Sanofi Claims Genzyme With $20.1 Billion Upfront And CVRs

Sanofi-Aventis SA's drawn out and much-publicized semi-battle to acquire Genzyme Corp. for $20.1 billion, or $74 per share, plus potential future payments, ended on Feb. 16, in a deal that most of those involved as well as many onlookers said was an expensive, albeit strategic, win-win.

With Sanofi facing the loss of blockbuster drugs like Plavix (clopidogrel), Lovenox (enoxaparin) and Taxotere (docetaxel) to generics, the addition of Genzyme's $4.05 billion in sales and $422.1 million in profits will help to pad the French pharma's top and bottom lines. Genzyme's portfolio of drugs for rare diseases offers another growth platform, according to Sanofi CEO Chris Viehbacher, not unlike the consumer health portfolio Sanofi gained through the $1.9 billion acquisition of Chattem in late 2009 (Also see "Sanofi-Aventis Will Enter U.S. OTC Market By Paying $1.9 Billion For Chattem" - Pink Sheet, 21 Dec, 2009.).

Genzyme is slowly emerging from a bout of manufacturing difficulties and has a portfolio of maturing products, with a limited late-stage pipeline. That its founder and CEO Henri Termeer was able to extract a sweetened offer from the French pharma is a testament to the strategic fit between the two firms, and the depth of Sanofi’s current difficulties.

Under the agreement, Sanofi will pay Genzyme shareholders $74 per share in cash, $5 more than Sanofi's original $69-per-share offer. Each shareholder also will receive one contingent value right per share, which could be worth up to $14 a share, depending on whether certain milestones are met.

The CVRs – viewed by management on both sides as the bridge that closed the valuation gap – will trade on the open market and are good for future cash payouts linked to milestones for the pipeline drug Lemtrada (alemtuzumab) in multiple sclerosis and to production volumes for Cerezyme (imiglucerase) and Fabrazyme (agalsidase) in 2011 (Also see "Complex CVR Will Enable Genzyme And Sanofi Shareholders To Share Potential Upside For Lemtrada" - Pink Sheet, 21 Feb, 2011.).

The messaging from both camps was celebratory during a conference call from Genzyme's Cambridge headquarters. "This is a very exciting moment for Sanofi-Aventis," Viehbacher said, laying out again his justification for the acquisition: the opportunity for Sanofi to expand its research and manufacturing capability in biologics, extend its presence in rare diseases and build its footprint in a major biotechnology hub.

Sanofi is a world leader in insulins and makes vaccines and the low-weight molecular heparin Lovenox, but the company has not historically had a significant presence in therapeutic biologics. "What we are trying to do as a business is create sustainable growth, and you build sustainable growth through competencies, through significant capital expenditures, through brand loyalty, through know-how, and there's an awful lot of that within Genzyme's business," said Viehbacher.

The deal seems to satisfy investors on both sides, but particularly those who own Genzyme. Because it includes the CVRs, it gives Genzyme an opportunity to extract more value if Lemtrada, a key source of contention during negotiations, does better than expected on the market. And it fits Sanofi management's plans to find an acquisition that would be transformative but not overwhelming. Importantly, the deal is accretive to Sanofi earnings in the first year after closing and will be financed through a mix of cash on hand and, mostly, low-cost debt.

On the other hand, the deal comes with many risks for the buyer. Genzyme is operating under an FDA consent decree and its efforts to get its manufacturing operations back on track have met several setbacks, even as they progress (Also see "Genzyme Jumps First Consent Decree Hurdle" - Pink Sheet, 24 Nov, 2010.). Like Sanofi, Genzyme also faces a patent cliff, as products that generate two-thirds of its current revenues are slated to lose exclusivity between 2013 and 2016 – although the challenge is somewhat reduced because slightly more than half of those revenues come from biologics.

Analysts see the drugs Genzyme has in mid-to-late stage development – including Lemtrada, mipomersen for familial hypercholesterolemia (which is partnered with Isis Pharmaceuticals), and eliglustat for Gaucher's disease – as limited opportunities for a variety of reasons.

And while Genzyme will help boost Sanofi revenues and earnings, it alone won't be enough to put Sanofi on a growth track come 2013, the year after Plavix goes off patent. Perhaps most important, as with all large biopharma deals, Sanofi's biggest challenge will be the execution.

Retaining Genzyme’s Independence

The companies struck a deal on Feb. 16 after months of wrangling – from friendly advances to a hostile bid and eventually constructive negotiations. Wooing Genzyme wasn't easy, but now that the marriage certificate is all but signed, the bigger challenge for Sanofi will be successfully integrating the orphan disease specialist to extract Genzyme's full value.

The head of Sanofi's European pharmaceutical operations, Belén Garijo, has reportedly been tapped to oversee the integration. But on a conference call to announce the deal Feb. 16, Sanofi's executives provided few details on how they plan to integrate Genzyme, retain key talent or confront the challenges facing the biotech, including the manufacturing deficiencies and growing competitive threats to Cerezyme for Gaucher's disease from Shire PLC and Pfizer Inc.

For now, Sanofi intends to maintain Genzyme's Cambridge headquarters, where the company employs 4,500, as its global center for excellence in rare diseases. Genzyme has about 12,000 employees based in 100 countries.

Neither did Sanofi provide color on where cost savings could come from, although synergies were not the main driver of the deal. When pressed by analysts, Chief Financial Officer Jérôme Contamine speculated the combination could yield synergies north of $600 million. “As you can imagine, we have not been able to go into the details of the synergies that we can generate. So we have built, let’s say, a certain amount of synergies based on what we consider will be Genzyme’s standalone business plan,” he said.

Presumably some of those synergies will come from the consolidation of Genzyme’s renal, endocrinology and oncology franchises, which form the bulk of Genzyme's non-orphan disease business and generate 60% of the company's annual sales. But Genzyme already had a cost-cutting program under way, including a 10% head count reduction, most of which will take place in 2011, so analysts said finding additional areas to save money could be hard.

Termeer will resign after the closing, expected in the second quarter, though he will continue in an advisory capacity.

In order to get full value for the acquisition, therefore, Viehbacher and his team also will need to create an incentive plan that retains other key talent such as Chief Operating Officer David Meeker and Senior VP-Quality Ron Branning, who only recently joined Genzyme after successfully helping former employer Gilead Sciences negotiate a consent decree. In addition, given the very different sales model for rare diseases, the French pharma is likely to want to retain Genzyme’s specialized commercial team.

The decision to keep Genzyme somewhat independent is similar to what some other big pharmas have done recently with acquisition targets, including Roche with Genentech and Takeda with Millennium Pharmaceuticals. Their successes with this approach, however, vary.

Sanofi’s Limited Choices

Sanofi’s final offer came after months of careful calculation. After a succession of R&D failures, most notably the collapse of its efforts to get the diet drug Acomplia (rimonabant) approved in the U.S. and the drug's subsequent withdrawal from the European market in 2008 for safety reasons, the world's number three pharmaceutical company needed to look to external sources for growth, both in its prescription drug businesses and other areas.

It has spent considerable time building its presence in emerging markets, from which it now derives more than 25% of its revenues – the most of any big pharma company. It is also the world's largest maker of vaccines and the second largest producer of insulin. And it has a growing presence in cancer therapeutics, generics and animal health.

But those have provided only partial relief, and given the size of Sanofi's patent cliff, the need to acquire was inevitable. According to sources in the investment community, the board's decision to focus on a mid-sized target was conservative because it wanted something transformative, without the risks that a mega-merger entails. With valuations of many potential target acquisitions skyrocketing, Genzyme fit this criteria. Although critics argue that the price is high, the price-to-sales multiple is well in line with average multiples assigned to similar biopharma deals in recent years.

Sanofi's board has been publicly quiet about the deal, leaving Viehbacher to lead the way. The company's two largest shareholders, L'Oreal Asset Management, the French cosmetics company, and Total, the oil and gas company, which together own roughly 14% of shares, both have favored the deal, a source said. L'Oreal, which owns 8.9% of the company, has two representatives on Sanofi's board, and was engaged in the process. Total, which now owns roughly 5% of the company, has been slowly reducing its stake and has said it plans to exit its investment completely by the end of 2012.

A Comfortable Exit For Genzyme Shareholders

The deal was welcome news to Genzyme shareholders, who saw the value of their shares slide from a high of $83.25 in August 2008 to around $48 last year amid the manufacturing failures that sent sales of Cerezyme and Fabrazyme tumbling. Genzyme's shares closed at $75.37 on Feb. 18, implying investors are giving the CVRs a value of $1.37.

Analysts covering Genzyme largely felt the deal represented fair value. "With continued pressure from Shire's Vpriv, an upcoming PDUFA for Pfizer's taliglucerase (next week), we think history may show that Genzyme played its cards exceptionally well with this deal," Robert W. Baird analyst Christopher Raymond said in a same-day research note.

Sanofi shares on the NYSE closed at $34.64 on Feb. 18, up considerably from the summer, when rumors of talks between both companies emerged, but before Sanofi made an official offer. Bernstein Research & Co. analyst Tim Anderson saw the deal as neutral for Sanofi, though he estimated that doing a share buyback as a way to return cash to shareholders would have been equally accretive to earnings-per-share versus acquiring Genzyme, without the execution risk.

"This is a happy end with a deal that is good for both companies," Genzyme shareholder Lionel Melka, co-manager of Bernheim, Dreyfus & Co.'s Diva Synergy Fund, said.

Ultimately, Viehbacher's bet will depend largely on the success of Genzyme integration, the full restoration of Cerezyme and Genzyme production, and Sanofi's ability to build on the orphan disease business, including expanding it to emerging markets, where Genzyme currently has a small presence .

Lemtrada's success will be a nice addition, but, as the high hurdles set by the CVRs suggest, Sanofi isn't banking on that. Nonetheless, investors on both sides were no doubt relieved to see a conclusion to what at times seemed never-ending.

By Jessica Merrill, Wendy Diller