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Sanofi Nabs Genzyme

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Sanofi puts the risk of an experimental multiple sclerosis drug in the hands of investors.

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After holding out months for a better deal, Genzyme (GENZ) agreed to sell to Sanofi-Aventis (SNY) for about $20 billion, or $74 a share, in cash and a separately traded security that may pay investors more based on the success of an experimental multiple sclerosis drug.

The milestone payment is unusual for a transaction of such size and reduces Sanofi's risk if Genzyme's experimental drug Lemtrada is a bust. In addition to cash, Genzyme investors get a tradable security, called a contingent value right or CVR, for each share they own.

These CVRs will trade on the Nasdaq and may increase in value largely based on the success of Lemtrada. Think of it as a mini stock that tracks the potential success or failure of one drug. In other words, Sanofi is letting investors decide, putting the risk of that one experimental product into Genzyme shareholders' hands. The model could be used by future pharma and biotech acquirers as they try to build their product lineups.

"Part of the new future business model of these large pharmaceutical companies is diversifying risk," says Christopher Bowe, US health care analyst for Informa-Scrip Intelligence.

The MS market is competitive and it's not clear that Genzyme has the best product going forward, he says.

Sanofi's move isn't completely unprecedented. Celgene (CELG) created a CVR for its $2.9 billion takeover of Abraxis BioScience in October. That security (CELGZ) trades at half its original market value, about $2.55 a share Wednesday morning.

If Lemtrada is everything Genzyme CEO Henri Termeer says it will be: Sanofi will add $14 in payments to the CVRs over the next nine years. However, that means not only must Lemtrada be approved for sale and commercially successful, it has to reach $2.8 billion in annual sales.

Shares of Genzyme rose to $75.40 in morning trading, showing that investors aren't putting a high value on the worth of those CVRs. The US shares of Paris-based Sanofi rose almost 2% to $35.01.

Given the lack of other bidders, $74 a share and the added milestones is a good deal for Genzyme shareholders, says Karen Andersen, senior biotech analyst for Morningstar.

She earlier predicted Genzyme would fetch $78 a share if other potential buyers stepped up. Of course, that didn't happen.

Termeer spurned Sanofi's initial $69 a share offer in October, saying it was much too low and didn't recognize the enormous value in Lemtrada.

Sanofi CEO Chris Viehbacher called Termeer's bluff on the MS drug.

If Termeer is right and Lemtrada is the multi-billion dollar drug as promised, Viehbacher said he'll "bring the check personally (to Termeer) with his favorite wine to accompany it."

Termeer won't have a job in the acquired company.

In the biotech world, big drug companies strike deals with small developmental-stage companies all the time. Big payouts are promised based on future potential. But Genzyme is a massive biotech company, one of the biggest. It grew selling treatments that costs hundreds of thousands of dollars a year to treat ultra-rare conditions such as Fabry and Gaucher diseases.

But two years of manufacturing problems hurt sales and badly damaged Genzyme's reputation. The Food and Drug Administration slapped the company with $175 million in penalties and ordered Genzyme to clean up its problems. At one plant, government inspectors found drugs contaminated with metal, fiber, rubber and glass particles.

Genzyme's incompetence allowed Irish drug maker Shire (SHGP) to enter the US market and sell a competing drug for Gaucher disease.

Pfizer (PFE) and Israeli drug maker Protalix Biotherapeutics (PLX) are expecting word from the FDA this month on another treatment for Gaucher that would compete with Genzyme's Cerezyme.

Now, Genzyme's problems are Sanofi's. But the company mitigated its risk in one area.


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