Sanofi seen prolonging Genzyme bid to mull CVRs

PARIS Tue Dec 7, 2010 10:59pm EST

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PARIS (Reuters) - Sanofi-Aventis (SASY.PA) will likely buy time by extending its $18.5 billion cash offer for Genzyme GENZ.O this weekend and try to hammer out a deal that involves a higher pay-out if the U.S. biotech meets milestones.

The odds are that hardly any Genzyme investors will have handed their shares this weekend to Sanofi for $69 each while they have been trading at $70.24, on average, since July 23, when stories broke of Sanofi's interest in the group.

The French drugmaker's tender offer for Genzyme ends at midnight New York time on Friday.

It launched the offer on October 4, frustrated by encountering what Sanofi's Chief Executive Christopher Viehbacher has called a brick wall in the Genzyme board's refusal even to just sit down and talk.

Prolonging the tender would give both companies room to reach a deal that links Genzyme's value to the future performance of its key experimental multiple sclerosis drug Campath, people familiar with the situation said.

"Such a scenario is not absurd," said one source close to the matter, who declined to be identified because he was not authorized to speak to the media.

Through contingent value rights (CVRs) Sanofi could end up paying Genzyme investors more if Campath proves to be the success that Genzyme expects. But investors will need patience.

"Extending the offer as it stands seems somewhat futile but extending it to bide time and negotiate a CVR and then increase the offer could be a strategy," Collins Stewart analyst Emmanuel Papadakis said. "Sanofi would likely rather base a higher offer on a CVR than increase it just to get talks going."

Sanofi has dismissed Genzyme's $3.5 billion sales estimate for Campath as "unrealistic" and has pulled together analyst forecasts giving a $700 million sales average. Since Genzyme showcased its growth prospects, its shares have lost 2.4 percent.

Genzyme Chief Executive Henri Termeer said last month he was open to a CVR for Campath and Sanofi's finance chief Jerome Contamine told Reuters last week that using such a mechanism to bridge valuation disputes was interesting "in principle.

Viehbacher and Termeer have met only once, on September 20, to discuss the situation, but the two men may well bump into each other again next month in Davos, when they are both expected to attend the annual World Economic Forum, from January 26 to 30.

Whether they have anything to discuss will depend on any progress in behind-the-scenes talks between their advisers.

Another source familiar with the situation said December 10 was not a hard deadline for Sanofi but just one point in a process, and Sanofi did not feel under pressure to raise its bid at the moment.

NO RUSH

Viehbacher has repeatedly said he is in no rush and that the Genzyme situation would not distract from other issues. On Monday, he became chairman of the main U.S. pharmaceutical industry group after Jeff Kindler resigned as CEO of Pfizer (PFE.N).

Analysts agree a CVR could help break the deadlock, though negotiating the terms will be challenging. But with no rival bidders for Genzyme, despite attempts by Genzyme to woo others, Sanofi can take its time to try and get to a deal.

"It will be hard for Sanofi to prove to Genzyme shareholders that it did its utmost to maximize the value of Campath. After all, Sanofi needs to try and maximize the value of its entire multiple sclerosis franchise and not just of one product," said a Frankfurt-based analyst who asked not to be named.

Sanofi sells Copaxone and is developing teriflunomide.

When Fresenius FREG_p.DE bought infusion drugmaker APP in 2008 its takeover price had a tradeable CVR attached that could deliver an extra payment of up to $6 if APP exceeded core earnings targets. In fact, the rights APCVZ.O now trade at just 4 cents.

At any rate, analysts are convinced Sanofi will ultimately need to increase its bid if it wants to bag Genzyme. Genzyme shareholder and board member Ralph Whitworth said early this month the ingredients for a deal were there but that the current offer was "not even a good starting point.

Buying Genzyme would provide Sanofi with a new area for growth, the high-margin business of rare diseases, as it seeks to diversify its business to make up for patent losses that will take out roughly a third of its 2008 sales base through to 2013.

Sanofi shares have dropped 11 percent this year compared with a 4.5 percent rise in the European sector .SXDP. Trading at 6.9 times their expected earnings per share, they are the cheapest among big European pharma stocks.

(Additional reporting by Julien Ponthus and Blaise Robinson in Paris, Ben Hirschler in London and Jessica Hall in Philadelphia; Editing by David Cowell)

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