Thursday, December 17, 2009

2009 M&A/Alliance DOTY Nominee: Sanofi-Aventis/Regeneron

It's time for the IN VIVO Blog's Second Annual Deal of the Year! competition. This year we're presenting awards in three categories--that's 300% more fake prizes than last year!--to highlight the most interesting and creative deal making solutions of the year. The categories are: Big Pharma Deal of the Year, M&A/Alliance Deal of the Year, and Exit/Financing Deal of the Year. We'll supply the nominations (roughly half a dozen in each category throughout December) and you, the voting public, will decide the winners (by voting early and often, commencing once we've announced all the nominees). Strap yourselves in, it's The Race for the Roger™.

How good was the Sanofi-Aventis/Regeneron alliance announced Nov. 10? We're nominating it for deal of the year even though it was actually an extension of a deal signed in late 2007. Before we dive into the details, consider this scenario.

You own a cement factory. You make very nice cement, some of the best cement in the land, but it's hard to make fat profits selling cement, no matter how many skyscrapers go up in Shanghai. (For the sake of our analogy, please pretend there is no global real-estate bloodbath.) Then one day, one of the biggest skyscraper builders says to you, Psst, hey buddy, how about we pay you to make cement for us, you get to split the profits our skyscrapers make, and you pay us back for some of the building costs, but only if our skyscrapers fill up with tenants and make lots of money! Oh, and we'll help you expand your cement factory.

You'd squint and purse your lips and wonder, "What's the catch?"

The world could lose its zest for skyscrapers, perhaps, but unlikely. The company could be full of dolts whose skyscrapers all fall down, but... enough, already. You get the picture. Biotechs often link their destinies to a Big Pharma big sibling, but few have gotten such sweet deals as Regeneron has with Sanofi-Aventis.

If our bricks-and-mortar analogy didn't refresh your memory, here are the details: Sanofi pays Regeneron $160 million a year in research funding through 2017 and can take over development of any antibody candidate at IND. Sanofi then funds clinical development, and if the candidates come to market, Regeneron splits profits (50/50 in the U.S., and a sliding scale from 65/35 to 55/45 in Sanofi's favor outside the U.S.). Regeneron reimburses Sanofi half the development costs from its share of the profits, which means no profits, no reimbursement.

What's the catch? You tell us when you find one, at least from Regeneron's point of view. Oh, we guess Sanofi could totally flub development, and Regeneron could find itself hitched to a broke-down wagon. Or a different pardner, if there's more mega-merging in store. But with the ambitious goal of putting 30 to 40 compounds into the clinic over the eight-year deal extension, they'd truly have to be all thumbs. (They've already promoted five projects.) The companies have been partners since 2003 -- Sanofi has development rights to Regeneron's aflibercept (VEGF-Trap) -- and Regeneron is willing to take the risk.

It cuts both ways: Sanofi's only escape clause isn't an escape at all. It can reduce the annual R&D payments from $160 million to $120 million after 2013. However you slice it, Regeneron gets paid. It said it expects to add about 400 employees, or 40%, in 2010, mainly in its two locations in upstate New York. How's that for a jobs program?

And unlike Genentech-Roche, another famous biotech-pharma couple that were joined at the hip, Sanofi can't hold out the threat of total ownership to squeeze better terms from Regeneron. Sanofi owns 19% of Regeneron, most of which it paid for when they struck their original agreement in 2007, but it can't go higher than 30% ownership without permission. And no board seats, either. "This deal tries to take the best of Genentech and Roche, but there won't be threats of calls [to buy up stock] every few years," said Regeneron CFO Murray Goldberg.

Image by Flickr user Onion used under a creative commons license.

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