On Dec. 9, pharmaceutical giant Sanofi (SNY 0.83%) said it's buying immuno-oncology company Synthorx (THOR) for $2.5 billion to boost its cancer and autoimmune program. Considering the performance of Sanofi's businesses, the pipeline Synthorx brings to the table, and global projections for growth in the cancer immunotherapy market, the purchase sounds like a bargain for Sanofi. For Synthorx, which more than doubled research and development spending in a year's time, the financial power of a major player will be welcome.
Sanofi is paying $68 per share in cash, which is a 172% premium over Synthorx's previous closing price of $25.03. After the announcement, Synthorx's shares soared to the offer price, then closed at $67.71, while Sanofi's shares lost 1.6%. Sanofi, which plans to finance the deal with cash on hand, expects to complete the transaction in the first quarter of 2020.
A look at Sanofi's latest earnings report shows exactly why the move is the right one for the French company. Sanofi's traditional businesses of diabetes, cardiovascular, and vaccines are seeing sales decline in most territories, with only emerging markets contributing growth. The company reported a 9.9% decline in diabetes revenue in the third quarter and a 10.6% decrease in cardiovascular, while vaccine sales fell 9.8%.
Sanofi started preparing for the loss of revenue from more traditional businesses about a decade ago with the $20 billion acquisition of biotech company Genzyme. With the purchase came access to products and expertise in areas such as rare diseases and oncology. The bet is paying off. Growth is happening at Sanofi's specialty-care franchises, with four out of five treatment areas reporting sales gains in the quarter. The biggest increases were in oncology and immunology, with net sales rising 9.2% and 140%, respectively.
The right element at the right time
The Synthorx deal isn't anywhere near the size of the Genzyme one, but it doesn't have to be. It is the right element at the right time to boost businesses that are already producing results for Sanofi. Sanofi has put the focus on oncology, with 28 candidates in the pipeline, followed by 18 for immuno-inflammation.
Synthorx brings to Sanofi its lead investigational immuno-oncology product, THOR-707. It is in phase 1/2 clinical development as a single agent and will also be tested as a treatment combined with another type of immunotherapy drug to address multiple tumor types. THOR-707, a variant of immune system molecule interleukin-2, kills tumors by increasing the immune system cells that kill sick or damaged cells. Synthorx's research so far shows the compound requires fewer doses than other interleukin-2 products.
The company has two other immuno-oncology candidates in the pipeline and one candidate for autoimmune disorders. In a news release announcing the takeover, Sanofi and Synthorx said they expect the drug to offer combination opportunities with Sanofi's clinical and preclinical programs.
Market will more than double
Sanofi's expansion in immuno-oncology allows it to target a growing market as its older revenue drivers contribute less to earnings. According to Grand View Research, the global cancer immunotherapy market will more than double to $126.9 billion by 2026 from 2018.
Collaborations and partnerships in the field are also growing. Genetic Engineering and Biotechnology News said this year's biggest partnerships were worth nearly $40 billion, up 16% from the collaborations tallied last year. Among companies with the biggest partnerships are Bristol-Myers Squibb and GlaxoSmithKline, showing that big pharma players are in the field.
For Synthorx investors, Sanofi offers the resources needed at just the right time. Research and development expenses totaled about $10 million in the third quarter, more than doubling from the year-earlier period. The increase was due mainly to the advancement of THOR-707. With this new opportunity comes renewed confidence that the company will have the financial resources to take pipeline products through trials and, ideally, to market.
For Sanofi investors, this deal is good news, as it further strengthens a promising business area. And it shows that Sanofi isn't a company that relies on older products but one that continues to push forward into growing markets. Sanofi's shares have gained less than 10% this year, and the company trades at 23 times earnings. By comparison, GlaxoSmithKline -- which, like Sanofi, has a market value of about $114 billion -- trades at 46 times earnings, and the shares have gained about 18% this year. For investors with a long-term view, this might be the right moment to take a closer look at Sanofi.