Genzyme manufactures “orphan drugs” that target rare genetic diseases. In July 2010, Sanofi-aventis offered to acquire Genzyme at $69 a share. Genzyme’s board rejected the offer and sought $75 a share. Sanofi and Genzyme disagreed about the future sales of Genzyme’s new drug, Lemtrada, a treatment for multiple sclerosis. Eventually, in February

2011, Genzyme accepted a revised offer of $74 per share in cash plus a contingent value right (CVR) worth up to $14 per share depending on the sales of Lemtrada and other milestones. (Sources: “Sanofi steps up Genzyme pursuit,” Financial Times, August 29, 2010; Genzyme Corporation media release, “Sanofi-aventis to Acquire Genzyme for $74.00 in cash per share plus contingent value right,” February 16, 2011.)

(a) Explain the asymmetry of information between Sanofi and Genzyme.

(b) How could the CVR resolve the asymmetry of information? Compare Sanofi’s valuation of the CVR with Genzyme’s valuation.

(c) Could the asymmetry be resolved directly by Sanofi inspecting Genzyme’s accounts and facilities?