Sanofi agrees $3.7 billion for Principia BioPharma

Acquisition Summary

The French multinational pharmaceutical company, Sanofi SA, announced that it would be acquiring its San Francisco-based partner, Principia Biopharma Inc. The $3.68 billion deal is the second-largest pharmaceutical transaction in 2020, following Gilead Science Inc’s $4.9 billion acquisition of Forty Seven Inc in March. Sanofi will be able to completely control Principia’s multiple sclerosis (MS) drug and other BTK inhibitors that treat autoimmune disorders.

The two companies have been collaborating on the MS medication, SAR442168, since 2017. Included in the pipeline of BTK inhibitors that Sanofi will access is Rilzabrutinib, a technologically advanced oral drug which could potentially treat a rare skin disease called pemphigus vulgaris. As a result, Sanofi will be able to diversify its portfolio and focus less on the therapeutic areas that it is best known for- cardiovascular and diabetic disorders- and more on the development of the next generation of autoimmune drugs. Some experts have relatively positive attitudes towards the deal, but others believe the transaction is potentially risky.

Deal Structure

The Boards of Directors for both Sanofi and Principia collectively approved the deal. Sanofi will begin a tender offer and, using its cash reserves, pay $100 per outstanding share- Principia’s aggregate enterprise value is approximately $3.68 billion. Evercore Inc. is the financial advisor to Sanofi and Weil, Gotshal & Manages LLP is providing legal advice for the firm. Principia’s financial advisors are Centerview Partners LLC and BofA Securities; the US biopharma company will be receiving legal counsel from Cooley LLP.

Principia Biopharma Overview

Principia Biopharma was established in 2008 and commenced its operations in 2011. The US biopharmaceutical company focuses on the research and development of small molecule drugs for treating autoimmune diseases and oncology. The company, currently consisting of 118 employees, aims to design products with therapeutic benefits that will significantly improve their patients’ quality of life. At the moment, the firm only has US customers. Principia’s BTK inhibitors are designed to treat autoimmune diseases by preventing B lymphocytes, a type of white blood cell, from attacking healthy tissues.

Sanofi Overview

Sanofi is a global leader in the pharmaceutical industry, selling over 4.5 billion units worth of pharmaceuticals, vaccines and consumer healthcare in 2019. In the nineteenth and twentieth centuries, the company’s innovative solutions contributed to many scientific discoveries. Since then, Sanofi has undergone multiple mergers. Its last was with Aventis in 2004 when the company was known as Sanofi-Synthélabo.

This merger resulted in the formation of a new company, Sanofi-Aventis. Both companies were able to successfully gain leverage in the markets, reduce expenses and accelerate their research and development. Now going by Sanofi, the pharmaceutical company is based in 100 countries- including the United Kingdom, United States, China and Germany- and its 100,000 employees provide healthcare treatments in 170 different countries. Sanofi’s therapeutic areas of interest are rare diseases, rare blood disorders, multiple sclerosis, oncology and immunology.

Industry Insight

Biopharmaceuticals are any biologically synthesised molecules which treat diseases. The fast-growing biopharmaceutical market, which is continually driven by the inclination of chronic diseases, has an expected CAGR of 7.32% between 2020–2025. At the end of 2019, the industry was worth over $275 billion, with the US showing exponential growth in the market.

Innovative biopharmaceutical drugs are continuously being developed to address diseases which were previously considered untreatable. Biopharmaceuticals contributed to a decrease in the number of deaths due to cancer and HIV/AIDS, resulting in increased demand for these drugs over the years. This subsection of healthcare is becoming more and more lucrative, but high expenses and challenging procedures are required for the development of these medicines.

Contrary to popular belief, the biopharmaceutical industry is not oligopolistic but, in fact, a very fragmented market, consisting of a variety of companies which contribute to the advancements of their focused fields. As such, this fragmentation makes the industry very competitive. Mid-size to smaller biopharmaceutical companies are increasing their market share by introducing novel drugs at lower prices compared to pharmaceutical giants. However, global healthcare leaders, such as Amgen Inc., Eli Lily & Company, Johnson & Johnson and Pfizer Inc, currently possess the largest market share. Sanofi, on the other hand, has a relatively low market share.

Strategic Rationale

The Sanofi-Principia deal, which is expected to close in the fourth quarter of 2020, is part of Paul Hudson’s strategy to focus the company in the specialisation of cancer and rare diseases, rather than medication for diabetes and cardiovascular diseases, which the company mainly concentrated on in the past. His decision will help Sanofi move away from old areas of interest and tap into the global autoimmune disease market, which is predicted to be worth $149.4 billion by 2025.

A Need for Reinvention and Diversification

In January 2020, analysts at Vantage stated that 78% of Sanofi’s 2019 sales were generated from products over a decade old and forecasted that, for the next five years, 75% of the company’s revenue would continue to come from 10-year-old drugs. According to Vantage’s Freshness index, Sanofi relied on its older products the most out of the 18 largest drug-makers in the world, followed by AbbVie and Pfizer. Vantage predicted that little change would occur in Sanofi’s sales and said, “investors must hope that the sweeping strategy review announced by its new chief executive, Paul Hudson, signals the turning of this big pharma tanker.” The acquisition of Principia illustrates that Sanofi is addressing its dependence on old medication.

In December 2019, Paul Hudson, who joined Sanofi as CEO in September last year, released his strategy on driving innovation in the company. The key elements of his plan were: diversifying the firm’s portfolio; using science to continue being a leader in the industry; improving efficiency and changing the way the firm worked.

Hudson stated:

“Our new strategy positions Sanofi to achieve breakthroughs with our most promising medicine…Sanofi gained leadership and changed the practice of medicine in diabetes and cardiovascular diseases. We are now preparing for our next cycle, with a new round of innovative solutions for patients.”

Hudson wants to leave his mark on the firm. In only a short amount of time as CEO, he is already leading Sanofi towards new drug discoveries for cancer and rare diseases and revamping the firm as a whole. Ending the hunt for new solutions to diabetes and cardiovascular diseases and turning to more profitable areas like oncology will help the firm save over $2 billion.

Growth, Market Share and Competition

Principia’s BTK inhibitors will play a significant role in expanding Sanofi’s research and development of autoimmune drugs and could increase Sanofi’s market share. Since 2017, the two companies have been working together on Principia’s promising SAR442168 medication (known as PRN2246 before) for multiple sclerosis and other central nervous system disorders. The partnership allowed Sanofi to advance its pipeline in MS and neurological diseases. Principia received a $40 million upfront payment in 2017 for the MS drug’s development and granted Sanofi a license to commercialise the drug globally.

Principia would have received a total of $765 million in future payments. This year’s acquisition of the US firm means Sanofi will now have full ownership of SAR442168, enabling them to increase the efficacy of commercialisation, eliminate the future royalty payments and potentially garner 50% of the market for MS drugs. Sanofi believes that Principia’s advanced BTK inhibitor, Rilzabrutinib, also has potential; the drug has treatment benefits for pemphigus and various other diseases. Developing Rilzabrutinib is a way for the firm to challenge its competitor Roche, who have already received approval from the US and Europe for Rituxan, a drug that also treats pemphigus vulgaris.

Principia is not the only company Hudson has sought out as part of his plan to diversify the firm’s portfolio and will probably not be the last. Sanofi’s CEO began his mission for expansion at the end of 2019 by acquiring the San Diego-based biotechnology company, Synthorx, in a $2.5 billion buyout. The transaction will enable Sanofi to expand its immuno-oncology pipeline. The acquisition illustrates Hudson’s vision to “build a portfolio of high-quality assets and to lead with innovation”. Sanofi currently has a lot of capital and low debts, since the French firm sold its stake in its long-time American partner, Regeneron, for $13 billion, after Regeneron’s stock prices increased 57% in the last six months. Sam Fazeli, Bloomberg Intelligence pharmaceuticals analyst, believes the transaction will boost Sanofi’s acquisition war chest to $50 billion. As such, Hudson will most likely continue searching for more companies, like Synthorx and Principia, to push the firm towards new biological technologies.

Principia Biopharma deems selling its shares to the pharmaceutical giant to be beneficial. The American company aims to create a portfolio of BTK inhibitors and discover new methods to treat illnesses. Martin Babler, President and CEO of Principia, views the deal as an excellent opportunity to achieve the firm’s objective, stating:

“By combining with Sanofi, we will bring significant resources to expand and accelerate the potential benefit of these therapies.”

The deal will enable Principia to access global resources to develop their innovative discoveries and advance the progress of their drugs.

Long term prospects

Much positivity surrounds this deal, which Hudson describes as a:

“relatively low-risk value accretion…with longer-term optionality that fits within the strategy of deploying firepower across numerous…deals.”

Investor sentiment increased after the acquisition was announced, with Sanofi’s shares increasing by 1.2% in Paris and Principia’s shares rising 9.4% at $99.25 per share in the US- five times greater than its 2018 IPO price. Analysts at Jefferies expect SAR442168 to generate $2 billion in global sales if its Phase III data gets approved and a multiple sclerosis expert told Jefferies that SAR442168 could have a competitive edge over a candidate at Merck KGaA.

However, Kerrisdale Capital and Sam Fazeli are not as optimistic. Kerrisdale Capital believes the drug possesses “a mode of action that seems irrelevant to the aetiology of MS” and that SAR442186’s Phase II data “seems almost designed to be confusing and inconclusive”. Unlike Kerrisdale Capital, Bloomberg Intelligence’s Sam Fazeli thinks the Phase II data is “strong” but thinks the deal is “a risky mechanism”. He said:

“It’s… an unusual move, as pharma companies don’t tend to buy biotechs from which they have licensed drugs before Phase III data.”

Kerrisdale Capital and Bloomberg Intelligence are right to view the deal as risky. Last year, Sanofi paid Lexicon $260 million to end their partnership when Phase III data for Lexicon’s Zynquista, a Type 1 diabetes drug, failed to be approved by the Food and Drug Administration (FDA). Sanofi paid $300 million upfront in 2015 for the license to develop and commercialise the diabetes drug. There were high expectations for Zynquista, but the medication significantly underperformed during clinical trials. Considering how unsuccessful Zynquista was for the French firm, Sanofi’s decision to completely control Principia’s MS drug before receiving Phase III data may be rash. As such, we will have to wait and see if SAR442168 meets the same fate as Zynquista.

Written by Dior Donkor (University College London)