Sanofi/Provention: innovative diabetes drug is a good fit

After last year’s slump, biotech M&A has surged this year. The companies best placed to replenish Big Pharma’s pipeline have attracted premium prices. US diabetes drugmaker Provention Bio is a case in point. Sanofi has bought it for $2.9bn in cash, more than three times its undisturbed price, in a deal that closed last week.

The deal is a good fit for Sanofi, even though boss Paul Hudson pulled back from diabetes research in 2019. He judged none of its projects innovative enough to secure high prices from cash-strapped health systems. That is not the case for New Jersey-based Provention’s Tzield, which is the first of its kind. It can delay onset of the clinical stage of type 1 diabetes by several years. Analysts expect peak US sales to reach $1bn — and potentially double that if approved to treat people who already have the disease.

It is not a stretch for Sanofi, with a net debt-to-ebitda ratio of 0.6 according to S&P Capital IQ. It had enough financial muscle to bid for rare disease specialist Horizon, which was ultimately sold to Amgen for $26bn last December. Its interest in Horizon was unusual. Provention is far more typical of the small science-centred deals that Hudson has favoured. There have been 10 totalling $16.8bn since 2019.

As well as the diabetes drug, Provention has therapies for lupus and coeliac disease that are at an early stage of development. Sanofi needs new assets after disappointments such as the trial failure of cancer drug hope amcenestrant last August. To be sure, asthma and eczema drug Dupixent goes from strength to strength. A recent trial of its use in lung disease posted impressive results.

Yet the dependence on Dupixent, which UBS says could account for a third of its sales in 2029, explains why the valuation of 11 times forward earnings is below peers with similar short-term growth prospects. Sanofi needs to show how it will replace it in order to close its valuation gap.