Tuesday, February 15, 2011

Sanofi/Genzyme: The End Is Nigh !?!

The blogosphere erupted Tuesday afternoon with the news that – finally! finally! – Sanofi Aventis and Genzyme appear to have reached rapprochement -- and it's only going to cost the French pharma $19.2 billion upfront.

“This is a happy end with a deal that is good for both companies,” Genzyme shareholder Lionel Melka, co-manager of Bernheim, Dreyfus and Co.’s Diva Synergy Fund, told IN VIVO Blog on February 15.

But just how good a deal is it for Sanofi shareholders at $74-a-share?

That’s just one of the many questions swirling ahead of any official disclosure of the acquisition, details of which are expected to be announced in concert with Genzyme’s quarterly earnings call February 16.

Oh, we know that Genzyme provides Sanofi with access to a basket of lucrative marketed products, but these assets are also mature and facing competition from upstarts who have capitalized on the big biotech’s manufacturing missteps. At this undeniably rich price tag, how easy will it be for Sanofi to extract full value from the deal? Given the months of bitter back-and-forth, can the French pharma integrate Genzyme and retain important people like COO David Meeker and Senior VP, Quality, Ron Branning, who are essential to helping Sanofi make the big biotech a successful US subsidiary?

There’s no question this is a good deal for Termeer, who saw his company’s share price slide from a high in August 2008 of $83.25 to around $48 in the wake of 2009 manufacturing difficulties that sent sales of top drugs Cerezyme and Fabrazyme tumbling and, ultimately, resulted in a consent decree. Were the deal not to transpire, it’s highly likely he would have been forced out by activist shareholders like Icahn Partners. Now he can face shareholders with a straight face and tell them he restored a good chunk of the stock's value as a result of this transaction, thereby justifying what’s likely to be a handsome exit package.

But Sanofi shareholders may not be so happy; reports in recent weeks indicate some were less than enthusiastic about the possibility of a sweetened offer, believing the initial $69-a-share tender provided fair value. Viehbacher seemed to be trying to allay their concerns as recently as a month ago when he addressed the biopharma community at the annual J.P. Morgan Healthcare conference. “We will only do a deal if both Genzyme shareholders and Sanofi shareholders feel there is value for both,” he said.

Interestingly, in that same address, Viehbacher also noted during that break-out session that M&A hasn’t generated value for big pharma shareholders, in part because in an era of “cheap debt” it’s not hard to make any deal look accretive to earnings. “We’ve tried to be much more disciplined and we start to evaluate these deals not just on the basis of accretion,” he said.

Those comments may or may not come back to haunt him. In the interim, the onus is on Viehbacher to provide in specific detail an answer to a question Sanofi shareholders are almost sure to ask: how will the nearly $20 billion acquisition of Genzyme position Sanofi, a company trying even now to scale a significant patent cliff, for future growth?

Undoubtedly, Genzyme’s expertise in rare diseases, an area that has become au courant for big pharma, will come up. “As somebody said to me this morning, actually, we’re all ultimately going to be in rare diseases,” Viehbacher told JPMers. “As we develop biomarkers and narrow the population and the price per patient goes up, this is probably a model that we are actually going to see outside of the classic orphan drug business.”

Far be it from IN VIVO Blog to argue with the estimable Viehbacher on that point. However, does expertise in rare disease require spending $20 billion? Can't a company as externally focused as Sanofi claims to be obtain the skills via some other route? Indeed, as GSK’s initiatives in the rare disease space show, another alternative to a costly and time consuming acquisition is an alliance-driven model, where partnerships provide access to products that are now in vogue in part because they are largely protected from health care reform and generic competition, and, as such, have high pricing power.

Let's assume it's better to acquire than ally. Aren't there potentially cheaper acquisition candidates for the plucking? (Alexion and BioMarin are just two possibilities that come to mind.) Viewed alongside the proposed take out of Genzyme, Shire's 2005 acquisition of Transkaryotic Therapies for $1.57 billion and a 31% premium looks like a veritable bargain. And maybe that's the rub; late to the rare disease party, Sanofi has little choice but to overpay to get access to these niche-y products.

Of course there's another reason for Sanofi’s interest in Genzyme: accessing its biologics manufacturing facilities. Every big pharma is amassing greater biologics capabilities, lured by the specialty nature of the products. But building plants is not only expensive – it takes time. (Look how long Genzyme’s been building its Framingham site.) “By acquiring Genzyme, Sanofi gets the manufacturing capability right away,” says Salveen Richter, an analyst with Collins Stewart. “They probably believe they can use their fill/finish and manufacturing expertise to ameliorate the current manufacturing issues at Allston,” the Genzyme manufacturing site currently operating under a consent decree.

Based on Richter’s sum-of-the-parts analysis, which values Genzyme between $72 and $84 a share, she believes the sweetened offer is a fair deal for both sides. In all likelihood, it will be months before that assessment can be made -- and the answer will hinge mightily on how Sanofi manages the integration of Genzyme. Viehbacher and his team would do well to look at recent past history – AstraZeneca/MedImmune, Roche/Genentech, Takeda/Millennium Pharmaceuticals – for some pointers.

-- Ellen Licking and Joseph Haas

Image courtesy of flickrer jasongrahamhowell used with permission through a creative commons license.

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