Sanofi plots $12.5B Merial tradeoff with Boehringer, gaining consumer unit in the bargain

Novartis ($NVS) and GlaxoSmithKline ($GSK) may have started a trend with their big sale-and-swap announced last year. Now, it's Sanofi ($SNY) and Boehringer Ingelheim working on a trade, with the French drugmaker's animal health business moving to Boehringer in exchange for the latter's consumer healthcare unit.

Boehringer would also pitch in €4.7 billion, valuing Merial at the end of the deal at €11.4 billion ($12.56 billion). Sanofi plans to use some of the cash to buy back stock.

That Sanofi is saying goodbye to Merial isn't a surprise; the company said earlier this year that it would probably dispose of animal health. The way it's bidding farewell isn't exactly what many market watchers had expected, however. Sanofi had also suggested an IPO or spinoff.

But the trade beefs up Sanofi's consumer health unit significantly, taking sales up to €5.1 billion and making it the leading player in the field, the company said in a statement. BI's consumer business would add heft to Sanofi's in countries where it's currently weak--including Germany and Japan--and would give Sanofi "critical mass" in the cough-and-cold line of business. Overall, Sanofi consumer health would have 4.6% of the global market, the company said.

Sanofi CEO Olivier Brandicourt

The trade follows fairly closely on CEO Olivier Brandicourt's arrival at Sanofi--he took the helm in April--and even more closely on its announcing a potential sale or spinoff. "[W]e certainly did not expect this move at this point in time," Leerink Partners analyst Seamus Fernandez wrote in a Tuesday note to investors. "CEO Brandicourt's rapid moves toward his strategic view of the business are encouraging."

That "strategic view," outlined at an investor day last month, puts Sanofi in line with several of its Big Pharma peers. The world's biggest drugmakers have been slimming down and refocusing, homing in on fields where they're strongest and hiving off units and products that no longer fit. That's why Novartis snapped up GSK's oncology business, traded away its vaccines and transferred its consumer health unit to a joint venture now led by GSK. It's also why Merck & Co. ($MRK) sold its consumer health business to Bayer, and why AstraZeneca has been selling off products a few at a time while making bigger buy-ins such as Almirall's respiratory portfolio.

Of course it was Pfizer ($PFE) that triggered the current wave of slimdowns, with a series of selloffs that included its nutrition business, to Nestle, and its animal health unit, Zoetis ($ZTS), in a two-stage spinoff. After Pfizer's megamerger with Allergan ($AGN), it's expected to take the much more radical step of splitting into two hefty pieces, one focused on innovative treatments, the other on older and lower-priced drugs, including generics.

Sanofi shares were up on news of the Merial trade, which is expected to close in the fourth quarter of next year and start adding to earnings in 2018. Sanofi says Boehringer's consumer business will bring about €1.6 billion in sales, adding to Sanofi's existing €3.5 billion.

"While some investors may have been more hopeful of an IPO and subsequent spin or share exchange for Merial," Fernandez said, "we believe value investors will be pleased with Dr. Brandicourt's aggressive repositioning of the business. … On balance we view this move as a likely more compelling option," because it builds up the consumer business at the same time.

Bernstein analyst Tim Anderson wasn't quite as impressed. "Strategically, Sanofi's scope of business narrows and becomes more focused--a (current) trend among global pharmaceutical companies--so in this sense the transaction is a modest positive, but the deal is not exactly transformative," he wrote in a Tuesday note.

But he expects Sanofi to continue to be "an active hunter of M&A targets," so a more transformative deal might still be ahead. Brandicourt has said he's looking at deals as big as Sanofi's 2011 buyout of Genzyme, valued at about $20 billion, or slightly larger. The company is said to be close to hiring Morgan Stanley dealmaker Alban de La Sabliere to head up M&A, as part of a shake-up in the business development department.

- read the Sanofi release
- here's FierceAnimalHealth's take

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