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Aventis - Sanofi - Novartis love triangle heats up


Love is in ze air, mon chere

Novartis (NVS:NYSE) confirmed today it would make a bid for Aventis (AVE:NYSE), possibly by the end of April. This surprised people who believed Novartis had not yet received an "all-clear" from French officials -- something Novartis said was a requirement before they made a deal. French President Chirac said in early February his government would remain neutral, but almost none of his ministers have followed suit. The French clearly want Sanofi (SNY:NYSE) to close the deal for Aventis.

If Novartis indeed enters the fray wholeheartedly, they will win as they have far more resources than Sanofi. A Novartis/Aventis pairing will create the world's second largest pharma company behind Pfizer (PFE:NYSE).

This deal process is going to have a number of unintended and potentially far-reaching consequences:

Sanofi in play

A successful Novartis bid will likely mean Sanofi is in play. Sanofi's large investors pushed the Aventis bid, reportedly by telling management to get bigger or sell out. If the French government does not stand in the way of the Aventis deal, other companies will assume they will not stand in the way of a deal to acquire Sanofi.

Partnering negotiations

As previously mentioned, this whole love triangle will delay partnership negotiations -- a key driver of small biotech valuations. This will be especially true for companies negotiating deals for oncology drugs since Aventis is a major player in that space and Novartis is trying to play catch-up.

The ability to partner drugs is the lifeblood of small biotech companies. Phase III trials and creating marketing/promotion/sales efforts are expenses beyond the reach of most small biotechs so they like to partner their drugs before these events begin in earnest.

The wild card here is the emergence of the biopharmaceutical companies (particularly Amgen (AMGN:NASD) and Genentech (DNA:NYSE)) as self-avowed partners of choice. Genentech, in particular, has said it wants to be a giant in oncology. Both companies are actively seeking deals and have plenty of cash on hand to make them happen.

While nothing beats the global reach and experience of a big pharma company, partnering with a biopharma company has its advantages. First, these companies are likely to bid more to make up for their relative lack of global reach and regulatory experience. Second, since these companies have far fewer products on the market than a big pharma, it is much less likely a small biotech's product will get lost in the shuffle. Finally, these companies are closer in structure and culture to a small biotech than a big pharma so the culture shock involved in a close relationship would not be as great.

This last point is also a drawback, of course. Nearly every small biotech executive has a goal of becoming a big biotech. Partnering with a biopharma company would almost feel like partnering with a competitor.

On the small biotech side, companies possessing very late-stage products with the cleanest clinical track records will benefit the most. Biopharma will want to make a splash with a top deal valuation, so they will want to make sure that splash works out by picking something as close to a sure winner as possible.

Power shift

I expect smart biopharmaceutical companies to aggressively make hay while two of the top big pharma partner choices are wrapped up in this love triangle. If biopharma acts quickly and decisively, they could skim the Daisy-deals out of the herd of late-stage, unpartnered drugs and propel themselves in a very short amount of time into the ranks of true pharmaceutical companies.

Of the three companies in the love triangle, Aventis and Sanofi are likely to be at the biggest disadvantage. Aventis cannot do anything that might make it less attractive to Novartis - either by adding a competitive drug or mucking up its financials. Sanofi can't do anything period because it will need every last drop of resources if it expects to win a duel with Novartis.

This is an interesting inflection point in biotechnology that I guarantee has captured the attention of any biotech company seeking to partner a drug. How it plays out - and how biopharma companies react to the opportunity - may affect the entire biotech and pharmaceutical space for some time.
No positions in stocks mentioned.

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