Ultimately it looks like two major drug companies are getting what they both think they need. After months of posturing, Sanofi-Aventis (NYSE:SNY) and Genzyme (Nasdaq:GENZ) found common ground on the value and structure of a deal, and Genzyme will become part of Sanofi. Though this deal was long in the making, only time will tell whether shareholders on both sides of the deal really benefit.
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Sanofi-Aventis agreed to pay $74 a share in cash up front for Genzyme, a price that on its own virtually matches the all-time high set back in 2008. At that price, Sanofi is paying over four-times trailing revenue and over 26-times trailing EBITDA - a pretty generous premium compared to larger biotechs like Amgen (Nasdaq:AMGN) and Gilead (Nasdaq:GILD) as well as other growth names like Celgene (Nasdaq:CELG).
In response to charges of opportunism from Genzyme's management, Sanofi agreed to sweeten the pot with so-called contingent value rights (CVR). If Genzyme's business reaches certain milestones after the deal, Genzyme shareholders will get additional payments. There are six different hurdles laid out for Genzyme, worth up to $14 per share in total (or about $3.8 billion), but only the first three (production levels for Cerezyme, approval of Lemtrada and Lemtrada sales in excess of $400 million in certain territories) seem highly likely to be reached. If those three are reached, it will cost Sanofi about $4 per Genzyme share, while the remaining hurdles are all tied to ever-higher levels of sales.
The Logic of the Deal
Sanofi-Aventis is clearly hoping that this deal will stabilize the business as the company transitions through some severe patent-related revenue declines. While a resolution of Genzyme's manufacturing issues and the sales of products like Lumizyme and other drugs will help, Sanofi is also clearly banking on the synergies that are available in combining two large drug companies and firing suddenly redundant workers. Moreover, it is fair to assume that recent pipeline failures at Sanofi had to apply some pressure to management to find plugs for the new holes in the future revenue model.
There is certainly logic to a sale on the Genzyme side as well. Genzyme is facing more competition than ever before, with Shire (Nasdaq:SHPGY) and Protalix (NYSE:PLX) / Pfizer (NYSE:PFE) challenging the company in Gaucher disease, and Shire, Amgen and Abbott (NYSE:ABT) becoming more formidable in nephrology.
More worrisome than that, though, is the regulatory and reimbursement environment. The FDA has clearly become much more difficult to deal with and much more safety-conscious, and that could be a threat to a company that focuses on very rare diseases where regulators have in the past been less strict on safety due to a lack of treatment alternatives. What's more, as health care costs become increasingly problematic for payors, it is fair to wonder if these rare and orphan drug indications can continue to enjoy such high levels of reimbursement as in the past.
Danger and Opportunity
Sanofi may find that this deal never lives up to its promise. Roche (Nasdaq:RHHBY) has had mixed success with its acquisition of Genentech and other combinations between Big Pharma and Big Biotech have not really worked as well as the buyer had hoped. What's more, Sanofi may find that Genzyme does not really solve its own pipeline woes, as promising drugs like mipomersen (partnered with Isis Pharmaceuticals (Nasdaq:ISIS) could fall victim to a safety-obsessed FDA.
The Bottom Line
Although it is understandable to see how Sanofi felt they had to make strong moves to respond to investor concerns about growth and profit sustainability, the company will have its work cut out in making this deal a winner for its shareholders. Conversely, Genzyme shareholders should give some kudos to their management team for striking a rather hard bargain with a buyer that really felt it needed to seal a deal. (This high-risk strategy attempts to profit from price discrepancies that arise during acquisitions. See Trade Takeover Stocks With Merger Arbitrage.)
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