Saturday, 9 July 2016

Sanofi and Boehringer Ingelheim swap units: a new model for pharma deals to come?

M&A activity in the pharma space has focused on seeking mega-mergers structured as a tax inversion, where the surviving company is domiciled in
the lower tax rate jurisdiction. This structure has come under vociferous criticism, especially in the U.S., where the claim has been made that U.S. companies are seeking to flee the US solely for achieve tax benefits. The poster child for this kind of transaction was the proposed $160 billion deal between Pfizer and Allergan, which called for Pfizer to relocate to Ireland and to reap tax benefits of $1 billion a year. The deal was scrapped in early April, after new tax regulations made the transaction less unattractive.

But if mega-deals with a sizeable tax consequence, such as the proposed Pfizer and Allergan merger, are now less likely to occur, this does not mean that pharma transaction activity will come to end. An illustrative example of what such future deals may look like can be found in the announcement at the end of June that the French pharma company, Sanofi, will hand-over its Merial animal medicines business (estimated to be worth $14.4 billion euros) to Boehringer Ingelheim, in exchange for the latter’s non-China over-the-counter medicines’ business (estimated to be worth 6.7 billion euros), plus the payment to Sanofi of $4.7 billion in cash. Stripped to its essentials, the deal harkens back to the most ancient form of transaction, namely barter. For those readers who seek a more contemporary analogy, view the deal as the exchange of one sports player for another, plus the payment of some cash by one of the teams. However one views this deal, it is far-removed from the world of mega-deal tax inversions.

A recent interview on Bloomberg radio suggested several advantages to this type of transaction:

First, there is less or no risk that the regulator will turn down the transaction. Not only is the mere risk of regulatory rejection deleterious to the business plans of the companies involved, but the failure to consummate the agreement may well obligate one company to pay the other a break-up fee.

Second, the challenges of integration, as each company seeks to absorb the unit acquired, should be significantly reduced in comparison with the full-fledged merger of companies, as in the current transaction, where only one dedicated unit from each company will be involved. Presumably, there will be less disruption to the activities of these units, each of which can continue to carry on as usual, Management teams will also largely be left intact, although not entirely, as Boehringer announced, only days after the deal had been announced, that it was cutting 50 positions at his headquarters in Ridgefield, Connecticut.

Third, tax consequences would appear to be taking a back seat to the issues of product strategy. Each company is presumably strengthening itself in an area what it hopes to reap competitive advantage. Here, as well, the risk of success or failure for each company in exiting one drug area while entering another is less cosmic than the ultimate risk of a full company merger gone bad. Indeed, the modularity of the transaction may portend a different focus for pharma companies. Big may be good for its own sake, but if the regulator puts its foot down on such moves, company management will need to find alternative forms of transactions to improve company performance.

One also wonders whether this kind of transaction will be better for the R&D and the IP position of the companies involved. Much has been written about the patent cliff facing pharma as block-buster drugs are coming off patent. The question is whether R&D can come up with replacements, even if this means more specialized drugs in place of these block-busters. From this perspective, the transactional focus on discrete units, rather than on entire companies, might assist pharma, especially Big Pharma, in coming up with a new generation of successful products.

No comments: