The Health Care M&A Monthly: Sanofi Courts Genzyme--

Opens Negotiations With $18.3 Billion Bid

In what appears to be the industry’s worst-kept secret, Sanofi-Aventis (NYSE: SNY) has approached biotech giant Genzyme Corp. (NASDAQ: GENZ) with a takeover offer. Why it would do so, however, is no secret. Several of Sanofi’s proprietary drugs are facing patent expiration this year and next, and to make up for the loss of revenue from impending generic competition, the company needs to acquire new drugs and new sources of revenue. With the high prices that biotech drugs can command, it is small wonder that Sanofi would seek out a major biotechnology firm such as Genzyme. The music is cued, and the delicate dance to determine valuation and pricing has begun, with activist investor Carl Icahn poised to cut in.

Sanofi-Aventis is the world’s third-largest drug maker, offering a broad range of health care assets such as prescription drugs, generic drugs, vaccines and veterinary drugs. On a trailing 12-month basis, SNY generated revenue of $40.6 billion, EBITDA of $15.8 billion and net income of $7.1 billion. As noted above, several of SNY’s blockbuster drugs are facing the looming patent cliff. When, for example, the US FDA approved a generic version of SNY’s Lovenox blood thinner, the company had to cut its 2010 earnings estimate on July 26 to levels 4% lower than 2009. Other drugs facing generic competition include Plavix, Taxotere and Eloxatin, soon to be followed by Ambien.

Formed from the $65.0 billion 2004 merger of Sanofi and Aventis, Paris-based Sanofi has been no stranger to the M&A market. CEO Chris Viehbacher, an alumnus of GlaxoSmithKline (NYSE: GSK),  has learned the lesson of his alma mater’s ambitious growth-through-acquisition strategy. In 2010, to date, SNY has made two acquisitions and six licensing deals or collaboration agreements; in 2009, it made seven acquisitions and 10 licensing deals or collaboration agreements. Despite this flurry of deals, Sanofi stills needs a grand gesture to replenish lost revenue from its blockbusters going generic.

Based in Cambridge, Massachusetts, Genzyme is the world’s largest maker of drugs for rare genetic disorders.  It currently markets Cerezyme for Gaucher disease, Fabrazyme for Fabry disease and Myozyme for Pompe disease, to name a few. On a trailing 12-month basis, it generated revenue of $4.3 billion, EBITDA of $506.0 million and a net loss of $76.0 million.  Recent viral contamination at a Massachusetts manufacturing plant resulted in a shortage of Cerezyme and Fabrazyme, which translated into a 2% decline in revenue. This, on top of the market meltdown, has led to a depressed stock price. Once news of Sanofi’s more than casual interest became public in mid July, GENZ’s stock price jumped 30% from $51.77 on July 16 to $67.38 on July 26. The price has risen as high as $70.36 per share, a level it has not seen since February 2009, just before a plunge to the market bottom in March, which wiped out one-third of the company’s market cap.

Given that Sanofi has been stung by generic competition, the idea of acquiring a company whose drugs are difficult to make and therefore expensive to copy must be very appealing. Apparently, Sanofi’s board has authorized Mr. Viehbacher to make a start with a bid of up to $70.00 per share, which works out to about $18.6 billion.

In early August, Sanofi opened low with a bid of $69.00 per share, or $18.3 billion. Some analysts, glossing over GENZ’s manufacturing woes, think the company is worth $80.00 per share, or about $21.2 billion. However, we believe that Sanofi will fight to keep the price to a maximum range of $74.00 to $77.00 per share. Above this level, the deal would likely not add to SNY’s earnings.

At $70.00 per share, the deal is worth 4.3x revenue; at $74.00 per share, 4.5x; at $78.00 per share, 4.8x; and at $80.00 per share, 4.9x. This is not a particularly low range of multiples for a mature biotech with a broad portfolio of products; for example, Merck KGaA (DE: MRCG) acquired Serono for $15.2 billion, or 4.9x revenue. Still, given the different stages of company growth in our biotech M&A database, valuing a biotech is still a daunting, often idiosyncratic enterprise that has been made no easier by the Great Recession. This deal, if it closes, will be the second largest biotech deal, after Roche’s (SWX: ROCZ.S) $46.8 billion acquisition of Genentech in 2008  and ahead of AstraZeneca’s (NYSE: AZN) $15.3 billion acquisition of MedImmune in 2007.

Anticipating the board’s response is difficult given all the varied interests it embraces. GENZ Chairman and CEO Henri Termeer will likely oppose a sale of the company he has worked so hard and so long to grow. Carl Icahn, the third largest shareholder, will likely want to cash out. But, the second largest shareholder, Ralph Whitworth, whose firm Relational Investors, LLC bought stock in the low $80.00 range in 2008 and owns 4% of the shares outstanding, might well object to a sale in the mid $70.00s, wishing to be made whole on his investment. (Alas, no time machine exists to return us to the halcyon levels before the March 2009 generational bottom). No matter, Sanofi could turn hostile, circumvent the board and go straight to the shareholders with an offer; that is, after all, how the company acquired Aventis in 2004.

We do not anticipate other large companies, acting as a white knight, to enter the lists and bid up the price. The names Glaxo, Johnson & Johnson (NYSE: JNJ) and Pfizer (NYSE: PFE) have all been bandied about, but a bid at a level that is not profitable for Sanofi may well not be profitable for them, either.