Analysis: How Sanofi could raise bid for Genzyme, save face

By Toni Clarke

BOSTON (BestGrowthStock) – French drugmaker Sanofi-Aventis SA (SASY.PA: ) needs an excuse to increase its bid for the U.S. biotech company Genzyme Corp (GENZ.O: ), and it may be about to get one.

On Friday, Genzyme will meet investors in New York to argue its case for rejecting Sanofi’s $18.5 billion tender offer.

At the meeting it will provide an earnings forecast for 2011. If that forecast is higher than analysts are expecting, Sanofi could raise its bid while keeping the multiple in the same range as its current, $69-a-share offer.

“The struggle for Sanofi is to save face with its own shareholders,” said Sven Borho, portfolio manager at Genzyme shareholder OrbiMed Advisors. “At some point they are going to have to raise their offer. If they don’t go to $75 or so I doubt anyone will tender their shares.”

Sanofi has indicated it is willing in principle to pay more for Genzyme, but only if it can see proof of a higher value. Genzyme, in turn, has said it will not negotiate unless Sanofi increases its bid.

Sanofi’s tender offer, which expires December 10, is designed to put pressure on Genzyme to negotiate. But Genzyme’s shares are currently trading north or $72, suggesting that those shareholders who have not sold out are likely to hold firm for a higher offer.

Analysts polled by Thomson Reuters I/B/E/S on average expect the company to earn $3.69 a share in 2011 on revenue of $5.21 billion. On that basis, Sanofi’s offer implies a multiple of about 19 times earnings and 3.5 times sales.

“If Genzyme shows strong earnings expectations for 2011, this could allow Sanofi to raise its bid without raising the earnings multiple implicit in the offer, which is a sensitive number for some skeptics of the deal,” said Karen Andersen, an analyst at Morningstar, who expects Genzyme to report 2011 earnings of $2.79 a share.

Genzyme, which makes drugs for rare and chronic diseases, was forced last year to temporarily close its plant in Boston due to a manufacturing crisis, leading to a shortage of two of its biggest products. It has said it is on the road to recovery and it will attempt to give further evidence of that on Friday.

On Wednesday, the company will report its third-quarter financial results. Analysts are on average expecting earnings of 53 cents a share. They are expecting revenue of $1.09 billion, up from $1.06 billion a year ago..

For the full year, analysts are expecting earnings of $1.95 a share and revenue of $4.49 billion.

Still, Mark Schoenebaum, an analyst at ISI Group, said that Genzyme has a relatively weak track record in reaching its own forecast, and that investors will likely take the 2011 projections with a “healthy dose of skepticism.”

“I personally don’t think bullish guidance will do much for the stock or affect the deal terms in any material way,” he said.

As important as the company’s outlook will be any additional reasoning it can supply on why its pipeline of experimental drugs — particularly Campath for multiple sclerosis — should be given a higher value than implied in Sanofi’s offer.

Sanofi has penciled in estimated peak sales of Campath of around $700 million. Genzyme has not given its own estimate, but it has said it expects to gain a significant share of a market it estimates will be worth $13 billion by the end of this year.

Independent market research group BioMedTracker predicts Campath sales will reach $1.6 billion by 2019, and some analysts see sales reaching nearly $2 billion.

Campath appears to be more efficacious than any MS drug on the market, but it carries the risk of some serious side effects, including immune thrombocytopenic purpura, an autoimmune disease in which low blood platelet levels can lead to bleeding, and Goodpasture syndrome, a rare disease that can quickly cause kidney failure.

Though episodes of the disorders were rare in clinical trials, and can be treated if caught early, some experts believe its use will be reserved for patients with the most severe disease — especially given the recent approval of the first oral MS pill, Gilenya, from Novartis AG (NOVN.VX: ).

“There is a primitive bias that people have for oral medications,” said Harry Tracy, publisher of NeuroInvestment, a monthly publication that specializes in central nervous system disorders. “The Campath numbers are impressive, but the story would be so much more compelling if it were not for Gilenya.”

As part of its effort to explain its value, Genzyme will also outline the progress it has made in executing on a five-point plan it outlined in May to increase shareholder value.

The plan includes the sale of assets not central to its core business; maximizing the potential of products in its pipeline; balancing revenue and earnings growth with cash flow return on investment; improving operating margins; and implementing a $2 billion share buyback — which is expected to be completed by May.

(Reporting by Toni Clarke; Editing by Bernard Orr)

Analysis: How Sanofi could raise bid for Genzyme, save face