OVERVIEW OF THE DEAL
On September 8, 2021, French drugmaker Sanofi announced the acquisition of Kadmon, a New York City-based biopharmaceutical company. Kadmon’s assets will be used to complete and stabilize Sanofi’s offer in the General Medicines sector as the U.S. firm received approval for RezurockTM, a treatment for a specific post-transplant disease, the chronic graft-versus-host disease (cGVHD). UBS estimated the maximum amount of sales for this medicine around $700 million, Jefferies is more optimistic with a $1 billion approximation.
Olivier Charmeil, Sanofi’s Executive Vice President in charge of General Medicines announced the company’s ambition: “create an ideal platform to achieve the full potential of Rezurock” with their expertise, scale and existing transplant business. In the meantime, Harlan Waksal, President and CEO of Kadmon, was delighted to complete such deal recognizing Rezurock’s potential and making it “well positioned for global accessibility, faster”. Whereas investors expected Sanofi to keep on looking for acquisition opportunities, most of them were regarding specialty care drugs and vaccines investments. However, most of them understand the logic behind this deal: strengthen the General Medicine division to generate funds to invest in other fields in the long-term.
The deal, a $1.92 billion all-cash operation, represents a large premium of 79.25% above Kadmon’s share price on the previous closure. Sanofi announced that no debt would be issued to fund this deal, planning to use its important cash and cash-equivalent reserves, around $11.5 billion. It is the latest of 11 acquisitions since Paul Hudson’s nomination as CEO of Sanofi in September 2019.
Company Details: Acquirer – Sanofi
Founded: 1973
Headquarters: Paris, France
CEO: Paul Hudson
Status: Public (Euronext & Nasdaq)
Number of Employees: 99,412 (2020)
Market Cap: $129.39 billion
Revenue (TTM): $44.4 billion
EBITDA (TTM): $13.2 billion
Sanofi is one of the world largest healthcare companies, with activities ranging from research to marketing of medicine and other therapies. It organizes its activities in three operating segments: consumer healthcare, pharmaceuticals and vaccines.
During Covid-19, Sanofi fared poorly compared to major competitors as it failed to deliver a vaccine as quickly as Pfizer, Moderna or Johnson & Johnson. In reaction to this failure, the French firm continued its external growth strategy with significant acquisitions like Translate Bio, an American mRNA therapeutics company, thus specialized in the technology used by most Covid-19 vaccine makers.
This external growth strategy boomed following Paul Hudson’s nomination as CEO in September 2019, registering 11 deals during his tenure, including the Kadmon deal.
Sanofi’s largest shareholder is L’Oréal, accounting for 9.5% of total shares. Moreover, 35.9% of said shares belong to French investors, either as individuals or institutional. Speaking of institutional investors, only Dodge & Cox (2.78%) has a stake that exceeds 1% but, overall, institutional investors represent 78% of the shares.
Company Details: Target - Kadmon
Founded: 2009
Headquarters: New York City, U.S.
CEO: Harlan W. Waksal
Status: Public (Nasdaq)
Number of Employees: 127 (2020)
Market Cap: $913 million
Revenue (TTM): $1.87 million
EBITDA (TTM): -$106.1 million
Kadmon is a biopharmaceutical company based in New York that operates at the clinical stage. Its research focuses on immune and fibrotic diseases and immune-oncology. Its main medicine, RezurockTM was approved for the U.S. by the FDA in July 2021 and was designated as a Breakthrough Therapy. It indeed addresses a medical need left unmet so far: patients having chronic graft-versus-host disease that fail several types of immunosuppressive therapies. The concerned population regroups around 5,000 patients per year in the U.S. alone. Apart from RezurockTM, Kadmon aims at bringing innovative therapies for several unmet health needs.
In addition to drug development, Kadmon owns its own commercial infrastructure with compliance and quality control teams. The FDA approval of its drug in July led Kadmon to start leveraging its commercial structure to deploy the medicine where needed. The firm’s negative EBITDA stems from the fact that Kadmon was operating in research only until the FDA’s approval, thus this figure doesn’t illustrate the company’s potential. Kadmon’s activities are entirely driven towards the U.S. market and its operational structure is organized in this order.
SYNERGIES
• Expected synergies
Most synergies are expected to come from the enhanced growth of the group’s transplant business. Indeed, Sanofi’s board is confident that the association of RezurockTM with its proprietary transplant drugs as well as with the company’s distribution platform will make it possible to fully achieve the new medicine’s potential.These sales, forecast to range from $500 million to $1 billion in the U.S., will help stabilize the sales and growth of Sanofi’s General Medicine division.
Moreover, if RezurockTM is to be approved by health agencies worldwide, the integration of Kadmon in Sanofi will make it much easier and faster to deliver the medicine where needed.
This operation is a graphic example of Sanofi’s recent external growth strategy, saving research costs for some medicine while incorporating innovative technologies and new methods to its existing process.
No parties involved gave a precise synergy valuation when they announced the acquisition and brokers covering both companies provided only the drug’s estimated sales.
• Synergies analysis and outlook
Revenue Synergies
Revenue synergies are the first to jump out. Indeed, the integration of Kadmon’s medicines, either approved or in clinical trials, will complement Sanofi’s current offer. The group could become the leader for transplant therapies as RezurockTM addresses needs for which rivals failed to offer a solution and Sanofi’s existing drugs provide other options all along the transplant therapies.
Cost Synergies
Moreover, cost synergies are predicted. As a matter of fact, Kadmon will be using the French company’s production and distribution capabilities all around the world and the American labs of both partners could be merged, saving utilities, facilities and equipment costs.
Financial Synergies
Some financial synergies may be predicted: on one hand, Sanofi will be using its cash reserves to pay the deal and on the other hand, Kadmon net financial debt is currently negative. Moreover Sanofi’s low indebtment ratio offered the possibility to invest in order to improve investor confidence after the Covid-19 vaccine failure. If successful, this operation could make it easier than it already is to fund new projects.
RISKS AND UNCERTAINTIES
Two intertwined sources of uncertainty and risk can be found: current clinical trials and investor reaction.
Indeed, if RezurockTM or other Kadmon drug projects fail to be approved by health agencies, the increase in sales will be very limited, thus, the success of ongoing trials is key for the transaction potential’s accomplishment. Furthermore, most investors were prepared for an acquisition, but they were hoping the target would be in a more ambitious and innovative field. If they are disappointed, it could lead to a questioning of the leadership and its strategy.
FINANCIAL CONSEQUENCES
This deal being a full-cash operation, Sanofi shareholders will not experience dilution of their stake. For Kadmon shareholders the proposed premium of nearly 80% is impossible to refuse.
Sanofi’s very favorable debt ratio and the use of already existing cash make the impact on the new group’s debt cost very negligeable. Within the scope of pharmaceuticals, the new group should in fact remained rated A in terms for its leverage.
Due to the lack of synergy valuation, no analysis on EPS dilution or accretion can be done, however, Sanofi acknowledged this deal should be slightly dilutive for its shareholders.
IS THIS DEAL FAIRLY PRICED?
Covid-19 led to a surge of M&A deals in the health industries which is expected to continue at least for a year as Covid-19 tension begins to ease in some parts of the world. For this particular case, transaction multiples, mostly based on EBITDA, are irrelevant due to Kadmon’s negative EBITDA. Thus the comparison in terms of premiums offered is the main tool to assess if the deal is fairly priced.
Compared to the average premium for M&A deals in the whole economy, around 30%, this deal seems unreasonable, however, even before Covid-19, concentration was very intensive in the biopharmaceutical industry, with an average premium in the U.S. of 97% in 2019, according to the Statista database.
Facing such competition, compared to which it fared poorly during the coronavirus crisis, Sanofi had to establish a strong position which can explain why it is willing to pay a higher premium than direct rivals like Johnson & Johnson. In such context, this 79.25% premium can be understood as Kadmon is a low-risk investment opportunity, ideal for a company trying to steady its position in non-priority sectors in order to focus on key innovations.
MARKET REACTION AND PROBABILITY OF DEAL COMPLETION
Regarding the probability of deal completion, markets and investors are quite optimistic. Indeed, one week after the announcement, merger arbitrage strategies already contributed to bridge 83.3% of the initial gap between the offer and the previous share price. It is all the more remarkable that the premium is very high in absolute terms, as stated before.
In the meantime, Sanofi’s share price dropped 6.6% within a week. If this figure is not alarming by itself, the fact that investors anticipated future deals should have reduced this effect by incorporating this anticipation in the share price earlier. It shows markets are skeptical concerning the target choice.
All in all, investors predicted an upcoming deal, thus they are confident the deal will be carried out smoothly. However, we can interpret the share price drop for Sanofi as a sign of doubt regarding the sector concerned.