Is Sanofi-Aventis After Bristol-Myers?

Word is the two major pharmaceuticals may soon merge and become the world's largest drugmaker ahead of some best-selling drugs coming off patent

Speculation is mounting that the long-rumored merger between Franco-German drugmaker Sanofi-Aventis and New York-based Bristol-Myers Squibb may soon be reality. If true, the deal will enable Sanofi to vault past Pfizer (PFE) and Britain's GlaxoSmithKline (GSK) to become the world's largest drugmaker, with combined annual revenues of nearly $55 billion. Neither company is commenting. But a recent report in French financial newsletter La Lettre de l'Expansion claims the two companies have already signed a pre-merger agreement.

It's just the latest sign that the drug industry is gripped by M&A fever. In their quest to stave off generic competition and fill dwindling pipelines, a growing number of pharmaceutical companies and biotech companies are scrambling to find partners (see, 1/29/07, "More Merger Mania Ahead for Pharma").

For Sanofi (SNY), a deal with Bristol-Myers (BMY) is about more than just size. It would provide the European pharma giant—currently the third largest in the world, with $36 billion in 2005 sales—with a more substantial U.S. presence, both in sales and research and development.

The Off-Patent Jungle

Merging with Bristol-Myers would boost Sanofi's U.S. sales force in preparation for the company's expected April launch of potential obesity blockbuster Acomplia (see, 11/24/06, "Will Sanofi's Wonder Drug Save the Day?"). It also could protect the drugmaker from becoming a possible takeover target if one of its main shareholders, French oil giant Total (TOT), sells its 13% stake. Total has said it's interested in divesting the holding when it is free to do so later this year.

Perhaps most importantly, a deal would help protect both companies when a slew of their best-selling drugs come off patent in the next few years. According to analysts at Prudential Financial, both drugmakers could lose as much as 30% of current revenues to generic competition within three to five years. With Sanofi's earnings expected to slow and Bristol's expected to grow over the next few years, Sanofi is eager to gain access to new products.

Bristol-Myers Squibb has them, having launched four new drugs last year and with six more in late-stage clinical trials. "BMS has a fantastic pipeline of new products coming to market," says Dr. Gbola Amusa, senior research analyst at Sanford C. Bernstein Ltd. in London. "And these days, it's cheaper to buy a pipeline than build one."

Bristol-Myers' Missteps

Bristol-Myers has been a takeover target for months after a series of management missteps. This summer the company failed to stop Canadian generics company Apotex from flooding the U.S. market with a generic version of best-selling blood thinning drug Plavix, which Bristol-Myers co-markets with Sanofi. Although a judge halted sales a few weeks later, the Justice Dept. launched an investigation into Bristol-Myers' dealings with Apotex, leading to the firing of Bristol-Myers Chief Executive Officer Peter Dolan in September (see, 9/13/06, "Patent Fight Bounces Bristol-Myers CEO").

The problems with Plavix also are taking their toll on Bristol-Myers' financials. Plunging sales of Plavix contributed to the company reporting a fourth-quarter loss of $134 million on Jan. 25, compared with a profit of $499 million a year ago, on sales of $4.2 billion, a drop of 16.1%.

With Bristol-Myers' image battered, both Schering-Plough (SGP) and Britain's AstraZeneca (AZN), with whom Bristol-Myers signed a $1.25 billion deal to develop two diabetes drugs on Jan. 11, have been mentioned as potential buyers.

But industry insiders say Sanofi has the edge. The two companies have long-standing marketing alliances for Plavix and hypertension drug Avapro, and are thus seen as natural partners. Analysts reckon Sanofi has been reluctant to make a move because its shares trade at a discount to Bristol-Myers', so any deal would dilute the French company's earnings. Though Sanofi is more than twice the size of Bristol-Myers, its shares trade at 13 times 2007 earnings, compared with a 24 price-to-earnings ratio for Bristol. The expectation was that Sanofi would wait until its share price picked up before launching any bid.

Leg Up on Information?

But now Sanofi is running out of time. On Jan. 22, litigation began to determine the validity of one of Plavix's main patents in the U.S., where Sanofi and Bristol-Myers are up against Apotex. A decision isn't expected for at least another three months. But once the case is resolved, previously hesitant buyers are likely to make their move. "If Sanofi really wants Bristol, it will have to launch a bid before the case is settled," says Bernstein's Amusa.

Considering how much is at stake—Plavix is the world's fourth best-selling drug, generating more than $6.3 billion in annual revenue—moving before a verdict is known might seem odd. But as party to the lawsuit, Sanofi has access to information that other bidders don't. "They can price the risk more accurately as they know exactly what Bristol does," Amusa says.

Moreover, no matter whether the case is won or lost, Sanofi and Bristol-Myers' share prices are likely to move in sync, making it more likely that the price will be right. By contrast, Amusa notes, any other CEO using his company's stock to buy Bristol-Myers could "find himself out of a job if the Plavix case is lost."

Fueled by Ambition

Analysts believe any final offer from Sanofi is likely to depend upon the outcome of the pending Plavix litigation. If Sanofi makes a bid, it is likely to use a combination of debt and cash. Using recent transactions as a guide, analysts say Sanofi can expect to pay at least a 20% premium to Bristol-Myers' current value of $54 billion.

No question, snagging Bristol would be a huge victory for Sanofi's Chairman Jean-Francois Dehecq. The veteran dealmaker, who negotiated the takeover of Germany's Aventis three years ago, is due to retire at the end of 2009. And for the ambitious Dehecq, the lure of becoming the world's No. 1 might just prove too strong to ignore.

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