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Sanofi Tracking Stock Drops on Genzyme MS Drug

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Study data doesn't support contention that Lemtrada will take market from other treatments.

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At the heart of the standoff over Sanofi's (SNY) $20 billion takeover of Genzyme was the value of a multiple sclerosis drug.

Genzyme argued that the drug Lemtrada's market potential was not being recognized in Sanofi's offering price. After months of back and forth, the two sides agreed on a compromise: a tracking stock that allowed investors to make an individual bet on the MS drug. If the drug met milestones, Sanofi would increase the value of the stock. (See Sanofi Nabs Genzyme.)

This morning, investors are dumping Sanofi's tracking stock (also known as contingent value right or CVR) on study results of Lemtrada. While the drug appears to work better than an older treatment, Pfizer (PFE) and EMD Serono's Rebif, the data doesn't support the contention that Genzyme has a drug that can compete with more recently approved medicines made by Novartis (NVS) and Biogen Idec (BIIB).

RBC Capital Markets analyst Michael Yee predicts Lemtrada will be approved in the US but he considers it as "a last-line agent" to treat MS. In other words, other drugs will be used before doctors prescribe Lemtrada, which means sales will be limited. Novartis' oral MS drug Gilenya and Biogen's injectable Tysabri will be prescribed before Lemtrada, Yee says. Lemtrada is an injectable drug.

"Feedback from docs is that (Lemtrada) may be best for aggressive disease but long-term safety will be a concern," Yee says.

The CVR stock, which trades on Nasdaq as GCVRZ, is down 10% to $2.28 in midday trading Monday. The stock is down almost 3% since it began trading in April.

It would be a stretch to say that Sanofi is a clear winner here. After all, Lemtrada is the French drug maker's product now. But it's clear why company execs crafted a deal that reduced its risk on that particular product. Had Sanofi paid Genzyme's original asking price, it would look foolish now. Instead, the company put some of the risk of the acquisition in the hands of shareholders who chose to hang on to the tracking stock.

Sanofi said it would add up to $14 a share in Lemtrada gets approved and becomes a blockbuster drug. But the drug needs to reach $2.8 billion in annual sales for Sanofi to pay out that full amount.

Celgene (CELG) created a similar CVR stock when it acquired Abraxis BioScience in October for $2.9 billion. That tracking stock (CELGZ) is down 69% since it starting trading and was $1.71 midday Monday.

Don't be surprised if more big drug companies include -- or try to negotiate -- CVRs in their takeovers of smaller rivals.


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