Sanofi-Aventis Hasn't Got Genzyme in the Bag Yet

Sanofi has bought itself more time but we still think it undervalues Genzyme and a second bidder could yet emerge

Karen Andersen, CFA 14 December, 2010 | 3:15PM
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Sanofi-Aventis announced on Monday that it has extended its $69 per share hostile offer for Genzyme shares from the previous Dec. 10 deadline until Jan. 21. This was not an unexpected development, and while it pushes a final deal into 2011, we don't think it changes the dynamics of the negotiation. As we've stated before, we think Sanofi undervalues Genzyme's pipeline, particularly Campath in multiple sclerosis, and we continue to believe that our $78 fair value estimate remains a reasonable level for a final deal.

Sanofi's initial $69 per share offer for Genzyme was both officially confirmed and rejected, and Sanofi opted to go hostile in October, appealing directly to Genzyme shareholders with the same offer that was rejected by Genzyme's board. As we expected, shareholders were not amenable to this price (less than 1% of shares were tendered by the December 10 expiration of the tender offer), and we see the extended offer as likely to bring both firms back to the negotiating table to agree on a higher price. We've witnessed a pattern of hostile offers leading to increased bids with recent deals in the biotech space, including Roche's acquisition of Genentech and Astellas' acquisition of OSI Pharmaceuticals. An alternative to a higher bid would be the incorporation of a contingent value right into the deal, to account for the discrepancy in Sanofi and Genzyme's valuation of Campath and reward Genzyme shareholders if Campath is indeed commercially successful in multiple sclerosis. Celgene used earnouts related to Abraxane sales and future approvals in its acquisition of Abraxis, and we think such a structure could make sense with a firm like Genzyme, as $13 of our $78 fair value estimate relies on future cash flow from MS drug candidate Campath.

As we've discussed previously, there also remains the possibility of a second bidder emerging. Johnson & Johnson's and Pfizer's financial health would make it relatively easy for either firm to absorb Genzyme, and GlaxoSmithKline's strategy to increase its orphan drug exposure would receive strong support from Genzyme's established rare disease portfolio. We also consider Amgen a potential suitor. While Amgen's biologic drug focus separates it from its big pharma peers, many of whom are contending with a steep patent cliff over the next few years, its aging portfolio is among the first to face biosimilar competition, and growth prospects are heavily tied to Prolia. Given Amgen's recent slowing of share repurchases, management could be seriously considering an acquisition. While it is likely to be tempted by non-US based biotechs in order to avoid repatriation tax and yet still accomplish its goal of reinvigorating revenue growth, the dearth of internationally-based targets that make sense for the firm could still lead it to consider Genzyme, in our view.

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Karen Andersen, CFA  Karen Andersen, CFA, is a senior stock analyst with Morningstar.

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