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Why Principia Could Be the Next Target of Sanofi's Makeover

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Rumors are heating up that French pharma giant Sanofi (SNY) is ready to dip into its cash hoard of $50 billion to make a key acquisition aimed at beefing up the company's pipeline, according to Bloomberg.

Sanofi got a $11.7 billion windfall at the end of May when it completed the sale of all its shares of Regeneron Pharmaceuticals Inc. (REGN). That sale has further heightened speculation about a deal, with most of the rumors centering on the South San-Francisco-based biotech Principia Biopharma Inc. (PRNB), with which Sanofi already has a relationship. In 2017, Sanofi licensed a Principia drug as a possible treatment for multiple sclerosis and other central nervous system disorders.


Investors certainly appear to think a buyout is imminent, as they have piled into Principia shares recently, driving the stock price up $30 to $85 in less than two months. The 12-year-old company has a market cap of $2.8 billion, and even at a substantial premium would be easily digestible for Sanofi.

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Bloomberg and Bio Space have recently reported that the French company was working with advisers on potential deals, although they acknowledged there's no assurance one will be consummated.

Sanofi is selling at a five-year high of $53.26 and is rated a buy on Wall Street with a median target price of $58.38. The company's sales were more than $40 billion last year and are forecasted to grow at a compound rate of more than 3%, reaching $49.5 billion by 2026, according to an Evaluate Pharma report.

Reuters reported that Sanofi is proceeding with its plan to spin off its active ingredients business into a separate company, enabling it to divert resources to its pharma side and strengthening its pipeline.

Adding Principia would help Sanofi speed the revamp of its R&D program. Up to now it has been known for heart and diabetes. Sanofi wants to go in another direction, emphasizing different areas of drug development and cancer. Toward that end, in December, Sanofi paid $2.5 billion for Synthorx, a young biotech with a promising cancer drug.

Like Synthorx, Principia uses proprietary technology. The company's drug that's furthest along is for three immune diseases. It targets an enzyme that is implicated in a variety of disorders and is at the center of more than $35 billion worth of biopharma deals, according to estimates from SVB Leerink.

Analysts in general give thumps up to the Principia deal, according to BioSpace. SVB Leerink analyst Geoffrey Porges wrote in a note to clients that Sanofi's takeout of Principia could save multiple billions in milestones/royalties, which could alone provide justification for a takeout premium. He added that the transaction would also provide Sanofi with the leading drug for immunology.

An opposing opinion was voiced by Sahm Adrangi's Kerrisdale Capital, who called the Principia pipeline "worthless" and that its approach to autoimmune diseases is "misguided." Kerrisdale is a short seller that has made previous attacks on other companies.

Disclosure: The author hold no position on any of the stocks mentioned in this article.

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This article first appeared on GuruFocus.