As Brexit Hits Forex, Spare A Thought For Those Uncompleted Deals

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Includes: MDVN, SNY
by: EP Vantage

Sanofi (NYSE:SNY) and Boehringer Ingelheim signing contracts on their animal health/consumer business swap today raises the obvious question of what the French company might do with its €4.7bn ($5.2bn) windfall when the deal closes later this year.

But, given the turmoil after the UK’s EU membership referendum result, a more fundamental observation might be that the deal is going ahead without any amendment to its terms. EvaluatePharma calculates that $102bn of open deals in healthcare have yet to be completed, and the euro dipping 2.5% against the US dollar since Thursday might have several companies fretting about their fate (see table below).

Indeed, Sanofi should itself privately be evaluating its ability to pay up for Medivation (NASDAQ:MDVN), given that it is a European company reporting in euros trying to buy a US biotech in dollars. However, for now the French group is playing hardball, trying to oust Medivation’s directors rather than putting a sweetened bid on the table.

And of course this possible move does not appear in the list of open deals, since it is not a transaction that has formal agreement; it is still at the “acrimonious exchange of correspondence” stage, and on Friday Medivation spelled out why it still thought Sanofi’s was a low-ball bid, and why its board should stay.

But investors would be wise to include Brexit in their assumptions for whether the two might strike a deal at some point, and at what price. Similar considerations might come into play in analyzing potential risk to some of the sector’s agreed-on transactions that have yet to close.

Biopharma's biggest open deals*

Acquiring company

Country

Target

Country

Deal value ($bn)

Teva

Israel

Allergan's generics business

Ireland

40.50

Mylan

US

Meda

Sweden

7.20

AstraZeneca

UK

Option on remainder of Acerta Pharma

Netherlands

3.00

Celgene

US

Option on Acetylon Pharmaceuticals

US

1.70

Jazz Pharmaceuticals

Ireland

Celator Pharmaceuticals

US

1.50

Bristol-Myers Squibb

US

Option on Promedior

US

1.25

Merck & Co

US

Afferent Pharmaceuticals

US

1.25

Aspen Pharmacare

South Africa

AstraZeneca’s ex-US anaesthetics potfolio

ex-US

0.77

Astellas Pharma

Japan

Option on Mitokyne

US

0.73

Novartis

Novartis

Option on Selexys Pharmaceuticals

US

0.67

Note: *acquisitions agreed on but yet to close, per EvaluatePharma.

However, just because a deal is cross-border should not necessarily have the accountants revisiting their spreadsheets. More to the point is the target’s exposure to UK and/or EU revenues and profits, a statistic that would apply to any biopharma business irrespective of its domicile.

Moreover, what “exposure” means exactly can still only be guessed at, though with the vote going in favor of Brexit the risks in terms of sentiment are clearly there.

The ability to finance a transaction could also be called into question where a cross-border acquirer has cash tied up in EU currencies, though clearly forex hedging would have reduced this risk. A separate risk could apply to current and future buyers that are reliant on bank loans or other financial instruments to pull off deals, whether these be takeovers or licensing transactions.

After Thursday’s vote some of the heaviest casualties have been European banks, which have been hammered after assuming that the referendum would go in favor of the UK remaining in the EU, and betting the wrong way on forex. Banks under pressure would naturally be expected to think twice about extending cheap lines of credit.

True, most considerations about the post-Brexit environment are pure guesswork at present, but the immediate currency volatility has already given companies plenty to think about.