Sanofi-Biogen Merger Could Deliver Potential Synergies

| About: Biogen Inc. (BIIB)

Summary

The likelihood of Biogen becoming a potential takeover target may have risen with new CEO Michel Vounatsos and the launch of potential blockbuster drug Spinraza.

Sanofi might want to explore an alternative target, including Biogen, if the Actelion deal fails to materialize.

A Sanofi-Biogen deal could create a robust CNS portfolio with control of well over 60% of the market share for oral MS drugs.

The successful outcome of the clinical trials of its experimental Alzheimer’s drug could add $20 billion in annual sales to Biogen’s top line.

Shares of Biogen Inc. (NASDAQ:BIIB) have gained about 3.8% since December 19, when the company announced the appointment of Chief Commercial Officer and Executive Vice President Michel Vounatsos as its next chief executive officer, succeeding George Scangos, effective January 6, 2017. The likelihood of Biogen becoming a potential takeover target may have risen with a new CEO and the launch of potential blockbuster drug Spinraza (nusinersen), as companies such as Pfizer (NYSE:PFE), Merck & Co. (NYSE:MRK), Gilead Sciences (NASDAQ:GILD) and Sanofi (NYSE:SNY) are still searching for deals to boost their revenues.

Biogen Technical Chart

Spinraza, which was developed by Ionis Pharmaceuticals (NASDAQ:IONS) and is licensed by Biogen, was approved on Friday under Priority Review by the U.S. Food and Drug Administration, or FDA, for the treatment of spinal muscular atrophy, or SMA, in pediatric and adult patients. Analysts at Leerink, Geoffrey C. Porges and Bradley P. Canino believe that Spinraza could generate revenues as much as $428 million in 2017, while its sales could reach $2 billion by 2020. Biogen owns the marketing rights to Spinraza, which means its total revenue forecast could increase by 3% in each year from 2017 through 2020, said the Leerink analysts.

Earlier this month, Biogen presented its data on the Phase 1b PRIME study at the Clinical Trials on Alzheimer's Disease, or CTAD, conference in San Diego, showing its experimental drug aducanumab (BIIB037) works on the theory that it slows cognitive decline in patients in the early stages of Alzheimer's disease, while reducing the amyloid plaque levels in their brains compared to the placebo group.

The company also disclosed one seizure event during the two-year trial in a group of 165 patients undergoing aducanumab treatment. Biogen didn't release any detailed information on the cause of the treatment-related seizure that resulted in the patient temporarily experiencing the loss of a pulse, but Evercore analyst John Scotti noted that Alzheimer's patients are six to 10 times more susceptible to seizures than healthy elderly people. Aducanumab was granted fast-track designation in September by the FDA and is currently being evaluated in two global Phase 3 studies, ENGAGE and EMERGE, which are designed to evaluate its safety and efficacy with an estimated completion date in February 2022.

Lilly Technical Chart

In late November, Eli Lilly (NYSE:LLY) said its experimental Alzheimer's drug, solanezumab, failed its primary endpoint in the late-stage clinical trial known as EXPEDITION3 after the company poured over 20 years of work and about $3 billion into its research. Lilly's trial results may come as no surprise for some since Alzheimer's disease drug candidates have the highest failures rates of any disease area, or about 99.6%, compared with 81% for cancer, according to a recent report by researchers at the Cleveland Clinic.

Biogen is planning to spin off its hemophilia drugs unit into an independent, publicly-traded company, named Bioverativ, which is expected to be launched in early 2017. Bioverativ's market capitalization could be well over $5 billion, based on sales of its hemophilia drugs, Eloctate and Alprolix, that generated combined revenues of $605 million in the first nine months of 2016, up 58.5% compared to the same period last year.

Biogen will have no stake in the spinoff, but for every two shares of Biogen common stock held of record as of the close of business on January 17, 2017, Biogen shareholders will receive one share of Bioverativ common stock. Bioverativ shareholders will also receive a special dividend, payable on February 1, 2017.

Sanofi continues its hunt for a deal after being outbid in August by Pfizer for the U.S. cancer drug company Medivation Inc. (NASDAQ:MDVN), with Pfizer paying $14 billion in cash. Time may be soon running out as sales of Sanofi's top-selling diabetes drug Lantus (insulin glargine) declined 10.7% in the first nine months of 2016 compared to the same period last year, after Lilly and its strategic partner Boehringer Ingelheim started launching Basaglar (biosimilar insulin glargine), also known as Abasaglar in Europe, in the U.K. in September 2015, with a 15% discount to Sanofi's branded drug. Since December 15, 2016, Lilly also started selling Basaglar in the U.S. at a 15% discount to Lantus and Toujeo (insulin glargine), another long-acting insulin made by Sanofi.

Sanofi Technical Chart

It was reported just two weeks ago that Sanofi was nearing a $30 billion deal for a Switzerland-based biopharmaceutical company, Actelion Ltd. (OTCPK:ALIOY), which specializes in the field of pulmonary arterial hypertension, a disease characterized by high blood pressure in the arteries leading from the heart to the lung. Prior to Sanofi, Actelion was discussing a possible merger with Johnson & Johnson (NYSE:JNJ), but both were unable to reach a deal that would create "adequate value" for shareholders.

Sanofi could be about to get sidelined, though, as Actelion is now back in talks with J&J again, according to a Barron's report citing that the Actelion-J&J deal could be valued at $32 billion, or about 15 times price-to-sales in 2015. In our view, Sanofi might want to explore an alternative target, including Biogen, if the Actelion deal fails to materialize.

Merger Deal Creates Robust Portfolio in the CNS Sector

A Sanofi-Biogen deal could create a robust central nervous system, or CNS, portfolio, which would consist of Biogen drugs, including Spinraza, Tecfidera (dimethyl fumarate), Avonex (interferon beta-1a), Tysabri (natalizumab), Plegridy (peginterferon beta-1a), and Fampyra (dalfampridine) and Sanofi Genzyme drugs such as oral multiple sclerosis, or MS, drug Aubagio (teriflunomide) and Lemtrada (alemtuzumab), a prescription medicine used to treat adults with relapsing forms of MS. In addition, a merger could provide tax benefits to Biogen, as France's corporate tax level stands at 33.3% compared to a U.S. corporate tax rate of 40%, according to KPMG.

Biogen admitted during its earnings call that the overall MS market, particularly in the U.S., has experienced a decline in commercial patients, but the European market continues to grow at a slower pace. Quarterly revenue from Biogen's top-selling drug, Tecfidera, has now topped $1.03 billion for the first time, and pricing seems not to be an issue since Tecfidera lost a couple of percentage points of oral MS drug market share during the past seven quarters, probably due to Sanofi's competing drug Aubagio, and not to price hikes.

Tecfidera vs Gilenya vs Aubagio

The total revenues in the third quarter 2016 from oral MS drugs, Biogen's Tecfidera, Novartis's (NYSE:NVS) Gilenya (fingolimod) and Sanofi's Aubagio were $2.16 billion, up 16.1% year on year. A combined company of Sanofi and Biogen would control well over 60% of the market share for oral MS drugs. In the company's 10-Q filing, Biogen said, "For the three and nine months ended September 30, 2016, compared to the same periods in 2015, the increase in U.S. Tecfidera revenues was primarily due to price increases, partially offset by higher discounts and allowances".

Biopharmaceutical industry consolidation becomes crucial not just for cost-saving purposes but also to increase negotiating leverage as new regulations could be introduced by the U.S. Congress in the foreseeable future. Regulations may include allowing Medicare to negotiate prescription drug prices, increasing transparency, and re-importing cheaper drugs from other countries, such as Canada.

In our view, prescription drug price negotiation is unproductive. Pointed out by the Congressional Budget Office, or CBO, in its most recent analysis, the savings through negotiations alone without a stronger ability to say "no", would be "negligible." A more efficient way could be for the U.S. government to regulate the price of a specific drug by telling the drug's developers how much the U.S. government is willing to pay for it, before the drug is even developed. The risk of doing that, though, is the drug might not be developed at all if the U.S. government sets the price too low.

Well-Developed Biosimilar Portfolio

Since 2011, South Korea-based Samsung Bioepis, a joint venture between Samsung Biologics and Biogen, has been collaborating with Biogen to develop and commercialize multiple biosimilar candidates, including SB2, SB4 and SB5, the biosimilar versions of Remicade (infliximab), Enbrel (etanercept) and Humira (adalimumab), respectively. Biogen owns 15% of the venture, with Samsung owning the rest, according to the press release.

The European Commission approved Benepali (etanercept), the first etanercept biosimilar referencing Amgen's (NASDAQ:AMGN) Enbrel in January 2016 and Flixabi (infliximab), an infliximab biosimilar referencing Johnson & Johnson's Remicade, in May 2016 for use in the European Union. Thus far, Biogen's revenues from Benepali were about $48 million since its launch in the first quarter 2016.

Earlier this month, Sanofi decided to jump on the biosimilar bandwagon and announced a partnership deal to develop biosimilar products, including Rituxan (rituximab), worth up to $236 million in upfront and milestone payments, with JHL Biotech, Inc. (6540.TWO), a Taiwan biopharmaceutical startup.

Conclusions

The likelihood of Biogen becoming a potential takeover target may have risen with new CEO Michel Vounatsos and the launch of potential blockbuster drug Spinraza (nusinersen), as companies such as Pfizer, Merck, Gilead Sciences and Sanofi are still searching for deals to boost their revenues. Biogen owns the marketing rights to Spinraza, which means its total revenue forecast could increase by 3% in each year from 2017 through 2020.

Biogen has showed that its experimental drug aducanumab works on the theory that it slows cognitive decline in patients in the early stages of Alzheimer's disease while reducing the amyloid plaque levels in their brains compared to the placebo group. The company also disclosed one seizure event during the two-year trial in a group of 165 patients undergoing aducanumab treatment, which could be due to the fact that Alzheimer's patients are six to 10 times more susceptible to seizures than healthy elderly people.

Sanofi continues its hunt for a deal after being outbid in August by Pfizer for Medivation and could be about to get sidelined, though, as Actelion is now back in talks with J&J again. Sanofi might want to explore an alternative target, including Biogen, if the Actelion deal fails to materialize.

A Sanofi-Biogen deal could create a robust CNS portfolio with control of well over 60% of the market share for oral MS drugs, and potential blockbuster SMA drug Spinraza. The experimental Alzheimer's drug, aducanumab, was granted fast-track designation by the FDA but the results from two studies, ENGAGE and EMERGE, are not expected until February 2022. The successful outcome of the clinical trials could add $20 billion in annual sales to Biogen's top line.

In our view, Biogen has a well-developed biosimilar portfolio of advanced biologics. The biosimilars field is already crowded and it could take years for Sanofi to catch up, if it is even possible, with the other major developers, including Amgen, Pfizer, Biogen and Novartis.

Disclosure: I am/we are long BIIB.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.