Sanofi and Glaxo CEOs cast wary eye on M&A

By Caroline Jacobs and Ben Hirschler -Analysis

PARIS/LONDON (Reuters) - The new bosses at Sanofi-Aventis (SASY.PA) and GlaxoSmithKline (GSK.L) are playing a cautious acquisition game, 13 and seven months respectively after taking control of the two big European drugmakers.

Back in 2007, Chris Viehbacher and Andrew Witty were rivals in a race for the top job at Glaxo, which Witty won.

Now the former colleagues are competing to strike the smartest pharmaceutical deals. It is a battle that doesn't necessarily mean writing the biggest checks, according to analysts, bankers and fund managers.

Around them the industry landscape is changing fast. Pfizer (PFE.N), Merck & Co (MRK.N) and Roche (ROG.VX) all clinched mega-deals in the first quarter of 2009. Novartis (NOVN.VX), meanwhile, is committed to buying eyecare giant Alcon (ACL.N).

With strong cash positions, Sanofi and Glaxo could both contemplate similar large-scale transactions as a tactic to deal with stalling sales growth, looming U.S. healthcare reform and loss of patent protection on many blockbuster medicines.

Yet Witty has flatly ruled out a mega-deal and Viehbacher, while not closing the door on the idea completely, wants to focus on small and mid-sized deals up to around 15 billion euros in generics, emerging markets, vaccines, consumer health and biotech.

"Sanofi is looking at everything but Viehbacher will be very cautious. He doesn't want to repeat the mistake of (AstraZeneca CEO David) Brennan when he overpaid for MedImmune," said one healthcare banker familiar with the group.

"Is he going to bid a big premium on a $50-billion-plus asset? I don't think so."

BUYING TIME

Viehbacher knows Sanofi needs to change and he has been holding its feet to the fire, shaping the French drugmaker from an introverted company into one with a more open and diversified approach that should secure better long-term growth.

He estimates Sanofi is "about half way through" the transformation process. The next step will come with a restructuring of drug research, due in weeks.

For 2009 Sanofi has suggested, and analysts expect, that EPS could beat its 7 percent growth goal at constant exchange rates. Beyond, many analysts see EPS declining until 2013, as more than a fifth of its current drug sales face patent loss, unless it cuts spending aggressively or makes a major takeover.

"They need to fix the mismatch between pipeline potential and generic overhang in pharmaceuticals. To buy time they need to acquire and do as many biotech partnerships as they can to rebuild their pipeline," said Helvea analyst Karl Heinz Koch.

So far, Viehbacher has picked up two Latin American generic businesses to boost Sanofi's emerging markets presence, as well a promising privately owned cancer company, BiPar Sciences.

One large and obvious bid target is Bristol-Myers Squibb (BMY.N), Sanofi's long-time U.S. partner on blood thinner Plavix, but Viehbacher said in March he was happy with existing partnership arrangements.