Date: Feb 16, 2011 Source: Forbes
This morning, Sanofi-Aventis, the French drug giant, announced that it has, after six months of negotiations, entered into a deal to buy Genzyme, the Cambridge, Mass.-based biotechnology company that dominates the market for rare disease drugs. Now let the Monday morning quarterbacking begin!
The purchase price is $74 per share, valuing Genzyme at $20.1 billion, but also includes a contingent value right (CVR) that could be worth $14 if Genzyme's troubled manufacturing comes fully up to speed and an experimental multiple sclerosis drug pays off. Right now, analyst say the CVR will probably trade at $3 or $4 for now, bringing the total purchase price up to about $78 per share -- a pretty good price for Genzyme shareholders. Whether it ever reaches the $14 level is a matter of debate -- Bernstein biotech analyst Geoffrey Porges expects it to peak at $11.
Did Sanofi overpay? Bernstein's pharmaceuticals analyst, Tim Anderson, notes that according to his team's calculations Sanofi could have probably increased earnings per share just as much as with a $20 billion share buyback, but devoid of risk. He notes that investors are also nervous that some of the $200,000-a-year drugs Genzyme sells could face competition from cheaper entrants. The team of Pfizer and Protalix and GlaxoSmithKline are developing alternative versions of some of these drugs. Anderson's basically neutral on the deal.
The Genzyme acquisition is really a bet that in the future drug companies will need stable businesses like vaccines and consumer health that are insulated from the sudden drops of sales that happen with traditional small molecule drugs in the U.S. market. Generic versions of biotech drugs like the ones Genzyme sells are never going to create this kind of sudden competition. Viehbacher has also said that Sanofi, which just installed a former head of the National Institutes of Health as its research chief, did not have enough presence near U.S. research hot spots. Genzyme's home near Harvard, MIT, and Boston's rich group of biotech startups certainly helps up the company's presence there.
One key for making the deal work will be holding on to the expertise in Genzyme's core rare disease drug business. Sanofi would be wise to walk in and offer all those employees raises, and focus any cost-cutting efforts on back office employees and those in other Genzyme businesses. This is the tough trick, here. Roche made all sorts of noise about preserving Genentech's culture, but it is not at all clear that the company managed to do so