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Done deal for Genzyme
March 2011
by Jeffrey Bouley  |  Email the author


CAMBRIDGE, Mass.—After months of standoff-style behavior, we finally know what it will take for Genzyme Corp. to allow itself to be acquired by Paris- based sanofi-aventis, and that would be $74 per share in cash, or a total of about $20.1 billion. That's assuming, of course, all customary closing conditions are met and no one (like the shareholders or regulators) pulls some unlikely and unexpected move to nix the deal.  
The process began some six months ago, with sanofi offering to pay about $18.5 billion, or $69 per share. Genzyme cried foul and said the offer undervalued the company, but sanofi stood firm on that price, and threatened a hostile takeover at one point. Geznyme likewise stood firm in its stance, and only opened its books for sanofi to perform due diligence at the beginning of February, ultimately leading to sanofi raising its offer.
In addition to the cash payment, each Genzyme shareholder will receive one contingent value right (CVR) for each share they own, entitling the holder to receive additional cash payments if specified milestones related to Lemtrada (alemtuzumab MS) are achieved over time or a milestone related to production volumes in 2011 for Cerezyme and Fabrazyme is achieved.
The one-time milestones and payments are as follows:
  • $1 per CVR if specified Cerezyme/Fabrazyme production levels are met in 2011
  • $1 per CVR upon final U.S. Food and Drug Adminisration (FDA) approval of Lemtrada for multiple sclerosis (MS) indication
  • $2 per CVR if net sales post-launch exceed an aggregate of $400 million within specified periods per territory
  • $3 per CVR if global net sales exceed $1.8 billion
  • $4 per CVR if global net sales exceed $2.3 billion $3 per CVR if global net sales exceed $2.8 billion
"This is a great deal for sanofi, paying close to their original budget … with extra contingency payments only coming if Genzyme's multiple sclerosis drug Lemtrada exceeds sanofi's expectations," notes John Shortmoor, an independent pharmaceutical companies analyst at Datamonitor. "Through the acquisition, sanofi has successfully gained access to niche markets where competition is limited by more than just patent protection—a stated aim of the company's CEO, Christopher Viehbacher—providing a platform for long-term sales growth, diversifying away from the traditional blockbuster model."  
On the other hand, Tim Anderson, an analyst with Bernstein, assesses the transaction as neutral overall, and makes note of investors' concerns about potential future competition to Cerezyme and other rare disease therapies, integration risks of the merger and possible disruptions to the correction of manufacturing problems at Genzyme's Allston, Mass.-based facility.
Morningstar analyst Karen Andersen wrote in a note of her own around the same time: "We don't expect to change our fair value estimate for sanofi, but we may slightly raise or lower our fair value estimate for Genzyme once we assess the value of the CVR. Given the low interest rates available for debt and assuming relatively low cost synergies, we believe the deal will largely be a net neutral to sanofi's valuation."
In any case, now that we know that and the clock is ticking on the final dotting of i's and crossing of t's, the question on many minds is what this will all mean for Genzyme—both as an entity itself and as a collection of people.
From the perspective of sanofi, the French company's "global footprint, significant resources and proven track record of successfully expanding franchises will create new long-term growth opportunities for the combined company, particularly in emerging markets," notes the news release about the deal—a sentiment that Datamonitor 's Shortmoor agrees with, noting that by extending the geographic reach of Genzyme's portfolio in growth markets, sanofi will bolster Genzyme's long-term sales potential.
"Genzyme will become an important new platform in sanofi-aventis' sustainable growth strategy and expand the company's presence in biotechnology," Viehbacher says, and as part of that, he intends to make Genzyme sanofi's global center for excellence in rare diseases.  
The acquisition will, Viehbacher adds, also reinforce sanofi-aventis' commitment to the greater Boston area, where Genzyme is based.
That last sentiment is important to not only the employees of Genzyme but to the Boston area itself—in fact, the entire state. Shortly after the acquisition deal was announced, Massachusetts Gov. Deval Patrick said he would do all he can to preserve jobs following the merger of the two companies, telling the Boston Herald, after a speech to the Greater Boston Chamber of Commerce, "I will fight for every job. I am always concerned about job losses."
Patrick said he would immediately meet personally with Viehbacher and with Henri Termeer, Genzyme's CEO, to discuss the future of the companies and any planned job cuts, and noted he's already been in regular contact with them individually as events have unfolded.
"Genzyme is a terrific company and has been growing in the Commonwealth and was growing even before our Life Sciences Initiative," Patrick said, adding, "sanofi-aventis has invested in Massachusetts for the last couple of years because of our Life Sciences Initiative and I'm going to do everything I can to continue that growth."  
Hours after the deal was finalized between sanofi and Genzyme, Viehbacher pledged to preserve the Genzyme brand name—a decision consistent with sanofi-aventis' approach in many other transactions—but wouldn't guarantee to retain all of the company's roughly 4,500 Massachusetts jobs.  
"The Genzyme name that's on the top of this building is going to be there tomorrow, a year from now, and 10 years from now,'' Viehbacher told employees at Genzyme's headquarters after being introduced to those employees by Termeer. And while he said sanofi-aventis isn't focused on cuts at Massachusetts' largest biotechnology company, he did admit changes are coming to Genzyme post-merger, telling the Boston Globe, "It wouldn't be credible to say there aren't going to be some cost savings along the way. But you want to be careful in terms of risk of disruption. It may be that we reduce in some areas, but that we invest in other areas.''
The $20.1 billion deal was unanimously approved by the boards of directors of both companies, and the deal is expected to close early in the second quarter of 2011, with the acquisition expected to be accretive to sanofi-aventis' earnings per share in the first year following closing.  
"This agreement with Genzyme is both consistent with our long-term strategy and creates significant long-term value for our shareholders," sanofi's Viehbacher says, adding that the CVR structure, "which served as an important value bridge between our two companies, rewards both Genzyme and sanofi-aventis shareholders, particularly if Lemtrada outperforms the market's current expectations."  
While Veihbacher sees a bridge, some market watchers see other metaphorical flat structures, such as analyst Dominic Valder of Evolution Securities, who wrote in an investor's note that with the acquisition agreement in place, sanofi's patent cliff becomes a "patent plateau," echoing some of the other analysts' "neutral" views. He explained that "instead of having a patent cliff—the stock now is likely to have flat earnings—at approximately $7 per share for the next three years, before earnings growth starts again post-2013."  
For his part, Genzyme's Termeer says, "This transaction represents a new beginning for Genzyme," adding that sanofi "believes in what we do, in our people and in our potential."
"Genzyme has a record of innovation and a unique and pioneering approach to serving patients," Termeer continues. "We also share an exciting vision of the future, one in which Genzyme and sanofi-aventis grow and innovate by developing breakthrough treatments that change the lives of people with serious diseases. We look forward to building a sustainable future together." 
In addition to rare diseases, the two executives note, Genzyme has built strong renal-endocrinology, hematology-oncology and biosurgery businesses, all of which are reportedly complementary to existing sanofi-aventis businesses.
Code: E031101



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