Sanofi(SNY) To Spin Off Active Pharmaceutical Ingredients Business

With coronavirus beginning its worldwide spread in February, France’s Sanofi (SNY) revealed plans to spin off its active pharmaceutical ingredients (API) business into a standalone company. For the sake of layman like us, APIs are the ‘magic’ molecules that make drugs work and according to Sanofi, the vast majority of APIs are currently manufactured in Asia (ex China and India).

Sanofi is pitching this transaction as one of national or regional (European) importance. The new company would be comprised of Sanofi’s API commercial and development activities along with six of its current European API production sites: Brindisi (Italy), Frankfurt Chemistry (Germany), Haverhill (UK), St Aubin les Elbeuf (France), Újpest (Hungary) and Vertolaye (France). Sadly, the current pandemic has highlighted the challenges of the current supply chain and it’s not hard to see the importance of having local capabilities for critical materials. For further proof, look at the US government providing a massive loan to Kodak (KODK), yes that Kodak, to begin API manufacturing in the USA.

Philippe Luscan, a Sanofi EVP, further explained the spinoff rationale:

Based on the expertise and experience built over decades within our industrial network, this new entity would help ensure a greater stability in supplying drugs to millions of patients in Europe and beyond. With this endeavor, this new entity would be agile as a standalone company, and able to unlock its growth potential, especially in capturing new third-party sales and all the opportunities of a market growing at a pace of 6 % per year

The new company is expected to generate 1B Euro in sales in 2022 and will instantly become the #2 player in the space behind Israel’s Teva Pharmaceuticals. The expectation is that the new company will be more competitive when bidding for contracts if it’s not tied to Sanofi. The details still need to be fleshed out, but it seems like it will start with a solid base of contracts because Sanofi is committed to establishing a long term customer relationship.

According to Reuters, navigating this separation is going to be a big ‘test’ for Sanofi’s CEO Paul Hudson who has prioritized streamlining the company, focusing on growth and cutting costs. In addition to the political sensitivity surrounding API manufacturing, the company may also face unrest over labor. The new company will be headquartered in France and is expected to employ over 3K people. The status of those employees will matter though, particularly as Sanofi fights to shed jobs elsewhere.

Sanofi plans to list the company with an IPO in 2022 or maybe even late 2021, subject to the famed ‘market conditions’. Sanofi will maintain a 30% in the new entity and surprisingly, has committed to establishing the company with a debt free balance sheet. I am sure that the new management team will be excited about that!

Disclosure: Author holds no position in any stock mentioned.