For us, the big headline from sanofi’s recent ‘meet the management’ day in Paris was the company’s announcement that it was reviewing the future of its European generics operation. This is as a consequence of the strategic review that has resulted in the creation of three new vertical global pharmaceutical business units at sanofi: General Medicines and Emerging Markets (which includes generics, established products and consumer healthcare as well as all the emerging market operations), Specialty Care (mainly Genzyme), and Diabetes and Cardiovascular. While the announcement was couched in the usual ‘all options are open’ language, it was clear from discussions on the day that the decision to sell has already been made. What is less clear, however, is where the line will be drawn between the generics assets and the rest of the business.
At the heart of sanofi’s generics unit in Europe is Zentiva, the Czech company that it bought (under a certain amount of duress) in 2009. Zentiva’s operations spanned not only the Czech and Slovak republics but also Poland, Russia, Hungary, Romania and Turkey (the last two via major acquisitions, of Sicomed and Eczacibasi respectively). Since 2009, vigorous efforts have been made (somewhat unfortunately, as it now turns out) to integrate Zentiva into sanofi’s pharma business and also into its emerging market operations (which are centred around generics). Thus, Zentiva took on the various bits of Winthrop generic business that sanofi already had in Europe (most notably in France, Germany and the UK) while simultaneously having its core CEE operations merged with the local sanofi units. Consequently, the lines between what was once Zentiva and what was sanofi are now rather blurred. Indeed, even the Zentiva name, which at one time encompassed all of sanofi’s generics operations in Europe, has been reduced to a regional brand under the ‘sanofi generics’ umbrella.
From the perspective of a potential buyer, the outlines of the perimeter are important because they could make a huge difference to the attractiveness of the business. For instance, Zentiva had some strong OTC brands in the Czech and Slovak republics. Are these going to stay with it, or will they be hived off into sanofi’s consumer healthcare unit? Will its Russian/CIS operations stay inside the perimeter, or are these considered to be within emerging markets? And in the UK, where Zentiva has been used as a vehicle to de-brand and raise the prices on some of sanofi’s tail-end products, is sanofi UK realistically going to give up these drugs? In addition, Sanofi was trying to bring in some value-added products to bolster its generic pipeline, such as the respiratory portfolio that it acquired from Siegfried in 2010. Now it has to decide whether to retain these alongside its established products or whether to let them go with the generics unit. In theory, of course, sanofi could also choose to expand its generics business by adding in some of its established products, but it seems that this is not currently planned as the company first wants to see if it can turn its old brands around by giving them a bit more focus.
According to sanofi, the European generics business has total sales of around €1bn and an EBIT margin of c20%, which would imply a total value in the region of €2bn. It also has a number of manufacturing facilities (in Prague, Bucharest and Istanbul) that will presumably be encompassed in the deal. The fact that sanofi describes margins as ‘under pressure’ and admits that it lacks the right pipeline to position the business for the future suggests that it can hardly be expecting a growth multiple, but even €2bn is a reasonable chunk of change. Who, then, is likely to buy it? Teva is clearly out, as it already has a strong generics operation in both western and eastern Europe. Ditto Sandoz and Stada. This leaves Mylan – recently rejected as a suitor by Perrigo – as the most obvious candidate, since it lacks a CEE presence and has plenty of cash on hand. Alternatives (other than private equity, who are also likely to be interested – sanofi originally bought its share in Zentiva from PE, after all) include US companies such as Endo, Alvogen or Amneal, who have relatively limited representation in Europe. We would be surprised to see any Indian companies look at this deal as it is too large and they have mostly retreated from Europe in any case: Lupin might be the one exception to this. It is also just possible that Avista and Nordic Capital would consider bolting sanofi’s operations onto Acino, the Swiss generics company that they bought in 2013, as the new Acino management comes from Nycomed, which was very active in the CEE region. Acino also has a decent pipeline of value-added products, which it could potentially sell directly if it had sanofi’s generics infrastructure. Similarly, BC could add the sanofi business to Pharmathen, the Greek dossier developer and manufacturer that it purchased earlier this year, although this would make less sense as Pharmathen would then be competing directly with its own customers, which it has traditionally avoided.
This will certainly be a deal for 2016, as it is going to take sanofi’s (also newly-restructured) business development team some time to get prepared for the sale, but it looks as if the next year will see Zentiva finally make its escape, possibly to stand independent once again.