Deal announcements are in the very DNA of the annual biotech wind-blown event also known as the J.P. Morgan Healthcare Conference in San Francisco. And after a rough biotech year in 2022 when only 11 companies went public and scores of private companies saw their valuations fall, the future of biotech M&A is a topic of great interest.
So not surprisingly, the issue of M&A and strategy came up at Sanofi’s media briefing Wednesday. CEO Paul Hudson and CFO Jean-Baptiste Chasseloup de Chatillon were asked about whether regulatory scrutiny from the FTC, the macroeconomic environment and provisions in the Inflation Reduction Act are hampering large-scale M&A in the biopharma world. They were also asked about their strategy especially in the context of their unsolicited bid for Horizon Therapeutics, which Amgen ultimately snagged for $27.8 billion in late December.
Hudson said “all of the above” in answering the M&A headwinds question but instead of directly answering what type of target or the size of future deals, turned the question on its head seemingly suggesting that Sanofi’s Big Pharma competitors are in more dire need to engage in large-scale M&A because they have a “leaky bathtub”. Here’s what Hudson said [edited for clarity]:
If you look at the top 20 drug companies and you look at their percentage of sales at risk to loss of intellectual property between now and the end of the decade, we are the lowest. We are less than 9% and many of our peers go as high as 75%, which means they have to completely renew all of their revenue in the next five, six, seven years – all of it – and these are major companies. So when you ask us about M&A, you assume that at some point those cliff edges of falling away of revenue mean that companies have to start making additional acquisitions. Some of these medicines are large medicines — some of the top two or three medicines in the world — that will lose their patent – what that means for these companies to replace that [revenue]? What could they possibly buy to do that?
There are only a small number of companies [you can buy] and it’s not an easy route. So why are people hesitating apart from Amgen Horizon? I think people are waiting to see… and they are trying to decide what is the best fit for them in their own journey and where is the science most predictable and dependable over time to make these large premiums — and they are large premiums — defendable. Our focus is to go and buy 10,12, 15 small biotechs and spin the roulette wheel, which is also credible work but it doesn’t necessarily mean by 2027 you can cover where the gap was.
If nothing happens, lots of people here are talking about whether that leads to consolidation, because people will have to find a way to continue to fuel R&D and if there are not enough breakthrough science organizations that can help replenish [the lost revenue], then it gets more complicated for some of these companies. Whether by hook or by crook, we have the lowest exposure…we don’t have a leaky bathtub and that’s the nicest way to describe it.
So whose bathtub has a leak?
A quick fact check shows that in 2021, Humira was the world’s second-biggest drug by sales (after Pfizer/BioNTech’s mRNA Covid-19 vaccine) garnering $20.7 billion. Though Humira’s U.S. patent expired in 2016, Abbvie, Humira’s maker, was able to wrangle an additional 132 patents related to other uses of the drug — including manufacturing methods and the actual administering of Humira. All of these pushed out the patent expiration date to 2034. But long-awaited Humira biosimilars are set to hit the market this year. Humira treats rheumatoid and psoriatic arthritis, ankylosing spondylitis, Crohn’s disease and ulcerative colitis.
Another top drug — 4th in drug sales after Moderna’s Covid-19 vaccine — is Merck’s oncology drug, Keytruda, that raked in $17.2 billion in 2021. But many believe that competition from biosimilars will eat into that revenue by the end of the decade. Keytruda’s U.S. patent expires in 2028. [In the list of top-selling drugs, Sanofi’s Dupixient came in at no. 14 with 2021 sales of $6.2 billion. The drug treats atopic dermatitis, asthma and chronic rhinosinitus with nasal polyps]
While Hudson did not provide the source of the data that led him to conclude that Sanofi’s overall risk profile is pretty low in terms of percentage of sales at risk to IP loss, the issue of patent cliff has long been an existential threat that Big Pharma has aggressively tried to manage.
Sanofi is in the midst of a transformation articulated in 2019 when it decided to abandon its focus on diabetes and cardiovascular products and embark on a path to develop oncology, immunology and gene therapy products. And that is what drove its interest in Horizon Therapeutics, which is developing treatments to address rare and rheumatic diseases.
“[Horizon was struggling a little bit if you remember at the beginning of the year with the launch of their new drug,” recalled Chasseloup de Chatillon, Sanofi’s chief financial officer. “Their share price was down, so it was an opportunity to help the deployment the drug for new patients and to create value for the shareholders of Sanofi, so we were interested but at the right price. The minute the price went off from what we thought was [the] value creation point, we walked away. It’s very simple.”
OK, so $27.8 billion was too steep a price for Paris-based drugmaker. So what kind of deals can we expect from Sanofi in 2023?
“We have been clear with our capital allocation from when we launched our strategy in 2019 that we are in the scientific bolt-on, the sort of $2-$5 billion acquisitions [space] – and everything we’ve done has been aligned with that,” Hudson said.
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