French pharma giant Sanofi-Aventis (SNY) recently went hostile with its bid to acquire biotech company Genzyme Corporation (GENZ). Sanofi has launched a tender offer for all outstanding shares of Genzyme – the offer is scheduled to expire on Dec 10. Sanofi’s offer price stands at $69 per share with the entire deal being valued at $18.5 billion.
The $69 offer price represents a 38% premium over Genzyme’s share price on July 1, 2010. Rumors regarding Sanofi’s intention to acquire Genzyme have been doing the rounds since early July 2010. Since then, Genzyme’s shares have shot up more than 40%.
Sanofi said that it launched the hostile bid mainly due to Genzyme management’s refusal to enter into constructive discussions with Sanofi. Sanofi had initially approached Genzyme with its $69 per share offer on Jul 29. Genzyme rejected the offer on Aug 11. This was followed by a second offer letter on Aug 29, which was once again rejected by Genzyme. Genzyme’s Board of Directors called the offer unrealistic stating that the offer price undervalues the company.
Sanofi then approached several shareholders at Genzyme and entered into another meeting with Genzyme management on Sep 20. This meeting also proved to be unproductive resulting in Sanofi taking its offer directly to the shareholders. Sanofi said that shareholders owning more than 50% of Genzyme’s outstanding shares were disappointed with Genzyme’s refusal to enter into constructive discussions.
What Does Sanofi Gain?
With this acquisition, Sanofi is looking to create a new source of growth. Sanofi has a high exposure to generic risk on many of its leading franchises. The company suffered a blow recently with the entry of a generic version of its anti-coagulant Lovenox, which was a major contributor to the top-line with 2009 sales coming in at €3,043 million, up 11.1%. Lovenox accounted for 10.4% of total sales in 2009 and the entry of generic competition will lead to a significant decline in sales.
In addition to Lovenox, we see generic risk to other products as well. The next wave of generic erosion could occur soon with Taxotere losing exclusivity. Avapro sales will be at risk following the August 2012 European patent expiration.
In such a scenario, it is imperative for Sanofi to successfully develop and launch new products in order to make up for the loss of revenues once major products lose exclusivity and start facing generic competition. The acquisition of Genzyme would boost Sanofi’s revenues as well as its pipeline.
Genzyme’s pipeline includes candidates like mipomersen, which is being developed with Isis Pharmaceuticals (ISIS), alemtuzumabfor multiple sclerosis, eliglustattartratefor Gaucher, and Clolarfor adult acute myeloid leukemia (AML) among others.
Concerns
While the acquisition of Genzyme would allow Sanofi to increase its presence in the biopharmaceutical market, we note that Genzyme’s performance has been hampered by manufacturing issues since June 2009. The company is currently operating under a consent decree imposed by the US Food and Drug Administration (FDA) and is working on resuming normal supply of the products that were affected by manufacturing issues. Genzyme could incur additional costs in case of non-compliance with the terms of the consent decree.
In addition to the manufacturing issues, Genzyme’s key product Cerezyme is facing additional competition in the form of Shire’s (SHPGY) Vpriv. Further competition could come in the form of Protalix BioTherapeutics Inc.’s (PLX) Uplyso which could gain approval in Feb 2011.
The Path Going Forward
While it doesn’t seem likely that Sanofi will be able to acquire Genzyme based on just the tender offer, we believe Genzyme’s Board might adopt a less rigid stance regarding Sanofi’s proposal. Although Sanofi has held out so far by not raising its offer price, we believe a deal could be struck in the mid-$70s range. Sanofi has already secured financing for the deal.
Neutral on Sanofi & Genzyme
We currently have a Neutral recommendation on Sanofi, which is supported by a Zacks #3 Rank (short-term “Hold” rating). Our biggest concern for Sanofi is the high exposure to generic risk on many of its leading franchises. The entry of generic Lovenox is a huge setback for the company. We expect the company to look to grow revenue through partnering deals and acquisitions.
As far as Genzyme is concerned, we believe that near-term challenges remain before the company will be able to go back to a normal production and supply schedule. Moreover, the FDA’s consent decree could result in Genzyme incurring additional costs in case of non-compliance. However, we are pleased to see that the company is taking steps to emerge from the impact of the temporary shutdown of the Allston plant. We view the recent approval of Lumizyme as a major positive and are pleased to see the company working on expanding its product portfolio and pipeline so as to reduce its dependence on a handful of products for growth. We currently have a Neutral recommendation on Genzyme, which is supported by a Zacks #3 Rank (short-term “Hold” rating).
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