Summit News

Genzyme's future in hands of arbitragers: banker

NEW YORK (Reuters) - Frederick Frank, a leading biotechnology banker and vice chairman of investment advisory firm Peter J. Solomon, said Genzyme Corp GENZ.O has no chance of remaining an independent company.

French drugmaker Sanofi-Aventis SA SASY.PA has made a hostile tender offer of $18.5 billion, or $69 a share, for the Cambridge, Massachusetts-based maker of drugs for rare diseases. Genzyme has rejected the bid but Sanofi is expected ultimately to prevail.

“Genzyme is history,” Frank said at the Reuters Health Summit on Monday. “It’s only a question of when and at what price.”

Genzyme’s shares closed on Monday at $71.06, and Frank said that if a deal were to fall through the stock price would likely fall into the mid-$50 range.

“I would estimate that 40 to 50 percent of the shares are held in the arbitrage community,” he said, referring to short-term investors who specialize in takeover targets. “That’s a big load to be sold.”

Frank, former vice chairman of Lehman Brothers and, until 2009, of Barclays Capital, has advised on countless transactions in the pharmaceuticals and biotech sector.

He said he expects mergers and acquisitions in the space to continue, since big pharmaceuticals companies are eager to acquire products to replace those that are losing patent protection.

But once Genzyme is gone, there will only be a handful of large biotech companies left, including Amgen Inc AMGN.O, Gilead Sciences Inc GILD.O and Biogen Idec Inc BIIB.O. If and when they too disappear, it is unlikely the industry will see new companies of their ilk emerge, he said.

“Today, venture capitalists are willing to finance a company through mid-stage trials but with the goal of selling it at that point,” he said. “You’re not going to see a lot of new Amgens or Genentechs.”

Genentech, the oldest and second-biggest biotech after Amgen, was fully acquired by Swiss drugmaker Roche Holding AG ROG.VX in early 2009.

Still, Frank said acquisitions will depend on valuations. Biogen Idec Inc BIIB.O, which makes the multiple sclerosis drugs Avonex and Tysabri, has long been considered an acquisition target. But in 2007 the company tried and failed to sell itself.

Frank said he was approached by a big pharmaceuticals company to represent them in a possible purchase of Biogen but he recommended against it.

“On the surface the numbers look very attractive,” he said, “but their wonderful drug Tysabri, for a very small group of people, has the potential to kill you.”

Tysabri has been linked with PML, a potentially deadly brain infection, and is competing in an ever-more crowded space. Recently U.S. regulators approved the first oral MS drug, Gilenya, made by Novartis AG NOVN.VX that is widely expected to become a leading player in the space.

Biogen is working on a test that could potentially screen patients at higher risk for developing PML, but uncertainty remains.

Despite Sanofi’s hostile bid for Genzyme, Frank does not expect hostile offers to increase.

“I don’t think you’ll see a lot of them,” he said. “These companies are very management intensive; you do a hostile tender offer, you tend to lose the management.”

For big pharmaceuticals companies, a new era is at hand, in which insurance companies are increasingly in the driver’s seat, he said.

“In the past, the payer community was not very active; the pharma companies set their prices and their prices were largely paid. Now the focus of power has changed.”

No longer can drug companies develop products with only marginal improvements over rival drugs. Payers won’t pay, he said.

“We’re entering a new world,” he said. “Pharma companies are going to spend a lot of time developing first-in-class drugs.”

Reporting by Toni Clarke; Editing by Richard Chang