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How Genzyme's Hardball Could Backfire


As Genzyme tries to fend off a hostile bid from Sanofi-Aventis, it projects revenue that one analyst says is overly optimistic.

Genzyme (GENZ) is trying to build the case that its financial outlook is far better than hostile suitor Sanofi-Aventis (SNY) acknowledges with its $69 a share offer.

But after the Cambridge, Massachusetts-based biotech company raised profit and sales estimates Friday, at least one analyst is calling its bluff.

Genzyme execs, now dealing with serious manufacturing issues that led to a shortage of drugs that treat rare diseases, promise a much better financial picture with a revenue target of up to $7.5 billion by 2013.

However, analyst Christopher Raymond of Robert W. Baird doesn't see revenue higher than $5.8 billion.

What's more, Raymond sees a risk that Sanofi will walk away from the deal. Investors already bid up the shares above the buyout price ($72.40 in midday trading) but no other company has shown an interest in making an offer for Genzyme. Sanofi's CEO Christopher Viehbacher says he won't bid against himself. The unsolicited offer is now valued at about $18.5 billion.

Genzyme has been dragged down by manufacturing problems of its drugs for rare conditions and some analysts don't see Genzyme recovering. Raymond, for one, thinks there is permanent damage to the company's two biggest sellers, Cerezyme for Gaucher disease and Fabrazyme for Fabry disease. With Genzyme's production problems, Irish drug maker Shire (SHPGY) was allowed to swoop in and steal sales. Those losses may be irreversible, Raymond says.

One thing that would drive overall sales is the potential for an experimental drug in human studies for multiple sclerosis -- alemtuzumab -- getting approved for the US market, according to Genzyme. The company estimates the MS drug may add as much as $600 million in annual revenue by 2013.

"Our board is unanimous in its view that the Sanofi-Aventis offer does not approach the real value of the company, nor does it reflect our financial recovery, the achievement of manufacturing and product-supply milestones, and the increasingly recognized commercial potential for alemtuzumab," Genzyme CEO Henri A. Termeer says in a statement.

But Raymond counters in a note, "Even presupposing an alemtuzumab/MS homerun, we cannot get to (Genzyme's) 2013 revenue estimate."

Genzyme historically has had a captive audience that would pay large sums for its medicines. As noted in a New York Times story earlier this year, Genzyme has a close relationship with its patients. There are fewer than 2,500 Americans with Gaucher or Fabry but they were willing to pay the huge premium on the drugs ($200,000 a year for treatment), the Times reports. Many of those people felt betrayed by the company, according to the article. The problems began in June 2009, when Genzyme had to shut down a main factory because of a contamination issue.

For the first nine months of this year, Genzyme reports a loss of almost $50 million, or 19 cents a share, on revenue of $2.9 billion. For the first nine months of 2009, the company had net income of $399 million, or $1.48 a share on sales of more than $3 billion.

Investors are bidding up Genzyme's stock on the hope of a higher bid from Sanofi. As bearish as he is on the stock, even Raymond sees a potential mid-$70s offer from Sanofi. But there is a risk that Sanofi will walk away if there's an extended Genzyme holdout.

"With (Genzyme) shares already in the low-$70s, while a few dollars of upside remains possible, we continue to think downside risk (should Sanofi walk) outweighs any such potential," Raymond says. "Remain cautious here."

The analyst is on the lower side of estimates on a buyout price. Some see the winning bid in the low $80s. But, then again, sometimes it's good to listen to that contrarian voice.

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