Genzyme shows how it can pressure Sanofi

September 13, 2010

Genzyme is showing how it can pressure Sanofi-Aventis. The U.S. biotech takeover target moved to unload its genetic-testing arm to Laboratory Corp on Monday for $925 million. The more Genzyme can do to fix itself up, the more likely it can squeeze its French suitor to sweeten its $18.5 billion takeover bid. Firms in the sector, once in play, almost always sell. A higher bid seems likely.

House-cleaning plans for the maker of rare-disease drugs are moving ahead. If Genzyme can fetch the same reasonable 2.5 times sales multiple for two other businesses it is shopping as it did from its genetic testing division, Genzyme will reap a total of about $1.3 billion. That’s small beer, but all three units have been a management distraction. Last year, their combined operating margin was slightly negative.

Selling them off makes Genzyme more attractive. Moreover, they allow the top brass to focus on developing what looks to be a blockbuster drug for multiple sclerosis and fixing the firm’s ongoing manufacturing problems, which would maximize value.

How much is a spruced-up Genzyme worth? The company’s four big, profitable rivals are valued at 3.7 times estimated sales for 2011. Put Genzyme’s remaining businesses on a similar multiple and it is worth about $18.5 billion — in other words, exactly the same as Sanofi’s bid. Genzyme had been trading at a discount because of its problems. So while Sanofi’s 38 percent premium to Genzyme’s undisturbed share price is in line with similarly sized biotech takeovers, it is tantamount to a nil premium offer if management can shape up the company. The sale of its genetic testing arm is a step in that direction.

Sanofi has effectively said it won’t bid against itself. It probably will have to if it wants to claim its target. Genzyme’s shares already trade a little over the offer price of $69 apiece. The longer Sanofi waits, the more progress Genzyme is apt to make on its own. Although no white knight has emerged, Genzyme’s chances of being sold are high. Of the past 10 healthcare companies to receive unsolicited bids of more than $1 billion, nine have eventually been sold, according to Leerink Swann research. Genzyme’s investors have time on their side.

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