It seems the Genzyme (GENZ) takeover saga has a happy ending. Assuming manufacturing issues at the U.S. biotech do not rear their ugly head once again $20bn, although not cheap, is a fair price for Sanofi-Aventis (SNY) to pay.
In reality, Genzyme was looking weaker as negotiations dragged on and white knights steadfastly kept their heads down. It has been forced to accept future payments linked to the success of experimental MS therapy Lemtrada and some pretty tough milestones have to be hit before significant amounts of cash change hands again, highlighting the high-risk nature and questionable potential of the project. Meanwhile Sanofi, which has witnessed a number of its peers embark on aggressive programmes to return cash to shareholders in the last month, now needs to clearly demonstrate the value this deal will create.
Initial signs are that investors are largely on board - Sanofi shares climbed 3% today to €51.28; the stock was trading around €47 in July last year, before rumours of a big deal started to circulate.
The $74 per share price tag is largely in-line with expectations but will come as a bit of a relief, as a higher price was always possible. The 40% premium to Genzyme’s share price prior to bid rumours emerging might seem rich, but at the time the company was in the midst of a manufacturing crisis and the shares were at five-year lows. Prior to these problems Genzyme stock was regularly in the $70 range, and Sanofi would have had to pay a lot more for the same acquisition in 2008.
Aggressive noises on anticipated estimated cost savings will also go down well. On a call with analysts today Jérôme Contamine, Sanofi’s chief finance officer, said more than $600m a year could be stripped out, a figure north of what many analysts were expecting.
Prior to the call, analysts at UBS calculated that assuming costs equivalent to 15% of Genzyme’s sales last year - $600m - are stripped out, the deal will inflate the French company’s earnings by almost 12% by 2013, or 74 cents. Today, Sanofi said the acquisition would add to earnings in the first year after closing – likely to be this year – and add up to €1 per share to earnings by 2013.
By year two, the cost of doing the deal will be outweighed by the returns, the company predicts.
No doubt investors are hoping these estimates are conservative, and that Sanofi has left much room for improvement.
The contingent value rights (CVR) negotiated over Lemtrada are also a smart move. Worth another $13 a share, equal to paying out another $3.5bn, Sanofi has protected itself from writing cheques for anything near this amount if, as many believe, the product fails to live up to Genzyme's lofty expectations.
Two phase III trials report later this year but the drug has to receive FDA approval before the first $1 per share CVR is triggered – this could happen next year if all goes well. However the potential of the drug rests more with the eventual patient population it treats – as reflected in the back-end loaded milestones. If, for example, the drug emerges as final resort therapy for very ill MS patients due to its side effect profile – as eventually many expect – the second Lemtrada CVR may not even be triggered.
For the second $2 per share payment to be made net sales have to exceed $400m within four specified quarters per territory, and for the third $3 CVR, global sales have to exceed $1.8bn.
Everything has to go swimmingly for these payments to be made, let alone the fifth and sixth potential payments. It is revealing that Genzyme shares are trading at $75.46 this morning. After the $74 in cash Sanofi is paying out upfront, that implies the CVRs are being valued at $1.50, roughly 10% of their total potential value.
Once the CVRs trade independently, analysts believe they could be valued at around $3. Over the coming months that value will be significantly influenced by the two pivotal trials – weak efficacy or a worrying safety signal will significantly dent their value.
Sanofi-Aventis shares, meanwhile, should be largely unaffected.
Chris Viehbacher, Sanofi’s chief executive, told analysts today this deal will mean the combination of the two companies means accelerated revenue growth. This remains to be seen, but the deal certainly gives the French company a big leg up the ranking tables as forecasts stand today. Combining the two companies' projected revenues from drug sales propels Sanofi from fourth to second position in 2016, the analysis below shows.
Since Mr Viehbacher arrived at Sanofi-Aventis a big deal was always on the cards and Genzyme, hobbled by manufacturing issues, was looking vulnerable.
The French company is certainly not as precariously balanced as others, but with an estimated 40% of 2010 drugs sales at risk of generic competition in the next three years – products that generated $11bn last year – buying a new top line is an understandable strategy.
This acquisition certainly looks like representing one of the sounder strides big pharma has made into biologics and the valuable world of rare diseases. And as long as the synergies and revenue growth opportunities materialise, it is certainly not the most expensive the industry has seen.