Reasons A Regeneron Pharmaceuticals Takeover Is Unlikely

Summary

Speculation of a potential Regeneron Pharmaceuticals takeover by big pharma companies has resurfaced as they still search for deals to boost revenues.

Allergan and Pfizer would not be interested to acquire Regeneron since they are more focused on buying back shares and making small acquisitions.

Gilead's M&A activities may begin to heat up, but it is looking for assets that can combine with or be complementary to things it already owns.

A takeover poses a significant challenge due to strong collaborative ties between Regeneron and Sanofi and provisions in their investor agreements.

Speculation of a potential Regeneron Pharmaceuticals (NASDAQ:REGN) takeover deal by big pharma companies has resurfaced once again as companies such as Pfizer (NYSE:PFE), Novartis AG (NYSE:NVS), Gilead Sciences (NASDAQ:GILD) and Sanofi (NYSE:SNY) have plenty of cash on hand and are still searching for deals to boost their revenues. According to the Financial Times, most big pharma companies are focused on acquiring smaller biotechs, which develop innovative drugs for the treatments of cancer and neurodegenerative diseases like Alzheimer's, since their valuations have come down considerably. "While larger deals would be more challenging to consummate, they would provide greater amounts of revenue and growth," said David Risinger, who covers big pharma for Morgan Stanley.

Regeneron Technicial Chart

Shares of Regeneron have fallen about 20% from its November high of $452.96 on concerns about the growth prospects of eye drug Eylea (aflibercept) and increased competition in the wet age-related macular degeneration, or AMD, market, the ongoing legal battle with Amgen (NASDAQ:AMGN) over patent infringements of Repatha (evolocumab), as well as president-elect Trump's negative remarks about drug companies. The stock is now bouncing along the trend-line support of the descending chart pattern, where it could bounce off from here.

Eylea Sales

Eylea's global net sales, including sales outside the United States from Regeneron's collaborative partner Bayer AG (OTCPK:BAYRY), came in at $1.33 billion during the third-quarter 2016. There does not seem to be any signs of a significant slowdown, as Eylea's total revenues have now exceeded a billion dollars ($1.025 billion) a quarter for the first time. Regeneron also raised its full-year 2016 Eylea U.S. net product sales guidance to 23-25% growth over 2015 from the previous 20-25% growth over 2015.

In our view, a takeover would pose a significant challenge as Regeneron and Sanofi have been collaborating since 2007. Sanofi also owns a large stake in Regeneron's common stock, and has nominated an independent director to the Regeneron Board of Directors. Last year, both companies entered into a major development of antibodies and bispecific antibodies for immuno-oncology. REGN2810, an antibody to programmed cell death protein 1 (PD-1), has now entered a pivotal clinical study for the treatment of advanced cutaneous squamous cell carcinoma.

Big Pharma Companies Prefer Small and Midsize Acquisitions

Allergan plc (NYSE:AGN) mentioned in April, as one of the potential suitors for a Regeneron-takeover, it would probably not be interested in any large deals now, as CEO Brent Saunders said in July that his company would be focusing on buying back shares and making small acquisitions, or as he put it, "stepping stones deals." The latest deal by Allergan was an acquisition of LifeCell Corporation, a regenerative medicine unit owned by privately-held Acelity LP, Inc., for $2.9 million in cash, bringing the number of small acquisitions it made in 2016 to nine.

Pfizer Technical Chart

In late August, Pfizer announced two of its acquisitions, including the U.S. cancer drug company Medivation, Inc. for $14 billion in cash, to expand its oncology product portfolio with prostate cancer drug Xtandi (enzalutamide) approved by the U.S. Food and Drug Administration, or FDA, in August 2012. Another smaller acquisition was a $1.5 billion deal with AstraZeneca (NYSE:AZN) for part of its antibiotics portfolio comprised of the approved antibiotics Merrem, Zinforo and Zavicefta, and ATM-AVI and CXL, which are in clinical development.

In our view, Pfizer may have already given up on a large M&A deal like Regeneron, after its failed attempts with Allergan in April 2016, and AstraZeneca in May 2014. Instead, Pfizer could simply want to do a series of bolt-on transactions.

Gilead Technical Chart

Analysts and investors have been pressuring Gilead's executives about M&A over the past few quarters, and several analysts noted that the company plans to ratchet down its share buybacks and thereby leave more free cash for M&A activities, according to FiercePharma. Gilead CEO John Milligan told analysts on September 12 at the Morgan Stanley Global Healthcare Conference that the company won't rule out a large deal, but would prefer a series of smaller ones. Three days later, Gilead announced the pricing of senior unsecured notes in an aggregate principal amount of $5 billion, maturing between the years of 2022 and 2047. The offering is expected to close on September 20.

According to the press release:

"Gilead intends to use the net proceeds from the offering for general corporate purposes, which may include the repayment of debt, working capital, payment of dividends, the repurchase of its outstanding common stock pursuant to its authorized share repurchase program and future acquisitions."

Jefferies analyst Brian Abrahams said in a note to clients in late September that the debt deal would give Gilead approximately $29.5 billion in cash, and that potential acquisition targets would be several small- to medium-sized deals focused on oncology, liver disease, fibrosis, and rheumatology. Abrahams would not exclude Gilead moving into a new field, such as orphan diseases.

Gilead reported a cash stockpile (including cash, cash equivalents, and marketable securities) of $31.6 billion at the end of the third-quarter 2016. The company also hired Alessandro Riva, MD, former Head of Novartis Global Oncology Development, to run its hematology and oncology division, which leads many to believe that M&A might be on the way.

In our view, Gilead might not be interested in Regeneron at all. Gilead CEO Milligan told Meg Tirrell during an interview on CNBC last week that, "we are looking heavily at assets that can combine with or be complementary to things that we own." While Gilead is looking for deals, its stock continues to slide to a level not seen since May 2014.

Sanofi Continues Buying Regeneron's Shares, But M&A Unlikely Until After 2020

In a SEC Form 4 filing on January 11, 2017, Sanofi said it purchased 87,298 common shares of Regeneron through its subsidiary Sanofi-Aventis Amerique du Nord at prices ranging from $361.76 to $379.80 per share. Sanofi now owns about 23.51 million outstanding shares, or a 22.7% stake in Regeneron, but it can't acquire more than 30% of Regeneron's outstanding common stock and Class A stock under their "standstill" provisions, according to Form 8-K filed with the U.S. Securities and Exchange Commission in January 2014. Furthermore, all shares of Regeneron's common stock owned by Sanofi, now or in the future, are subject to a "Lock-Up" provision that prohibits any sales through at least December 20, 2020, meaning any takeover attempt of Regeneron becomes less likely possible until the end of 2020.

Sanofi Technical Chart

Sanofi may have to continue its hunt for a deal after being outbid in August by Pfizer for Medivation. 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 the previous year, after Eli Lilly (NYSE:LLY) and its strategic partner Boehringer Ingelheim started launching Basaglar (biosimilar insulin glargine), also known as Abasaglar in Europe, in the UK 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.

It was reported in December that Sanofi was nearing a $30 billion deal for 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 companies were unable to reach a deal that would create "adequate value" for shareholders.

Sanofi might have already been sidelined. J&J and Actelion said last week that they have reached a tentative agreement on price, according to a Bloomberg report citing that the Actelion-J&J deal could be valued at more $28 billion, or about 13 times price-to-sales in 2015.

Conclusions

Speculation of a potential Regeneron Pharmaceuticals takeover deal by big pharma companies has resurfaced once again as they have plenty of cash on hand and are still searching for deals to boost their revenues. Big pharma companies are focused on acquiring small- to medium-sized biotechs, or a series of bolt-on transactions, despite larger deals that would provide greater amounts of revenue and growth but are more challenging to consummate.

A takeover of Regeneron would pose a significant challenge due to strong collaborative ties between Regeneron and Sanofi. Sanofi owns a large stake in Regeneron's common stock and has nominated an independent director to the Board of Directors. Therefore, any takeover attempt of Regeneron becomes less likely due to the "standstill" provision, and the "Lock-Up" provision that prohibits any sales of Regeneron's common stock owned by Sanofi through at least December 20, 2020.

Disclosure: I am/we are long AGN, REGN.

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.

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