Sanofi-Genzyme: What the Analysts Are Saying

After chasing Genzyme (GENZ) around the table for several months, Sanofi-Aventis (SNY) has finally reached a deal. Originally, the drugmaker offered $69 a share, but as you know, is paying $74 in cash, or roughly $20 billion, plus an unusual contingent value rights (CVR) that will be priced depending on various factors, such as fixing manufacturing problems and whether the Campath leukemia med is approved for multiple sclerosis. And so the CVR could require additional payouts of up to $4 per CVR later. Or maybe not.

As for strategy, Sanofi CEO Chris Viehbacher has pooh-poohed stock buybacks and talked up the value of pursuing Genzyme and its biologics, an area of keen interest to big pharma. Then again, Genzyme is saddled with ongoing manufacturing difficulties that resulted in not only a consent decree, but persistent shortages of Fabrazyme and Cerezyme, which are used to treat Fabry’s disease and Gaucher disease, respectively. So what are the wags saying? Here is a sampling …

In an investor note, Sanford Bernstein Analyst Tim Anderson writes that "buying Genzyme furthers Sanofi’s goal of having a broad collection of long-lived assets …and Genzyme’s revenue streams should be more durable than those of e.g. a pure small molecule drug franchise. And buying Genzyme puts Sanofi into an area – rare diseases – where the competition should be less …The list of vertically-integrated, biologically-focused biotechs continues to shorten, so buying Genzyme brings to Sanofi one of the few remaining assets in this area."

Then again, he also notes that sustaining pricing for rare disease meds, which are expensive, may be tricky. "Future potential competitors, like Pfizer (PFE) and Protalix (PLX) or GlaxoSmithKline (GSK), may elect to compete on price to capture share. " He continues that there is always the "possibility that Sanofi does not execute successfully on integrating Genzyme (at least on the rare drug side), because the physician/patient/drug company dynamic is much different than what Sanofi may be used to with more routine pharmaceutical products." And there is also "the potential that the acquisition disrupts an already-fragile manufacturing situation. Will key employees at Genzyme tasked with fixing manufacturing leave the organization?"

However, Erik Gordon of the Ross School of Business at the University of Michigan, is not as even-handed. "The final price is only 10 percent to 15 percent higher than the (initial) - not much of a bump - and part of it is contingent; it may never be paid. Even if it is, it will be paid years later. Viehbacher is pleased with his use of the CVR to make the deal, and with good reason. When was the last time you saw a CVR in a deal this size? Not in the Pfizer-Wyeth (WYE) deal. Not in the Merck (MRK)-SGP (SGP) deal. Probably in the Big Pharma - Small startup deal," he writes us.

"The total deal is less, net, and it is riskier than the likely deal that Genzyme could have gotten if they didn’t botch the negotiation by stonewalling in the hope that a bidding war would break out … (Genzyme CEO Henri Termeer) knew how to build a great company. He knew how to sell orphan drugs for prices that drew gasps of admiration and dismay. He didn’t know how to sell a company. He will celebrate his ’success’ by pointing to the increase in price from $69, but that’s not the right measure. The measure of success is how much more they got than they would have received if they used another approach, and by that measure, Genzyme failed."

Meanwhile, Jim Prutow, a partner in the health care practice at the PRTM consulting firm, says: "The Sanofi–Genzyme deal is indicative of two trends: First, the continued need for ‘established’ pharmaceutical companies to add to their pipeline through M&A due to the lack of new drug approvals. Second, regulatory actions including consent decrees are increasingly part of the cost of business, and it is not the ‘death knell’ to a company’s growth and acquisition options that it was in the past. Although the deal took time, the CVR structure is a win-win, since both Genzyme and Sanofi will benefit if the MS product is successful."

Disclosure: None