My firm has held a long position in biotechnology firm Genzyme (GENZ) since long before Sanofi Aventis (SNY) decided to make a play for the company in an effort to boost its future growth potential in the face of pending drug patent expirations. Prior to Sanofi’s interest, Genzyme had plunged below $50 per share on manufacturing woes for its largest drugs, creating huge opportunities for contrarian investors such as myself. However, the tables have shifted now, as Sanofi has offered $69 per share and is in discussions to increase their offer and seal a deal with Genzyme, whose management team has played hardball so far.
These negotiations have made the situation complicated for value investors, I believe. There is no doubt that the stock would be much lower without Sanofi’s involvement, making it clear that holders of Genzyme stock today are simply waiting for a deal to take shape. With Genzyme trading in the $71-$72 area and rumors of a final price being in the $75-$80 range, at first blush it might appear to make sense for shareholders to sit tight given the potential upside. However, I am strongly considering exiting my clients’ Genzyme positions, and I think others may want to think about the opportunity costs involved with waiting out these merger discussions.
The issue is that in order to bridge the perceived value gap with the two companies, a contingent value right (CVR) is being discussed as a way to consummate a deal. Rather than pay $80 cash today, which Sanofi believes is too rich, they might be more willing to pay somewhere between $72 and $75 cash today, with an additional bonus payment being paid to shareholders should future sales of Genzyme’s Campath exceed certain targets, which Sanofi believes are overly optimistic but Genzyme is using to justify holding out for a higher bid.
The problem for current Genzyme shareholders is that even if they can squeeze out an $80 bid from Sanofi, it could takes years to actually get your hands on that much money. Campath is still in clinical trials for the indications that would allow it to generate the level of sales required (several billion) to get the full CVR. Investors need to factor in the time value of waiting for their money when deciding how to proceed with this deal.
Even if we assume that Genzyme shareholders get the very best price possible (I would say this type of offer would be $75 cash and a $5 CVR, for a full price of $80 per share), the returns are not that exciting with Genzyme already trading at $71.50 or so. Does it really make financial sense to hold Genzyme stock for a 5% gain over 3-6 months (the time it will likely take for a deal to be agreed to and officially close) if it might take 2 years or more to get the other $5 per share (an additional 6.6% gain). I would think that I could find more attractive investments in the meantime.
Think about it this way; if you were researching a new investment opportunity today and you estimated you would make 5% over the next quarter or two and then average a 3.3% annual profit for the next two years after that, would you make the investment? I know I definitely would not, but even with an eventual $80 per share buyout, that is what current Genzyme shareholders can likely expect if they wait for every last penny from the Sanofi offer.