Jenks Healthcare Business Report FEB 2004

	Jenks Healthcare Business Report
February 2004 issue Big Pharma: Will Sassy Sanofi Sweeten Its Hostile Bid? Will the pharmaceutical industry survive another $60 billion acquisition? That is the hope of Sanofi-Synthelabo as it tries to woo Aventis investors into its tent with a miserly takeover premium. The price should go up to get a deal done, but it remains a question who will pay it. ... Public Equity Market After a dismal 2003, the IPO markets have opened up with more deals in the first six weeks of 2004 than in the first six months of 2003. Health care companies have a solid share of the market so far. With equity prices in general rising, companies are also lining up to do secondary offerings. See page 6 ... Private Placement Market Even as the public market appears to have new life, companies continue to tap the private placement market, with one deal this month topping $60 million. See page 10 ... Venture Capital Market In the past month, 26 companies raised more than $460 million, and for the second month in a row the largest investment goes to a Tennessee-based hospital company. See page 10 ... Departments M&A Anouncements 3 Public Equity Market 7 Private Placement Market 11 Venture Capital Market 13-14 Notes and Briefs 16 Sign up for a trial subscription and get the current issue! Read the past headlines.	Big Pharma: Will Sassy Sanofi Sweeten Its Hostile Bid? When trying to bring a reluctant bride to the altar, the size of the diamond can make a difference. The nature of the in-laws, warts and all, and the longevity of the offspring can also make a difference when evaluating the merits of a marriage proposal. Pondering such a momentous change in life is made even more difficult when others weigh in with their opinions, often with motives entirely different than yours. The bride may begin to panic, especially if other, more attractive suitors are lurking in the shadows, whispering their potential interest but not wanting to get in a scuffle and tarnish their image, or change churches, on the way to the altar. Such seems to be the current state of affairs between Aventis (SBF: AVEP) and Sanofi-Synthelabo (SBF: SASY), as the uncharacteristically hostile takeover proposal begins to take on a life of its own, with an outcome that perhaps no one will be particularly happy with, except, of course, all the advisors who will collect a few hundred million in fees regardless of who ends up kissing at the closing ceremony. A hostile takeover attempt between two French companies, while not unprecedented, is unusual in the pharmaceuticals industry, and a bit of a stretch when it is the 14th largest pharmaceuticals company (SASY) trying to take over the 5th largest, with size measured in terms of revenues and not market cap (here, size matters). Outside of the pharmaceutical industry, and especially outside of France, Sanofi is not nearly as well known as its larger competitors, and if not for its blockbuster anti-stroke drug Plavix, which represents 17% of its sales, its market cap would not be comparable to AVEP’s. But a merger between these two firms would result in the third largest pharmaceuticals company behind Pfizer (NYSE: PFE) and GlaxoSmithkline (NYSE: GSK), and would challenge the latter company for the number two spot. One has to wonder how much ego on the part of Sanofi’s founder has to do with the unwanted bid, as a takeover of his larger French competitor would be the crowning jewel in his remarkable career. The problem, of course, is in the dowry, and no respectable family of a bride-to-be would settle for a paltry 3.6% premium, even if the total price is close to $60 billion, especially when most of it comes in the form of stock from a much smaller family with, perhaps, a lesser pedigree. There are several moving parts in this courtship dance, not the least of which is an agreement between SASY’s two largest shareholders, L’Oreal and Total, to support the deal (at least at the current price). A pact between the two shareholders expires at the end of this year, and Sanofi’s hostile bid for Aventis is as much a defensive move to remain independent, keeping them from selling off Sanofi itself, as it is a move to become one of the world’s leading pharmaceuticals companies. As the old saying goes, be careful what you wish for, since now, with AVEP’s expressly stated no, potential buyers are looking at both companies as now being in play, a development that neither wanted. On the Aventis side, its largest shareholder, Kuwait Petroleum Corporation (KPC) with a 13.5% stake, has backed management’s opinion that the price offered is much too low. It is unknown, however, at what price KPC would fold its tent (so to speak) and commit to another bidder. Aventis has hired Goldman Sachs, Morgan Stanley and Rothschild to defend it and sort out potential white knight bids, of which Pfizer, Novartis (NYSE: NVS), Glaxo and AstraZeneca (NYSE: AZN) have been mentioned as potential candidates. The French finance minister has already weighed in with his opinion that he favors a Sanofi/Aventis combination in order to have a French pharmaceutical powerhouse, but if an American company gets into the mix, we wonder how the French foreign minister would react if asked whom he wanted to win this particular battle. That’s an easy one. It is no secret that organic growth within the pharmaceutical industry has slowed, even though Sanofi’s high market cap relative to revenues reflects SASY’s above average growth rate. But that growth rate is not sustainable, especially if it loses in the patent trial for Plavix, which is expected to begin this summer in New York. And that is why Sanofi needs Aventis – by cutting costs and combining their R&D efforts, the new entity would be very competitive and produce better organic growth than if both remained independent. The problem, however, is in the price, and it makes little sense for AVEP’s shareholders to accept such a small premium. The only way for this merger to change from hostile to friendly, if that’s at all possible, is for SASY to raise its bid by more than a token amount. While AVEP’s management talks of 30% to 50% premiums being the norm in the industry, it is unclear whether Aventis is worth that much, but more than clear that Sanofi will not pay that much - at least, not yet. But the price must rise nonetheless, and if not by Sanofi, someone else will surely be tempted. If the bidding gets too high, SASY’s two primary shareholders will probably bolt from the ranks, since they have little motive to hold on, and take their money and run, except there will be French governmental pressure not to do so. A higher price would also allow AVEP’s management to save face if it ultimately succumbs to SASY’s bid. As of mid-February, Sanofi stated that it will not raise its bid, denying a report in a German paper that a higher price would be presented within a week. Our guess is that this is a tactical move, and over time Sanofi wants to have as many potential white knights out of the picture before a new price materializes. At that point, AVEP will fold, secure in providing shareholders a higher return and keeping the marriage within the French family.
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