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BREAKINGVIEWS-Sanofi finds M&A cure to CEO foot-in-mouth disease

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

LONDON, May 26 (Reuters Breakingviews) - Sanofi Chief Executive Paul Hudson is not letting a small Covid-19 brouhaha put him off his stride. The French drugmaker is selling a $13 billion stake in U.S. biotech Regeneron Pharmaceuticals , giving it a pristine balance sheet to do deals and invest in new drugs. It’s a nice problem to have amid a global pandemic.

The decision to sell a Regeneron stake isn’t linked to the coronavirus. Hudson first hinted at it back in December. But it shows he has quickly shrugged off the kerfuffle triggered when he honestly suggested the United States could have first dibs on a new Covid-19 vaccine, angering the French government. And his sense of timing is good: Regeneron’s stock has risen 85% over the last year.

The sale will end one of big pharma’s more successful forays in biotech investing, although Sanofi will continue to hold a small stake. Regeneron’s share price has boomed over 2500% since 2007, when Sanofi increased its stake to 19%, which it later topped up further. Blockbusters to emerge include dermatitis treatment Dupixent, which Citigroup estimates could generate annual sales of $11 billion.

Still, the exit makes sense. Sanofi’s stock has lingered in recent years, thanks to falling prices in diabetes drugs, and a lackluster pipeline. At the end of 2019, Hudson announced a plan to slim down, cut costs, and invest. Regeneron, worth $64 billion, is probably too big to acquire outright, leaving Sanofi with an awkward 20.6% stake in a company it can’t control. Instead, Hudson can channel the proceeds into new drugs, such as potential vaccines for the coronavirus, and companies.

That means more risk for investors. Hudson has hinted that Sanofi could look at deals worth up to $5 billion. He could buy in hot areas such as oncology, or more niche sectors such as rare diseases and gene therapy. Yet, with cash from the sale, Sanofi’s net debt could disappear by 2021, according to Refinitiv data, adding to the pressure to make acquisitions. Sanofi’s track record is shaky: It recently wrote down the $12 billion purchase of Bioverativ, executed by Hudson’s predecessor.

Sanofi’s stock is valued at just 13 times forward earnings, lagging a pharmaceutical average of around 15 times according to Refinitiv data, suggesting investors are still wary of the stock. Hudson at least now has plenty of firepower to execute his plan.

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CONTEXT NEWS

- Sanofi said on May 25 it planned to sell most of its 20.6% stake in U.S. biotech group Regeneron Pharmaceuticals.

- The French pharmaceutical firm will carry out a public offering of the stock, after which Regeneron will buy back a further $5 billion tranche.

- Sanofi currently holds 23.2 million of Regeneron shares, worth approximately $13.2 billion. After the sale, it will continue to own 400,000 shares, and the two companies will continue to collaborate on developing new drugs.

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Editing by Rob Cox and Karen Kwok

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