* Companies agree on outline of Genzyme acquisition-sources
* Companies announce nondisclosure agreement
* Takeover deal could be reached in week or two -source
* Genzyme, Sanofi shares both up more than 3 pct (Adds closing share prices; reactions, background)
By Toni Clarke and Jessica Hall
BOSTON/PHILADELPHIA, Jan 31 (Reuters) - U.S. biotech Genzyme Corp GENZ.O and French drugmaker Sanofi-Aventis SA (SASY.PA) have reached agreement in principle on the terms of a deal under which Sanofi would acquire Genzyme, three sources familiar with the situation told Reuters on Monday.
The news buoyed expectations a final deal was close after Genzyme repeatedly rejected Sanofi's $18.5 billion, or $69 per share, hostile offer launched in early October. The two sides have been slowly moving closer in direct talks in recent weeks.
The agreement in principle would include a contingent value right (CVR), or payout over time based on the performance of Genzyme's experimental multiple sclerosis drug, Lemtrada, the sources said.
Industry analysts expect Sanofi to raise the cash portion of its bid to anywhere between $72 to $75 per share, with an additional CVR payout valued as much as $5 to $10 per share.
One of the sources said a deal agreement could well be reached within the next week or two, ahead of a Feb. 15 deadline for Sanofi's tender offer to shareholders. The sources declined to be named because the talks were not public.
(For more stories on Genzyme and Sanofi: [ID:nLDE70U1H1] )
Genzyme shares closed up 3.2 percent at $73.35 as investors see a higher payout. Sanofi's (SNY.N) U.S.-listed shares also gained more than 3 percent on hopes its performance will get a boost from Genzyme's portfolio of drugs for rare diseases.
Earlier on Monday, the two companies said in a regulatory filing that they had entered into a nondisclosure agreement, allowing Genzyme to open its books to Sanofi.
"If Genzyme is opening its books to Sanofi, it means that there is an agreement on price, or at least a very narrow range subject to adjustment following due diligence findings," said Lionel Melka, co-manager of Bernheim, Dreyfus & Co's Diva Synergy Fund, which owns Genzyme shares.
Melka estimates Sanofi will need two weeks to complete the due diligence and he is betting the transaction will be completed at $75 a share in cash plus a $5 per share CVR.
A second source said the due diligence being conducted is essentially "confirmatory due diligence" so Sanofi can ensure there are no major surprises in Genzyme's financial records or operations.
The two companies have been discussing a potential deal, including a CVR for several weeks, trying to bridge a wide gap in their expectations for Lemtrada. Genzyme has forecast peak annual sales of $3.5 billion, while Sanofi, using the average of several analyst estimates, expects only about $700 million.
But they have slowly edged closer to an agreement in that time. Sanofi Chief Executive Chris Viehbacher and Genzyme CEO Henri Termeer told Reuters last week during the annual meeting of the World Economic Forum in Davos, Switzerland, that they had made progress in takeover discussions.
Termeer also said a proxy battle for control of Genzyme was unlikely since the two sides were "constructively engaged." [ID:nLDE70Q0XW] [ID:nLDE70P0YF]
On Sunday, Genzyme's board met to review the discussions, and because the talks had progressed, the board authorized the company to allow Sanofi to conduct due diligence, according to a regulatory filing.
Genzyme investors are hoping that a higher portion of the final value of any deal will come in the form of cash, with only a nominal amount taking the form of a CVR, a tradable instrument whose value will depend on how much investors believe in the prospects for Lemtrada.
"The market will give a huge discount to this thing," said one Genzyme fund manager. (Additional reporting by Ben Hirschler, Sinead Cruise and Lewis Krauskopf; editing by Michele Gershberg, John Wallace, Dave Zimmerman and Matthew Lewis)