Done deal for Genzyme

sanofi- aventis finalizes agreement to acquire Genzyme for $20.1 billion, up from earlier $18.5 billion offer

Jeffrey Bouley
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CAMBRIDGE, Mass.—After months of standoff-style behavior, wefinally know what it will take for Genzyme Corp. to allow itself to be acquiredby Paris-based sanofi-aventis, and that would be $74 per share in cash, or atotal of about $20.1 billion. That's assuming, of course, all customary closingconditions are met and no one (like the shareholders or regulators) pulls someunlikely and unexpected move to nix the deal.
The process began some six months ago, with sanofi offeringto pay about $18.5 billion, or $69 per share. Genzyme cried foul and said theoffer undervalued the company, but sanofi stood firm on that price, andthreatened a hostile takeover at one point. Geznyme likewise stood firm in itsstance, and only opened its books for sanofi to perform due diligence at thebeginning of February, ultimately leading to sanofi raising its offer.
In addition to the cash payment, each Genzyme shareholderwill receive one contingent value right (CVR) for each share they own,entitling the holder to receive additional cash payments if specifiedmilestones related to Lemtrada (alemtuzumab MS) are achieved over time or amilestone related to production volumes in 2011 for Cerezyme and Fabrazyme isachieved.
The one-time milestones and payments are as follows:
  • $1 per CVR if specified Cerezyme/Fabrazyme productionlevels 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 aggregateof $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 theiroriginal budget … with extra contingency payments only coming if Genzyme'smultiple sclerosis drug Lemtrada exceeds sanofi's expectations," notes JohnShortmoor, an independent pharmaceutical companies analyst at Datamonitor."Through the acquisition, sanofi has successfully gained access to nichemarkets where competition is limited by more than just patent protection—astated aim of the company's CEO, Christopher Viehbacher—providing a platformfor long-term sales growth, diversifying away from the traditional blockbustermodel."
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 diseasetherapies, integration risks of the merger and possible disruptions to thecorrection of manufacturing problems at Genzyme's Allston, Mass.-basedfacility.
Morningstar analyst Karen Andersen wrote in a note of herown around the same time: "We don't expect to change our fair value estimatefor sanofi, but we may slightly raise or lower our fair value estimate forGenzyme once we assess the value of the CVR. Given the low interest ratesavailable for debt and assuming relatively low cost synergies, we believe thedeal will largely be a net neutral to sanofi's valuation."
In any case, now that we know that and the clock is tickingon the final dotting of i's and crossing of t's, the question on many minds iswhat this will all mean for Genzyme—both as an entity itself and as acollection of people.
From the perspective of sanofi, the French company's "globalfootprint, significant resources and proven track record of successfullyexpanding franchises will create new long-term growth opportunities for thecombined company, particularly in emerging markets," notes the news releaseabout the deal—a sentiment that Datamonitor's Shortmoor agrees with, notingthat by extending the geographic reach of Genzyme's portfolio in growthmarkets, 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 inbiotechnology," Viehbacher says, and as part of that, he intends to makeGenzyme sanofi's global center for excellence in rare diseases.
The acquisition will, Viehbacher adds, also reinforcesanofi-aventis' commitment to the greater Boston area, where Genzyme is based.
That last sentiment is important to not only the employeesof Genzyme but to the Boston area itself—in fact, the entire state. Shortlyafter the acquisition deal was announced, Massachusetts Gov. Deval Patrick saidhe would do all he can to preserve jobs following the merger of the twocompanies, telling the Boston Herald,after a speech to the Greater Boston Chamber of Commerce, "I will fight forevery job. I am always concerned about job losses."
Patrick said he would immediately meet personally withViehbacher and with Henri Termeer, Genzyme's CEO, to discuss the future of thecompanies and any planned job cuts, and noted he's already been in regularcontact with them individually as events have unfolded.
"Genzyme is a terrific company and has been growing in theCommonwealth and was growing even before our Life Sciences Initiative," Patricksaid, adding, "sanofi-aventis has invested in Massachusetts for the last coupleof years because of our Life Sciences Initiative and I'm going to do everythingI can to continue that growth."
Hours after the deal was finalized between sanofi andGenzyme, Viehbacher pledged to preserve the Genzyme brand name—a decisionconsistent with sanofi-aventis' approach in many other transactions—butwouldn't guarantee to retain all of the company's roughly 4,500 Massachusettsjobs.
"The Genzyme name that's on the top of this building isgoing to be there tomorrow, a year from now, and 10 years from now,''Viehbacher told employees at Genzyme's headquarters after being introduced tothose employees by Termeer. And while he said sanofi-aventis isn't focused oncuts at Massachusetts' largest biotechnology company, he did admit changes arecoming to Genzyme post-merger, telling the Boston Globe, "It wouldn't be credible to say there aren't goingto be some cost savings along the way. But you want to be careful in terms ofrisk of disruption. It may be that we reduce in some areas, but that we investin other areas.''
The $20.1 billion deal was unanimously approved by theboards of directors of both companies, and the deal is expected to close earlyin the second quarter of 2011, with the acquisition expected to be accretive tosanofi-aventis' earnings per share in the first year following closing.
"This agreement with Genzyme is both consistent with ourlong-term strategy and creates significant long-term value for ourshareholders," sanofi's Viehbacher says, adding that the CVR structure, "whichserved as an important value bridge between our two companies, rewards bothGenzyme and sanofi-aventis shareholders, particularly if Lemtrada outperformsthe market's current expectations."
While Veihbacher sees a bridge, some market watchers see othermetaphorical flat structures, such as analyst Dominic Valder of EvolutionSecurities, who wrote in an investor's note that with the acquisition agreementin place, sanofi's patent cliff becomes a "patent plateau," echoing some of theother analysts' "neutral" views. He explained that "instead of having a patentcliff—the stock now is likely to have flat earnings—at approximately $7 pershare for the next three years, before earnings growth starts again post-2013."
For his part, Genzyme's Termeer says, "This transactionrepresents a new beginning for Genzyme," adding that sanofi "believes in whatwe do, in our people and in our potential."
"Genzyme has a record of innovation and a unique andpioneering approach to serving patients," Termeer continues. "We also share anexciting vision of the future, one in which Genzyme and sanofi-aventis grow andinnovate by developing breakthrough treatments that change the lives of peoplewith 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 andbiosurgery businesses, all of which are reportedly complementary to existingsanofi-aventis businesses.

Jeffrey Bouley

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