Sanofi And Medivation Make Peace, But There's No Deal Yet

| About: Sanofi (SNY)

After two months of increasingly acrimonious correspondence between Sanofi (NYSE:SNY) and its intended acquisition target, Medivation (NASDAQ:MDVN), peace broke out yesterday. What the markets now have to decide is whether this makes a deal more likely or not.

While Medivation stresses that it has signed confidentiality agreements with a “number of parties”, hinting at a bidding war, Sanofi wants the markets to believe that a deal can be done at a new, higher bid of $58 per share plus a $3 contingent value right. Next comes a protracted process where Sanofi pretends not to be desperate to buy, and Medivation stresses that it is in no hurry to sell.

At least one thing has become clear, however: the main hurdle in terms of valuing Medivation is its Parp inhibitor talazoparib. This phase III asset still has relatively modest sellside consensus forecasts, but Medivation in its takeover defence claimed that it had an addressable market opportunity of over $30bn.

Contingent value

That this is a sticking point is obvious given Sanofi’s proposal, subject to due diligence that it will now be allowed to conduct, to throw in the $3-per-share contingent value right (CVR) “relating to talazoparib sales performance”. This would be in addition to $58 per Medivation share in cash, up from Sanofi’s earlier $52.50.

That $3 a share equates to about $500m of value, so not an overwhelming amount for an alleged blockbuster. True, the perceived value of Parp inhibitors has grown recently, but this has so far favored AstraZeneca’s (NYSE:AZN) Lynparza and Tesaro’s (NASDAQ:TSRO) niraparib (Tesaro shows that Lynparza was no fluke, June 30, 2016).

Moreover, Medivation investors will be wary of CVRs, given how this arrangement worked out for holders of Sanofi’s last big takeover, Genzyme (Value of Sanofi’s Genzyme security rests with the law courts, January 10, 2014). Expect the hyperbole to reach new heights when after market close today Medivation hosts an investor call specifically tackling the promise of talazoparib.

That said, Medivation can hardly be blamed for wanting to extract maximum value for its investors, who over the 12 months preceding the Sanofi approach had seen the stock lose half its value. Medivation clearly realizes that Sanofi is a desperate buyer, but it must also resign itself to the fact that, now the cat is out of the bag, a buyout by someone is its destiny.

The company yesterday issued a statement stressing the confidentiality agreements it had now signed with a number of parties in addition to Sanofi, and the fact that it had already rejected the French group’s $58-per-share cash plus $3 CVR proposal.

Bullish investors who see a bidding war yielding a top-dollar takeout here should be careful; due diligence proceedings are still a long way away from a formal offer. And the $58 cash element of Sanofi’s proposal values Medivation at over $9.5bn, whereas the NPV based on sellside forecasts of its assets, including Xtandi, computed by EvaluatePharma, is just $4.9bn.

Moving on

Nevertheless, it cannot be denied that things are moving on at last. Until now Medivation was refusing even to engage Sanofi in direct discussions, rejecting its approach out of hand, to which the French company responded by trying to unseat the target’s board of directors.

Now that Medivation has agreed to open its books Sanofi has withdrawn its solicitation to remove the directors. Pfizer and Celgene have already been suggested as interested bidders, and Medivation yesterday traded above the $61 per share of Sanofi’s cash and CVR approach combined.

On a valuation basis offers above $61 a share are clearly overblown, but this battle will not turn on strict valuation methodology. Medivation’s strongest hand is Sanofi’s desperation to act now to restock its pipeline, and it should exploit this to the full.