This article is reprinted from: China Venture, authored by Pu Fan. Lieyun Network has been authorized.
Blockbuster M&A deals exceeding 100 billion yuan in transaction value are coming.
French pharmaceutical company Sanofi S.A. is considering selling its Consumer Healthcare Business (CHC) for $20 billion (approximately RMB 145.37 billion), with the first round of bidding expected to take place in mid-July.
The consumer health business mainly operates over-the-counter products such as Phytoxil cough syrup and Icy Hot pain-relief gel. Currently disclosed potential buyers include sovereign wealth funds like the Abu Dhabi Investment Authority (ADIA) and Bpifrance SACA, as well as established private equity firms such as PAI Partners, Bain Capital, Cinven, and Advent International. EQT PARTNERS, a renowned Swedish private equity firm, reportedly inquired about the deal but has since chosen to withdraw.
Sanofi CEO Paul Hudson previously told the media in an interview that the company is in talks with all interested parties. In addition to engaging with private equity firms, it is also offering "capital market options." The current situation is that "many people are interested." Once the deal is completed, the $20 billion price tag would be enough to make it one of the largest M&A deals globally so far this year.
Chicken Rib Business?
Sanofi's plan to sell its consumer health business can be traced back to 2019. At that time, Paul Hudson, who had just taken over as the company’s leader, conducted a thorough review of Sanofi’s various departments. He believed that "the essence of business is to discover what matters most," and that Sanofi needed to "clarify priorities." Under this premise, the consumer health business, which had a revenue growth of only 3% at constant exchange rates, was considered an ideal candidate for "cashing out" to support higher-yield, more defensible core businesses. The "cashing out methods" included, but were not limited to, attracting external investors for joint ventures, outright sale, or seeking an IPO.
At that time, the media even listed the schedule for Sanofi's cash-out with vivid details: On September 1, 2019, Paul Hudson officially took office; in October 2019, Paul Hudson announced that he was working with the team to evaluate the performance of each business unit; in December 2019, Paul Hudson would attend the Investor Day event in Massachusetts to meet with investors and discuss specific plans. The valuation of the consumer health business was expected to be around $30 billion.
But the real world is like me dating Liu Yifei – no matter how prepared I am, things rarely go as I expect. Just when people thought Sanofi was only one step away from spinning off its consumer health business, the pandemic struck.
Special periods have changed the consumer environment, with people starting to pay attention to the stockpiling of daily medical supplies and nutritional supplements. Pharmaceutical giants with B2C business divisions have reaped enormous profits. According to a statistical report, the growth rate of dietary supplement sales in the U.S. never dropped below 10% in 2020, and it surged by as much as 51.2% at its peak in March 2020.
Sanofi Also Experienced Similar Performance Changes During the Same Period. According to third-party data platform GlobalData, Sanofi's sales increased moderately by 4.83% from 2020 to 2021, followed by a surge of 15.86% from 2021 to 2022. Sanofi also reported that the company has achieved growth for 13 consecutive quarters, while its consumer health business expanded to 150 countries and regions during the same period, with a workforce of over 11,000 employees.
In short, after all the twists and turns, by the time we officially saw Sanofi's announcement of the spin-off of its "Consumer Healthcare Business," it was already October 2023.
In the official self-narrative titled "Winning at the Starting Line," Sanofi officially announced the spin-off of its consumer health business and plans to allocate the funds obtained from the spin-off to the research and development of its biopharmaceuticals business. Paul Hudson explained that this move would help them "move towards becoming a pure biopharmaceutical company and further optimize the cost structure."
At the same time, Sanofi also provided investors with a detailed breakdown of the market prospects "as a pure biopharmaceutical company."
For example, the drug Dupixent they developed for treating chronic obstructive pulmonary disease had an annualized sales revenue of nearly 11 billion euros (approximately 85.15 billion RMB) in the third quarter of 2023, and there are six other new molecular entities with similar development potential.
For example, they are currently focusing on the development of the neuroinflammation product line, among which seven products have entered the mid-to-late stage of development. The estimated sales peak for each product will reach 2 billion euros (approximately RMB 15.7 billion) to 5 billion euros (approximately RMB 39.3 billion).
In contrast, the "significant progress" section only dedicates one and a half sentences to the consumer health business: "successfully streamlined the consumer healthcare product portfolio, focusing on priority brands" and "significantly improved BOI and free cash flow." It's fair to say that even the big players in the industry would shake their heads at this, offering no visual appeal whatsoever.
Of course, slightly different from the "M&A" we see today, in "Winning at the Starting Line," Sanofi emphasizes more on "spin-off" rather than "selling." The specific plan is to establish a newly listed entity headquartered in France through capital market transactions. Julie van Ongevalle, Executive Vice President of Sanofi's CHC business, stated that this choice is beneficial for "maximizing value returns for shareholders." If everything goes smoothly, the spin-off plan will be completed as early as Q4 2024.
Offensive Outpost?
However, it needs to be clear that even with a very clear strategic development intention and intuitive data comparison, Sanofi's decision to sell its consumer health business is still hard to be as straightforward as described in "Winning at the Starting Line." This is because, from the perspective of the industry development cycle, the current biotech track is in what can be considered a tough march phase.
Data from S&P Global Market Intelligence shows that the number of biotech companies filing for bankruptcy in 2023 hit a record high since 2010. As of mid-February 2024, bankruptcy filings by bio-tech companies ranked third across all sectors, trailing only industrial and non-essential consumer goods industries. Among these bankrupt companies are both startups like 9 Meters Biopharma and Sorrento, as well as established firms such as Novan, which went public in 2016.
Jon Norris, Managing Director of SVB (Silicon Valley Bank), pessimistically hinted to the public that "this wave of bankruptcies seems endless." According to their investigations, many bio-tech companies, even if fortunate enough to secure market-based financing, can easily fall into what is known as the "Series A trap." Their documented data shows that out of 356 bio-tech startups that secured Series A funding between July 1, 2020, and December 31, 2021, only 102 pharmaceutical companies were able to announce new financing within a year.
As for the reasons, we won't delve into them here. All you need to know is that ancient Eastern wisdom tells us, "Even the wealthiest may face shortages." Amidst an uncertain overall outlook for the track, Sanofi's management team likewise cannot avoid the growing pressure on performance.
An indirect proof is that in October 2023, Sanofi announced it would abandon its target of 32% revenue growth by 2025 amid the pressure of developing immunology and inflammation drugs, proposing instead to focus on "long-term profitability." On the day this news was released, Sanofi’s stock price plummeted 15.5%, hitting its lowest point in eight months.
This is also one of the reasons why I exclaimed "Finally, it's here" at the beginning. Selling idle assets and protecting core businesses might just be the main storyline for this generation of biotech companies.
Another reason that made me exclaim "Finally, it's here" is that the "M&A funds" have long been prepared to harvest high-quality assets. Almost all the buyers we see in this Sanofi deal have completed record-breaking M&A fund raises in the past two years.
For example, EQT Group completed the fundraising for its 10th flagship fund, EQT X, in March this year, with a total size reaching 22 billion euros (approximately 23.5 billion US dollars, 165 billion RMB). This figure not only set a fundraising record for EQT, representing a 40% expansion from the previous fund, but also made EQT X the third-largest "buyout fund" in the European market in history.
Cinven's buyout fund, which officially announced the completion of fundraising at the beginning of 2024, also set a new record since the company's establishment, with a fund size reaching $14.5 billion (approximately 104.4 billion RMB), ranking among the top 10 historically in the European market.
French veteran M&A group PAI Partners completed the fundraising for PAI Partners VIII at the end of last year, securing a total of 7.1 billion euros (approximately 7.59 billion US dollars, 55.5 billion RMB), representing a 40% increase in fund size compared to its previous fund, PAI Europe VII.
When viewed as a whole, the performance of buyout funds appears even more exaggerated: according to PitchBook statistics, private equity funds raised a total of $566 billion globally in 2023, surpassing the total scale of 2022.
The aforementioned Cinven Fund 8, a new buyout fund launched by Cinven earlier this year, ranks among the top 10 in European history but can only barely make it into the top 30 globally, as nine buyout funds raising over $10 billion each were established in 2023.
By contrast, the performance of VCs in 2023 dropped to its lowest level since 2017, with only 474 venture capital funds completing a new round of fundraising throughout the year, totaling $66.9 billion, a "precipitous drop" compared to last year.
Against this backdrop, Sanofi's sale of its consumer health business is less an indication of "industry giants seeking transformation" or "industry giants concentrating their efforts," and more appropriately interpreted as a "prelude to an offensive." In the foreseeable future, similar mergers and acquisitions will only increase. As EQT CEO Christian Sinding stated: "When the IPO market becomes dysfunctional, in fact, the threshold for using an IPO as an exit strategy is quite high... Fund managers need to create more financial instruments to return capital to investors."