Sanofi, Genzyme in ‘Game of Chicken’ as No Rivals Bid

Sanofi-Aventis SA is unlikely to raise its takeover offer for Genzyme Corp. or make a hostile approach as manufacturing concerns linger and competing bidders have failed to emerge, analysts and investors said.

Genzyme said this week it may take as long as four years to make production changes U.S. regulators required after contamination caused drug shortages. With fixes ongoing and future medicine sales uncertain, Sanofi probably won’t have to pay more than $70 a share for Genzyme, said Marc Booty, an investment manager at Pictet Asset Management Ltd.

“Without a competing bid what’s there to drive the price up? It’s a game of chicken,” said Booty, who helps oversee more than $100 billion, including Sanofi shares, in an Aug. 10 interview. “No one wants to be the one holding Genzyme stock when it was down near $50, reaches near $70 and then goes down to $50 again, which would happen if Sanofi walked away.”

Genzyme agreed in May to pay a $175 million penalty after the Food and Drug Administration found quality deficiencies at its Allston Landing plant. The company may face added fines of about $130 million if it fails to meet FDA deadlines for moving bottling and finishing to other facilities, as well as daily fees of $15,000 for each drug made in Allston if the company misses any of its remediation goals, said Michael Leuchten, an analyst at Barclays Capital.

‘Moving Parts’

“While these obstacles are not insurmountable, with a number of moving parts it is very unlikely that Sanofi would pursue a hostile approach, blindly assuming all the risk,” Leuchten said in an Aug. 11 research report. “The company needs access to the books, manufacturing plants and correspondence with the FDA to do the appropriate due diligence.”

Genzyme fell 66 cents to $66.16 at 4 p.m. in Nasdaq Stock Market composite trading, giving the company a market value of about $16.9 billion. The shares have climbed 22 percent since July 22, the last day of trading before Sanofi’s buyout interest was reported. Sanofi fell 13 cents to 45.32 euros in Paris trading.

Sanofi, based in Paris, offered $67 a share to $70 a share, or as much as $17.8 billion, in a letter to Cambridge, Massachusetts-based Genzyme’s board, one person familiar with the buyout process said. Genzyme’s shareholders are looking for a bid of more than $80 per share, or $20.4 billion, two people said. The people requested anonymity because talks are private.

Jean-Marc Podvin, a spokesman for Sanofi, and Genzyme spokesman John Lacey declined to comment.

Sanofi Acquisitions

Sanofi has spent about $17 billion on 25 acquisitions since Chief Executive Officer Chris Viehbacher joined the company in 2008, according to data compiled by Bloomberg. Viehbacher is looking for new products as generic versions of blood-thinners Lovenox and Plavix hurt sales and drugs accounting for more than 20 percent of revenue face competition by 2013. The revenue decline may work in Genzyme’s favor, said Sven Borho, a partner with OrbiMed Advisors in New York.

“If Sanofi listens to shareholders saying, ‘Don’t overpay,’ I can wait,” Borho said in an Aug. 4 interview. OrbiMed holds about 2.5 million Genzyme shares. “Genzyme is not in a weakened state, where they have to sell and they have no choice. It’s just the other way around.”

Genzyme’s products are less likely to face generic competitors because the treatments, made from living cells, are harder to copy than traditional pills made from chemical compounds. The therapies are designated as orphan drugs by the FDA because they are for diseases without other treatment options, giving them added patent protection.

Orphan Drugs

The orphan drugs may help justify Genzyme’s push for $80-a-share in a sale, said Salveen Richter, an analyst with Collins Stewart LLC, in an Aug. 4 telephone interview.

Manufacturing setbacks in biotechnology companies are often risky and “good examples of why companies should not pay any price to get these assets,” said Jeff Holford, an analyst with Jefferies International, in an Aug. 10 interview. He cited Novartis AG’s 2006 acquisition of Chiron Corp., where he said manufacturing glitches took longer than expected to resolve.

Novartis, which already held a stake in Chiron, increased its offer twice to appease Chiron shareholders before paying about $5.3 billion for the biotechnology company in 2006. Chiron had been recovering from a plant contamination that led it to pull its flu vaccine off the market in 2004.

Timeline Change

Genzyme in May projected fixes would take about two to three years. Any change in the timeline won’t have a material impact on drug supplies, Ron Branning, Genzyme’s senior vice president of global product quality, said in an Aug. 10 telephone interview.

Gaucher treatment Cerezyme is Genzyme’s best seller with $793 million in sales last year. Fabry disease drug Fabrazyme had $429.7 million in 2009. The drugs, which can cost $250,000 or more a year in the U.S., treat rare diseases in which patients lack enzymes needed for critical bodily functions.

Genzyme has switched some operations from Allston Landing to its facility in Waterford, Ireland, and signed an agreement with Hospira Worldwide Inc. to provide bottle-filling and finishing services for certain medicines, Genzyme said in a July 21 statement. Supplies of Cerezyme and Fabrazyme have been rationed and remain insufficient to meet patient demand.

“As an analyst of Sanofi, I don’t yet understand how market share will pan out on these drugs,” said Holford, who recommends buying Sanofi shares. “How much will they lose? Will there be a change in pricing? These are all things that will affect the net present value of what Genzyme is worth.”

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