunities, and while they are in-licensed, the royalties owed will not be all that large. Clovis is very early stage, but definitely digestible for Sanofi. Incyte isn't so digestible, with a deal likely to cost more than $9 billion, but offers more near-term contributions. Last and not least, Celldex is the wilder, more speculative possibility, but could have a real winner with glembatumumab vedotin (CDX-011) in triple-negative breast cancer.

The bottom line
Investors would do well to never buy a stock simply because of the possibility it may be acquired. Likewise, with the multi-year bull run in biotech, there aren't many cheap stocks left in the stable. Clovis and Celldex are arguably the cheapest names in this article, but then they also have far and away the most execution risk and uncertainty.

Sanofi could use its M&A war chest to buy a smaller, private biotech. Large M&A just isn't all that common in biotech/pharma, and if Sanofi's CEO is serious about spending less than $3 billion, there aren't many obvious publicly traded candidates. Either way, given the pressure Sanofi management is now under to improve its revenue growth prospects out to 2017 and beyond, bulking up in high-value areas like oncology makes a fair bit of sense.

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