Sanofi's Viehbacher Secures Genzyme Growth With Hard Line Offer

Sanofi Viehbacher Secures Genzyme Growth
Chris Viehbacher, chief executive officer of Sanofi-Aventis SA. Photographer: Michael Fein/Bloomberg

When Chris Viehbacher, the chief executive of Paris-based drugmaker Sanofi-Aventis SA, was trying to keep details of his unsolicited bid last year for Genzyme Corp. under wraps, he couldn’t resist drawing on his beloved Bordeaux.

“I really like French wines,” the 50-year-old German-Canadian said yesterday after sealing his sometimes rancorous nine-month pursuit of Cambridge, Massachusetts-based Genzyme, an acquisition valued at $20.1 billion.

“We had to have a code name. It was largely around P for Paris and M for Massachusetts, so we said Petrus for us and Margaux for them,” he said in an interview. “The project was Grand Cru. I couldn’t find a good wine that started with a G.”

Buying the world’s largest maker of biotech drugs for inherited diseases marks the 29th and largest deal since Viehbacher joined Sanofi in December 2008. In little more than two years, he has added everything from Gold Bond medicated powder to Chinese cough remedies and an Indian vaccine maker as part of his plan to broaden the company’s revenue base. That’s critical as Sanofi’s best-selling pharmaceuticals, including its blockbuster blood thinner Plavix, face generic competition.

“Genzyme is a huge achievement for Chris Viehbacher,” said Lionel Melka, co-manager of Paris-based Bernheim, Dreyfus & Co.’s Diva Synergy Fund. “It turns the company from being a value stock into a growth stock.”

Shot in Arm?

The question remains whether the long list of businesses Sanofi has amassed will provide the shot in the arm Sanofi was looking for when it hired Viehbacher, who months earlier had lost out in a three-way competition for the top job at London-based GlaxoSmithKline Plc. His task now is to meld these disparate operations into a coherent whole to produce years of growth.

Viehbacher’s resume suggests he may be able to pull it off. At Glaxo, he played a critical role in the company’s successful integration with rival SmithKline. At the same time, all the skill he has brought to bear to acquire companies for Sanofi hasn’t always yielded pay dirt. Ten weeks into the job he personally oversaw the courtship of BiPar Sciences Inc., a fledgling biotech with an innovative approach to cancer. Yet, last month, BiPar’s flagship drug failed in a study to benefit patients.

“The toughest part has yet to begin for Viehbacher,” Frederic Aubel, a sales trader at Global Equities in Paris, said in a telephone interview. “He will have to deliver now and make sure that the $20 billion he put on the table becomes profitable for Sanofi. It won’t happen overnight.”

Gold Bond

Sanofi has returned 32 percent including reinvested dividends since Viehbacher became CEO, outpacing the 28 percent return in the Bloomberg Europe Pharmaceutical Index. Sanofi’s consumer-health sales jumped 46 percent last year, most notably because of the $1.9 billion purchase of Chattem Inc., the maker of Gold Bond. The company’s generic-drug business has also risen 42 percent following the purchases of Medley SA and Zentiva NV in 2009.

Yet investors place a lower valuation on the French company than on almost any large drugmaker, reflecting skepticism that Viehbacher’s buying spree will pay off as advertised. Sanofi yesterday rose 1.75 euros, or 3.5 percent, to 51.55 euros in Paris. The shares have climbed 19 percent since Viehbacher became CEO.

“Viehbacher must rebuild Sanofi but he also needs to help the company find once again the profile of a growth stock, like the Sanofi we knew in the past,” said Jerome Forneris, who helps manage $12 billion, including Sanofi shares, at Banque Martin Maurel in Marseille. “This is the challenge for Viehbacher, finding strong growth once again.”

Want a Dividend

Sanofi itself was created through the merger of more than five different companies, including the German chemical maker Hoechst AG. Viehbacher acknowledges that he will be measured by how well he can combine the new operations into a top-tier performer.

“People want a dividend at the end of the year, they want a higher share price, and employees want an increase in pay,” he said in an interview yesterday. “You can’t do that unless you have a company that’s growing. And it has to be sustained growth.”

Viehbacher took over a company that had failed to develop enough drugs to replace those losing patent protection. In 2007, U.S. regulators rejected Sanofi’s once-heralded obesity pill, Acomplia. When the Multaq heart medicine won the backing of the Food and Drug Administration in 2009, it was the company’s first major U.S. approval in seven years. The result of the drought: Sanofi’s sales and profit in 2013 and before before the Genzyme acquisition will be the same as they were in 2008, the company has forecast.

‘Cheap Debt’

Viehbacher began pursuing Genzyme last year. At the time, Sanofi had decided it was a good time to make a larger acquisition than it had completed until then because “debt was cheap,” Viehbacher said. In addition, Genzyme, which reached a high of $83.25 in August 2008, fell to $47.16 last June after manufacturing snags cut into sales of its biggest products following a 2009 virus contamination at a factory in Allston, Massachusetts.

Sanofi also wanted to avoid getting into a bidding war. As Sanofi’s competitors appeared to be “tied up with other things,” Viehbacher said, “we weren’t surprised when no other bidder showed up.”

Genzyme was also appealing because it would bootstrap Sanofi into biotechnology, an area in which the French company was weak, as well as provide a research presence in the U.S. to attract scientists there. Viehbacher said that by early last year the company had five targets on its list and that, finally, “Genzyme kind of came up at the top.”

Approached Termeer

In a May 23 conversation, according to a Sanofi filing last year with the U.S. Securities and Exchange Commission, Viehbacher approached Henri Termeer, Genzyme’s 64-year-old chief executive, about a bid. Termeer, who built Genzyme beginning in 1983 by developing treatments for rare diseases other companies ignored, rebuffed Viehbacher’s unsolicited offer for months. In a regulatory filing, he described the $69 offer as “an opportunistic proposal with an unrealistic starting price that dramatically undervalues” the company.

Still, Termeer had few bargaining options, and Viehbacher refused to raise the offer. When no other buyers surfaced, Viehbacher waited as pressure from Genzyme shareholders built.

“Viehbacher played better poker than Termeer,” said Erik Gordon, who teaches at the University of Michigan’s Ross School of Business in Ann Arbor.

Cell Phone Calls

It wouldn’t be the first time Viehbacher would need to use his personal skills. A year earlier, Viehbacher phoned Hoyoung Huh, the CEO of BiPar, the South San Francisco-based cancer biotech company. Viehbacher asked Huh, who was getting on a flight to Geneva, to drop by for a chat, lunch and some “good French wine,” Huh recalled in an interview. Viehbacher explained he was trying to transform Sanofi and persuaded Huh to consider the French drugmaker as a potential buyer, as there were other suitors.

“He called on my cell phone on a weekly basis” over the next few months, Huh said. “He would call as he was walking his dog and I was at soccer with my kids, just to make sure our teams weren’t getting bogged down in the deal mechanics.”

It took until Sept. 20 to get the Dutch-born Termeer to sit down and discuss the offer. The tension between the two parties is apparent from U.S. Securities and Exchange Commission filings that detail conflicting accounts of the talks.

In its filing, Genzyme says that Viehbacher indicated the company might be willing to raise the bid to as much as $80 if Termeer named a price at which bargaining could begin. Termeer refused, according to the document, even though Viehbacher said doing so might cause him to make a hostile tender offer.

Tender Offer

After the filing was made public in October, Sanofi spokesman Jean-Marc Podvin said no such price was mentioned and that Sanofi “strongly disagreed with Genzyme’s characterization of the meeting.”

Two weeks later after beginning the tender offer, Viehbacher said in a Bloomberg Television interview, “I’m not going to bid against myself” to explain his unwillingness to raise the bid. Viehbacher also told advisers he wouldn’t budge until he was able to look over Genzyme’s books, according to two people familiar with the discussion.

By last month it was clear that Viehbacher had convinced Genzyme holders and that even Termeer was resigned to the deal. Both men attended the J.P. Morgan Healthcare Conference in San Francisco, where it was clear a resolution was being worked out.

‘Not a War’

“This is not a war,” Termeer said in a Jan. 11 interview at the conference. At the beginning, “it was a little bit tense. But it never deteriorated; it actually improved. We found a way to talk.”

The previous day both companies said their financial advisers and other representatives from both firms had met to discuss a contingent value right plan, or CVR, related to milestones for Genzyme’s multiple sclerosis drug.

The men met when they were both attending the World Economic Forum in Davos, Switzerland, the last week of January. At the meeting, they discussed a way to raise the offer. All along Termeer argued that Sanofi’s bid didn’t account for the potential of Genzyme’s most promising product, the multiple sclerosis drug called Lemtrada.

To value the drug, while also hedging his bet, Viehbacher suggested attaching a contingent value right, or CVR, to the offer that would rise in value if the drug reached certain milestones. At a mountainside hotel at the Swiss ski resort the CEOs discussed the CVR over a glass of scotch.

Favorite Wine

The final agreement, which came together in the past few days, will give Genzyme holders one contingent value right per share that may ultimately be worth $14 if Lemtrada reaches $2.8 billion in sales.

The solution let Viehbacher win Genzyme, without having to pay up unless the drug’s promise is proved. Viehbacher says he will gladly pay if that happens.

“I told Henri that if we have to pay the last milestone, I’ll bring him the check personally and with his favorite wine to accompany that,” Viehbacher told analysts yesterday.

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