Genzyme (GENZ) shares, which already jumped 15.4% Friday on reports that Sanofi-Aventis (SNY) approached the biotech to pursue a possible acquisition, continued to soar Monday, adding another 7.77% to close at $67.38. Genzyme rebuffed last week's takeover approach, according to Bloomberg, which cited two sources. The "informal approach," as the Wall Street Journal put it, did not involve price discussion.
The Cambridge, Mass., biotechnology company specializes in creating drugs for rare diseases. It's a small, but highly lucrative market. The Orphan Drug Act gives the company tax credits and enhanced patent protection, which help its drugs to become blockbusters.
Genzyme Runs into Trouble
In early 2009, the company ran into trouble when it had to temporarily shut down its Allston Landing, Mass., plant after viral contamination was discovered. The situation hasn't improved and in March, the Food and Drug Administration took enforcement action -- including a fine -- to ensure that production complies with regulations. The ailing plant manufactures Cerezyme (Genzyme's top-selling drug) and Fabrazyme, a treatment for Fabry disease. As production of these two blockbusters slowed, Genzyme's sales and profits plunged.
Meanwhile, activist investor Carl Icahn has been trying to gain more control of the company. He recently asked the board to remove CEO Henry Termeer from his position as Chairman and appoint four seats to his nominees. He has settled for two seats. Ralph Whitworth, another activist investor, also sits on the board. Icahn will likely push for a sale if past actions are any indication.
Termeer, however, said in a recent interview with Bloomberg that the company wasn't for sale and that he plans to concentrate on its manufacturing problems. A Genzyme spokesperson told DailyFinance the company does not comment on rumors.
Sanofi-Aventis Has Problems of Its Own
For its part, French pharmaceutical firm Sanofi-Aventis needs help replacing lost revenue. Five of its eight best-selling drugs will lose patent protection and face generic competition by 2012. Case in point, Sanofi cut outlook Friday after the FDA approved a generic version of its Lovenox blood thinner -- a $3.91 billion seller last year. Buying Genzyme would help Sanofi overcome its patent cliff problem and boost its weak biotech division. Sanofi-Aventis did not immediately respond to inquiries from DailyFinance.
Last year, Sanofi acquired Merck's (MRK) stake in Merial for $4 billion. It also bought Chattem for $1.9 billion. In all, Sanofi has spent about $17 billion on 25 acquisitions since CEO Viehbacher joined the company in 2008, according to Bloomberg.
And according to reports from the beginning of the month, Sanofi was preparing a major acquisition in the U.S. worth $20 billion or more. Among the companies mentioned were also Allergan (AGN) and Biogen Idec (BIIB). Those companies have market values of $18.7 billion and $13.6 billion, respectively. Genzyme's current market cap is just shy of $18 billion.
The Right Price
Considering the potential revenue once Genzyme fixes its manufacturing problems and introduces new medicines such as the recently approved Lumizyme, it can command at least $22 billion, or $80 a share, according to analysts and investors -- a 48% premium over its closing price Thursday. With some analysts expecting revenue to surge by nearly half, $20 billion seems to be the minimum price.
Paying 4.5 times 's sales, which were $4.5 billion last year, isn't too steep a price in pharma and biotech acquisitions. Roche (RHHBY) paid 6.5 times sales for Genentech. On a per share basis, this all comes to about $78.
And if other bidders join in, Sanofi may have no choice and pay up. GlaxoSmithKline (GSK) recently made a very casual approach to Genzyme, the WSJ reported, citing Johnson & Johnson (JNJ) as another potential suitor. If it can't, or won't join the fray, Sanofi may set its sights on other opportunities.
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