Aside from price hikes on their products, pharmaceutical companies have two levers they can pull to potentially juice their profit growth: acquisitions as well as higher research and development spending.
Sanofi (SNY 1.35%) recently opted for the former strategy to strengthen its business. In late April, the company completed its acquisition of Provention Bio for $2.9 billion in cash. This raises the following questions: Was the deal a savvy play by Sanofi? And could it be enough to move the needle for the company?
Let's dig into the primary drug, Tzield, that Sanofi picked up from the deal and look at the type 1 diabetes market to find the answers.
The autoimmune drug's efficacy is promising
Type 1 diabetes is an autoimmune disease that interferes with the ability of the pancreas to produce the insulin hormone. Unlike type 1 diabetics, type 2 diabetics are still able to create insulin but their body doesn't efficiently use insulin, leaving too much glucose in the bloodstream.
There is quite a bit of overlap between both types of diabetes in terms of symptoms, such as excessive thirst, unintentional weight loss, and frequent urination. Type 1 diabetes is estimated to account for about 5% of the cases in the U.S., whereas type 2 diabetes comprises the remainder of cases.
As is the case with any disease, early diagnosis is key to providing the best health outcomes for patients. And thanks to the capital that pharmaceutical companies have invested into type 1 diabetes research and development, it is now even possible to delay the progression of type 1 diabetes to clinical diabetes.
Provention Bio held a clinical trial with relatives of people with type 1 diabetes who had at least two diabetes-related autoantibodies (a big risk factor) and unusual blood sugar levels. These patients are thought to have a lifetime risk of clinical diabetes diagnosis close to 100%. Participants received either a 14-day course of teplizumab (brand name Tzield) or a placebo. Patients receiving teplizumab once daily for 14 days were diagnosed with type 1 diabetes at just a 43% rate during the clinical trial. This was well below the 72% rate recorded within the placebo group.
The median time for placebo patients to develop clinical diabetes was about two years, while patients in the treatment group had an average of four years before progressing to that point. Tzield was the first drug to demonstrate that type 1 diabetes can be delayed with treatment. This is why it shouldn't come as a surprise that, at long last, Provention Bio's drug candidate was approved by the U.S. Food and Drug Administration (FDA) this past November.
Image source: Getty Images.
Major sales potential
Tzield could be a great option for healthcare providers to help their at-risk patients delay the onset of type 1 diabetes. But what could this mean for Provention Bio, and by extension, Sanofi's financials?
With nearly 2 million type 1 diabetes patients in the U.S., the market for delaying the onset of the disease is considerable. This probably explains how some analysts had a peak annual sales estimate of $2 billion for Tzield before the initial FDA rejection in July 2021. Given that the company is also working on possibly expanding its indications to newly diagnosed type 1 diabetes patients, $1 billion-plus in annual sales potential for the drug doesn't seem to be out of the question. Even for a company such as Sanofi that is set to generate $48.4 billion in revenue in 2023, this acquisition could be a growth catalyst moving forward.
A growth stock at a value stock valuation
Sanofi also has a pipeline of over 70 projects in different stages of clinical trials. That's why analysts anticipate 7.1% annual earnings growth through the next five years from the company -- more than the drug manufacturer industry's average annual forecast of 6.6% over the same period.
Best of all, Sanofi's stock can be scooped up at a forward price-to-earnings ratio of just 5.9. For context, that is well below the drug manufacturer industry average of 12.9. Sanofi looks to be an above-average business at a below-average valuation, making the stock a convincing buy.
