Genzyme Corp. (GENZ) recently rejected Sanofi-Aventis’ (SNY) offer to acquire the company for $69 per share. Earlier in the day, Sanofi had announced its non-binding proposal to Genzyme with the all-cash transaction being valued at $18.5 billion. However, Genzyme’s board of directors rejected the offer calling it unrealistic. According to Genzyme, the offer price undervalues the company.
The offer price of $69 per share represents a 38% premium over Genzyme’s share price on July 1, 2010. Rumors regarding Sanofi’s intention to acquire Genzyme have been doing the rounds since early July 2010. Since then, Genzyme’s shares have shot up 35.6%.
What Does Sanofi Gain?
Sanofi has a high exposure to generic risk on many of its leading franchises. The company suffered a blow recently with the entry of a generic version of its anti-coagulant Lovenox, which was a major contributor to the top line with 2009 sales coming in at €3,043 million, up 11.1%. Lovenox accounted for 10.4% of total sales in 2009 and the entry of generic competition will lead to a significant decline in sales.
In addition to Lovenox, we see generic risk to other products as well. The next wave of generic erosion could occur soon with Taxotere losing exclusivity. Avapro sales will be at risk following the August 2012 European patent expiration.
In such a scenario, it is imperative for Sanofi to successfully develop and launch new products in order to make up for the loss of revenues once major products lose exclusivity and start facing generic competition. The acquisition of Genzyme would boost Sanofi’s revenues as well as its pipeline.
Genzyme’s pipeline includes candidates like mipomersen, which is being developed with Isis Pharmaceuticals (ISIS), alemtuzumabfor multiple sclerosis, eliglustattartratefor Gaucher, and Clolarfor adult acute myeloid leukemia (AML) among others.
While the acquisition of Genzyme would allow Sanofi to increase its presence in the biopharmaceutical market, we note that Genzyme’s performance has been hampered by manufacturing issues since June 2009. The company is currently operating under a consent decree imposed by the U.S. Food and Drug Administration (FDA) and is working on resuming normal supply of the products that were affected by manufacturing issues. Genzyme could incur additional costs in case of non-compliance with the terms of the consent decree.
In addition to the manufacturing issues, Genzyme’s key product Cerezyme is facing additional competition in the form of Shire’s (SHPGY) Vpriv. Further competition could come in the form of Protalix BioTherapeutics Inc.’s (PLX) Uplyso which could gain approval in February 2011.
Will Sanofi Raise its Offer?
With Genzyme refusing Sanofi’s offer, the big question that remains is how far will Sanofi go to acquire Genzyme. In its press release, Sanofi said that its offer represents a multiple of 36 times Genzyme’s 2010 earnings per share as estimated by analysts. Based on 2011 earnings estimates, the offer price represents a multiple of 20.
Sanofi’s non-binding offer, which was initially sent to Genzyme on July 29, was sent again given the failure to enter into discussions with Genzyme’s management. With Genzyme rejecting Sanofi’s current proposal, Sanofi has two options – it can either approach Genzyme’s shareholders directly or it may increase its offer price to $70–$72. A deal could be struck in the mid-$70s range. Genzyme has asked its shareholders to refrain from taking any action.
Neutral on Sanofi & Genzyme
We currently have a Neutral recommendation on Sanofi, which is supported by a Zacks #3 Rank (short-term “Hold” rating). Our biggest concern for Sanofi is the high exposure to generic risk on many of its leading franchises. The entry of generic Lovenox is a huge setback for the company.
We expect the company to look to grow revenue through partnering deals and acquisitions.
As far as Genzyme is concerned, we believe that near-term challenges remain before the company will be able to go back to a normal production and supply schedule. Moreover, the FDA’s consent decree could result in Genzyme incurring additional costs in case of non-compliance. However, we are pleased to see that the company is taking steps to emerge from the impact of the temporary shutdown of the Allston plant. We view the recent approval of Lumizyme as a major positive and are pleased to see the company working on expanding its product portfolio and pipeline so as to reduce its dependence on a handful of products for growth. We currently have a Neutral recommendation on Genzyme, which is supported by a Zacks #3 Rank (short-term “Hold” rating).