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Sanofi Ups The Pressure On Genzyme
It is not exactly a hostile bid, but French drug company Sanofi-aventis (NYSE:SNY) has certainly stepped up its efforts to acquire American rare disease drug specialist Genzyme (Nasdaq:GENZ). Over the weekend, Sanofi went public with an offer for Genzyme of $69 per share in cash. Nothing about this announcement was really a surprise; there had been ample talk of a deal for weeks at this price, but it does move the proceedings from plausible rumor to truth.
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An Opportunistic Bid for Genzyme
Genzyme's formal response to Sanofi's offer was predictable, if a bit confrontational. Genzyme not only rejected the bid, but deemed it so low as not to be worthy of further discussion with Sanofi's management. Those sound like bold words from a management team that has not delivered much shareholder value over the last five years until this bid.
On the other hand, Genzyme's management may have a point. Prior to the deal, Genzyme's stock definitely took a beating from some serious manufacturing problems, as well as concerns about competition (real or anticipated) from other drug companies like Shire (Nasdaq:SHPGY) and Protalix BioTherapeutics (AMEX:PLX). While those are valid worries, they seem to overshadow the significant ongoing value of the company's rare disease franchise and the prospects for new drugs like Campath (Multiple Sclerosis) and Mipomersen, a cholesterol drug licensed in from Isis Pharmaceuticals (Nasdaq:ISIS).
Sanofi does Not Need to Push Too Hard
All things considered, Sanofi is not in a bad place with this bid. It does not currently look as though there is a horde of rival drug companies clamoring to own Genzyme. Some rumors suggest that Pfizer (NYSE:PFE) could be curious, and perhaps Amgen (Nasdaq:AMGN) or Bristol-Myers Squibb (NYSE:BMY) would take a look if Genzyme wanted a white knight bidder.
Sanofi, though, has the luxury of not really needing this deal. Sanofi will lose Lovenox to generic competition soon, but the company is otherwise in pretty good shape, as far as patents. Moreover, late-stage drugs like an oral MS medicine and a breast cancer drug could be promising. On top of all that, there are plenty of other attractively-priced pharmaceutical and biotech companies to target; many of which would arguably offer even better synergies for Sanofi.
The Bottom Line
Sanofi shareholders should not be all that perturbed at this point. The current CEO has a well-deserved reputation as a man with a keen eye on costs (suggesting he may not push the bid too high just to win), and large shareholders like Total and L'Oreal will likely voice their displeasure if the bidding seems to get out of hand. So, if the company can do a deal with Genzyme at a price that does not exceed the $70s, Sanofi shareholders should be relatively happy and comfortable with the deal.
For Genzyme shareholders, it is a harder call. Certainly, this bid has highlighted the under-appreciated value that was hiding in the shares. Some of that value is likely at risk if a deal falls apart, but Genzyme shareholders should not be too eager to sell too cheaply. It is true that Genzyme has struggled and still has challenges in front of it, but an all-cash deal means that its upside is limited, and it has to push management to get the best deal possible. (For more, see An Unsurprising Increase In Biotech Acquisitions.)
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IN PICTURES: 9 Simple Investing Ratios You Need To Know
An Opportunistic Bid for Genzyme
Genzyme's formal response to Sanofi's offer was predictable, if a bit confrontational. Genzyme not only rejected the bid, but deemed it so low as not to be worthy of further discussion with Sanofi's management. Those sound like bold words from a management team that has not delivered much shareholder value over the last five years until this bid.
On the other hand, Genzyme's management may have a point. Prior to the deal, Genzyme's stock definitely took a beating from some serious manufacturing problems, as well as concerns about competition (real or anticipated) from other drug companies like Shire (Nasdaq:SHPGY) and Protalix BioTherapeutics (AMEX:PLX). While those are valid worries, they seem to overshadow the significant ongoing value of the company's rare disease franchise and the prospects for new drugs like Campath (Multiple Sclerosis) and Mipomersen, a cholesterol drug licensed in from Isis Pharmaceuticals (Nasdaq:ISIS).
All things considered, Sanofi is not in a bad place with this bid. It does not currently look as though there is a horde of rival drug companies clamoring to own Genzyme. Some rumors suggest that Pfizer (NYSE:PFE) could be curious, and perhaps Amgen (Nasdaq:AMGN) or Bristol-Myers Squibb (NYSE:BMY) would take a look if Genzyme wanted a white knight bidder.
Sanofi, though, has the luxury of not really needing this deal. Sanofi will lose Lovenox to generic competition soon, but the company is otherwise in pretty good shape, as far as patents. Moreover, late-stage drugs like an oral MS medicine and a breast cancer drug could be promising. On top of all that, there are plenty of other attractively-priced pharmaceutical and biotech companies to target; many of which would arguably offer even better synergies for Sanofi.
The Bottom Line
Sanofi shareholders should not be all that perturbed at this point. The current CEO has a well-deserved reputation as a man with a keen eye on costs (suggesting he may not push the bid too high just to win), and large shareholders like Total and L'Oreal will likely voice their displeasure if the bidding seems to get out of hand. So, if the company can do a deal with Genzyme at a price that does not exceed the $70s, Sanofi shareholders should be relatively happy and comfortable with the deal.
For Genzyme shareholders, it is a harder call. Certainly, this bid has highlighted the under-appreciated value that was hiding in the shares. Some of that value is likely at risk if a deal falls apart, but Genzyme shareholders should not be too eager to sell too cheaply. It is true that Genzyme has struggled and still has challenges in front of it, but an all-cash deal means that its upside is limited, and it has to push management to get the best deal possible. (For more, see An Unsurprising Increase In Biotech Acquisitions.)
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by
Stephen D. Simpson, CFA
Stephen D. Simpson, CFA, is a freelance financial writer, investor, and consultant. He has worked as an equity analyst for both sell-side and buy-side investment companies in both equities and fixed income. Stephen's consulting work has focused primarily upon the healthcare sector, while he has also written extensively for publication on topics pertaining to investments, security analysis, and healthcare. Simpson operates the Kratisto Investing blog, and can be reached there.
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