Sanofi Chief Executive Paul Hudson is starting a potential M&A spree in a relatively safe fashion. The French drugmaker is buying American biotech Principia Biopharma for $3.7 billion, boosting its presence in the lucrative field of diseases in which the immune system attacks the body. Buying an established collaborator reduces risk, while allowing Sanofi to save on royalty payments.
Sanofi has plenty of cash to splash around. In May, the $127 billion pharmaceuticals group sold a $12 billion stake in U.S. biotech Regeneron Pharmaceuticals, which Hudson plans to plough back into drug development and acquisitions to replenish his pipeline and make up for stagnant diabetes drug sales. Jefferies analysts reckon the group has up to $25 billion of firepower, after factoring in its relatively low debt.
Sanofi's close acquaintance with its target removes some of the risks. Principia's main drugs, so-called Bruton tyrosine kinase inhibitors, seek to stop the immune system from causing inflammation or tissue destruction. The French group already owns the licensing rights to Principia's key multiple sclerosis drugs, which should give it a clearer view on its prospects. Buying the whole company will give it wiggle room to use the drug with fewer restrictions and save on royalty payments if it performs well. It also gets access to potential treatments for conditions such as pemphigus, a rare disease that attacks the skin.
Still, investors face a long wait for returns. Principia is unlikely to make a decent operating profit until 2025, according to analysts at HC Wainwright & Co, who pencil in EBIT of $584 million in 2026. Tax that at Sanofi's 22% tax rate, and the French drugmaker could expect to make a 13% return on its investment, which values Principia at $3.4 billion once cash is factored in.
The relatively low-risk deal may help ease fears that Sanofi might squander its massive cash pile. The French group's shares have risen 5% since Hudson announced his new strategy last December, and they are now valued at nearly 14 times forward earnings, a modest premium to peers, according to Refinitiv data. But with cash to spare and biotech valuations rich, Hudson's challenge will be to stay disciplined.