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Here's How Sanofi Hopes to Avoid the Patent Cliff

By Motley Fool Staff - Feb 1, 2018 at 3:38PM

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Acquisitions may help the company navigate risks.

This week, Sanofi (SNY 1.96%) announced that it's buying hemophilia drug developer Bioverativ (BIVV) for $11.6 billion. The price tag raised eyebrows because it values Bioverativ at a lofty 10 times trailing-12-month revenue. Why is Sanofi willing to spend so much money to get its hands on this biotech?

In this clip from the Motley Fool's Industry Focus: Healthcare, analyst Kristine Harjes is joined by healthcare investor Todd Campbell to discuss how patent expiration may have factored into Sanofi's decision and why Bioverativ's hemophilia products are so intriguing to it.

A full transcript follows the video.

This video was recorded on Jan. 24, 2018.

Kristine Harjes: On Monday, not only did we get confirmation about that Celgene-Juno deal, but Sanofi also announced an all-cash deal to buy Bioverativ for $11.6 billion, or $105 per share.

Todd Campbell: Yeah. That was a little bit more of a pricey deal, as far as price divided by revenue, versus what we saw with Celgene and Juno. Bioverativ's hemophilia drugs are only bringing in, exiting the third quarter, about $1.1 billion in annualized sales.

Harjes: Yeah. Sanofi really paid up here. That was about a 64% premium on the bid. Shares of Sanofi were down a few percentage points on the news, which isn't really that surprising. You'll typically see the buyer lose a little bit of market cap when they announce a new deal. But I think I'm kind of with the market. I'm thinking this seems awfully expensive. For a little bit of background, Bioverativ was a spinoff from Biogen last year. They're a hemophilia specialist. They IPO'd in the range of $5 billion. So now, they're being bought for $11.6 billion, so if you held onto those shares, if you were a Biogen shareholder a year ago, you've done pretty well.

Campbell: Kristine, I just don't understand this deal. How come this didn't get done a year ago? Are you going to tell me that Biogen wasn't out knocking on doors saying, "Who wants to buy this company from us?"

Harjes: Yeah, really.

Campbell: So now, a year later, what's really changed in the past year that makes Sanofi so willing to pay twice what they theoretically could have bought it for pre-spinout? So I think there's reason for some question on how much they're paying for this. But for Sanofi, it's important. They need to insulate themselves against the risk of declining demand for Lantus, their multibillion-dollar diabetes drug. And one of the ways they can do that is by acquiring companies that are generating significant revenue growth.

And by all accounts, that's Bioverativ. Their sales in the third quarter of 2017 were $291 million, and that was up 27% year over year. That's pretty robust growth, especially when you consider the fact that the hemophilia market that they participate in is valued at about $10 billion annually. So that suggests a lot of running room.

Harjes: And it's a pretty competitive market, too. There's Shire in there; there's Bayer in there. But these companies and their hemophilia drugs are not growing nearly as quickly as Bioverativ and its portfolio of hemophilia drugs. I will say, though, I'm a little bit wary about the long-term potential of this because of the revolution that we could see in hemophilia due to gene therapies, like the ones that we've discussed being developed at Spark Therapeutics and BioMarin.

Campbell: Yeah. That was one of the other takeaways I had here. It seems like Sanofi has done some work and is modelling for either a longer than expected wait for those gene-editing therapies to reach the market, or a slower uptake. And I guess I could make an argument that, depending on the pricing that those gene editing therapies may command, you could see a situation where you have extremely severe cases of hemophilia A and B being treated with gene editing and less severe cases being treated with a prophylactic, such as the drugs sold by Bioverativ. So it may be one of those situations where they're looking at their model and saying, "Over the next 10 years, we may start to get bigger competition from one and done therapies, but it will take a while for those therapies to truly displace these prophylactic treatments."

And I think you could make a good argument that Eloctate and Alprolix, the two drugs that Bioverativ markets, those are resonating with doctors and patients. They're reducing patient burden, people are having to receive transfusions of the factors that help them coagulate their blood, less frequently, and that's a big win for these patients. And one of the things that was interesting to me as I was looking through this deal, Kristine, was there's still a lot of patients in this market who aren't or haven't switched over from those old, have-to-take-them-a-lot treatments to these newer, longer-lasting treatments. That suggests that maybe you could continue to have 20% growth for the foreseeable future.

Harjes: Yeah, I can see how one would make that argument. I'll also add to that argument that you could be looking even further down the line. Bioverativ does have a pipeline outside of hemophilia. They're doing some work in sickle cell disease, they have a gene editing collaboration with Sangamo Therapeutics in beta-thalassemia. They're also entering some phase 3 trials in cold agglutinin disease, which currently has no approved options. That also potentially could be where they're seeing the long-term value come from. Due to the expensive nature of this acquisition, they do need to be thinking long-term, because it's going to be a while before they can turn a profit on this.

Campbell: Yeah. Ultimately, the long term, whether or not this is a good deal or not, they overpaid or didn't, may hinge on those other programs that you just mentioned. Each one of those programs individually could be a nine-figure revenue generator for Sanofi over time. Again, they have to figure out a way to offset headwinds tied to Lantus. And I think this is one of the ways they might be able to do it.

Harjes: Yeah, and they've been looking for a while. You'll recall that they came second in trying to acquire Actelion and Medivation. Lantus didn't just lose its patent protection. I believe the patent expired in 2015. Meanwhile, this is the first major acquisition for the company since Genzyme back in 2011. That was a $20 billion acquisition. So they've been on hunt for a while. It doesn't surprise me to see them making some M&A moves.

Campbell: The other thing that's interesting is, the hemophilia market is going to grow. As I mentioned, it's $10 billion or so right now. It's expected to grow about 7% annually from here. That's a pretty solid natural tailwind for this market.

You mentioned there's a lot of competition. There is. If you look at it Baxalta, which is now owned by Shire, they generate $900 million a quarter from their hemophilia drugs, and they still rely pretty heavily on the short-acting therapies. So it's conceivable that you could have sales go from $1.1 billion today to $2 billion to potentially $3 billion, and then as some of these other programs pay off, then maybe you're getting up toward $4 billion. So I think the devil will be in the details. You're going to have to keep an eye on things.

But it's certainly interesting. It certainly makes you say, I want to be keeping an eye on hemophilia companies, because it seems like there's a lot of interest in paying up based on how much Shire paid, and now how much Sanofi paid, to get into the space.

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