Far from prostrate

Sanofi bidding war looks expensive from the start

Sanofi's incipient bid battle looks as pricey as some of the drugs the industry peddles. The French pharma group's $9.3-billion cash bid for prostate cancer drugmaker Medivation is opportunistic and logical: the target's shares have fallen on US pricing fears, and Sanofi needs to diversify. But it would take time to come good.

Sanofi Chief Executive Olivier Brandicourt's first serious foray into aggressive deal-making highlights how much changes in US drug pricing and President Barack Obama's Affordable Care Act are hurting. Health-care payers are consolidating and squeezing pricing, particularly in diabetes, where Sanofi makes nearly a third of its profits. Firms are responding by buying growth and scale.

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Democrat presidential hopeful Bernie Sanders has also rocked Medivation's shares. He says it charges four times more in the United States than neighbouring Canada and has threatened to steal its patents. That flatters Sanofi's offer, at a 50 per cent premium to Medivation's average share price over the last two months.

The strategic logic for Sanofi includes Medivation's track record in prostate cancer, as well as the possibility Xtandi could be more widely used, and extended to other cancer types.

But the deal may not pay off for Sanofi until 2020. Assume it wrings out synergies worth 10 per cent of Medivation's sales by 2019 - in line with other industry deals - and it would earn a return on capital of less than seven per cent that year, according to Eikon data, below the sector average of around eight per cent. That assumes Medivation can withstand political assaults.

There's also the risk of counterbidders pushing up the cost. Prostate cancer is the second-most common form of the disease, possibly making Medivation attractive for oncology specialist AstraZeneca. Sanofi's bid is all cash and it has stronger credit ratings than AstraZeneca, which is digesting the $4-billion acquisition of Acerta. But other potential suitors include Roche, Bayer and Amgen.

If a bidding war ensues, Sanofi has firepower. Citigroup estimates the company could borrow $20 billion before debt would hit an uncomfortable three times EBITDA. Sanofi shareholders were initially downcast, with Sanofi's stock off 2 percent on a day when the rest of the sector fell half as far. If it succeeds, they face a bitter bill.