Sanofi Acquires Genzyme in a Test of Wills

Key Points Contingent value rights help bridge price differences between buyers and sellers when the targets future earnings performance is dependent on the realization of a specific event. They are most appropriate when the target firm is a large publicly traded firm with numerous shareholders.

Facing a patent expiration precipice in 2015, big pharmaceutical companies have been scrambling to find new sources of revenue to offset probable revenue losses as many of their most popular drugs lose patent protection. Generic drug companies are expected to make replacement drugs and sell them at a much lower price.

Focusing on the biotechnology market, French-based drug company Sanofi-Aventis SA (Sanofi) announced on February 17, 2011, the takeover of U.S.-based Genzyme Corp. (Genzyme) for $74 per share, or $20.1 billion in cash, plus a contingent value right (CVR). The CVR could add as much as $14 a share or another $3.8 billion, to the purchase price if Genzyme is able to achieve certain performance targets. According to the terms of the agreement, Genzyme will retain its name and operate as a separate unit focusing on rare diseases, an area in which Genzyme has excelled. The purchase price represented a 48% premium over Genzymes share price of $50 per share immediately preceding the announcement. The acquisition represented the end of a nine-month effort that began on May 23, 2010, when Sanofi CEO Chris Viehbacher first approached Genzymes Henri Termeer, the firms founder, and CEO. Sanofi expressed interest in Genzyme at a time when a debt was cheap and when Genzymes share price was depressed, having fallen from a 2008 peak of $83.25 to $47.16 in June 2010. Genzymes depressed share price reflected manufacturing problems that had lowered sales of its best-selling products. Genzyme continued to recover from the manufacturing challenges that had temporarily shut down operations at its main site in 2009. The plant is the sole source of Genzymes top-selling products, Gauchers disease treatment Cerezyme and Fabry disease drug Fabrazyme. Both were in short supply throughout 2010 due to the plants shutdown. By yearend, the supply shortages were less acute. Sanofi was convinced that other potential bidders were too occupied with integrating recent deals to enter into a bidding war.

In an effort to get Genzyme to engage in discussions and to permit Sanofi to perform due diligence, Sanofi submitted a formal bid of $69 per share on July 29, 2010. However, Sanofi continued to ignore the unsolicited offer. The offer was 38% above Genzymes price on July 1, 2010, when investors began to speculate that Genzyme was in play. Sanofi was betting that the Genzyme shareholders would accept the offer rather than risk seeing their shares fall to $50. The shares, however, traded sharply higher at $70.49 per share, signaling that investors were expecting Sanofi to have to increase its bid. Viehbacher said he might increase the bid if Genzyme would be willing to disclose more information about the firms ongoing manufacturing problems and the promising new market potential for its multiple sclerosis drug.

In a letter made public on August 29, 2010, Sanofi indicated that it had been trying to engage Genzyme in acquisition talks for months and that its formal bid had been rejected by Genzyme without any further discussion on August 11, 2010. The letter concludes with a thinly disguised threat that all alternatives to complete the transaction would be considered and that Sanofi is confident that Genzyme shareholders will support the proposal. In responding to the public disclosure of the letter, the Genzyme board said it was not prepared to engage in merger negotiations with Sanofi based on an opportunistic proposal with an unrealistic starting price that dramatically undervalued the company. Termeer said publicly that the firm was worth at least $80 per share. He based this value on the improvement in the firms manufacturing operations and the revenue potential of Lemtrada, Genzymes experimental treatment for multiple sclerosis, which once approved for sale by the FDA was projected by Genzyme to generate billions of dollars annually. Despite Genzymes refusal to participate in takeover discussions, Sanofi declined to raise its initial offer in view of the absence of other bidders.

Sanofi finally initiated an all-cash hostile tender offer for all of the outstanding Genzyme shares at $69 per share on October 4, 2010. Set to expire initially on December 16, 2010, the tender offer was later extended to January 21, 2011, when the two parties started to discuss a contingent value right (CVR) as a means of bridging their disparate views on the value of Genzyme. Initially, Genzyme projected peak annual sales of $3.5 billion for Lemtrada and $700 million for Sanofi. At the end of January, the parties announced that they had signed a nondisclosure agreement to give Sanofi access to Genzymes financial statements.

The CVR helped to allay fears that Sanofi would overpay and that the drug Lemtrada would not be approved by the FDA. Under the terms of the CVR, Genzyme shareholders would receive $1 per share if Genzyme were able to meet certain production targets in 2011 for Cerezyme and Fabrazyme, whose output had been sharply curtailed by viral contamination at its plant in 2009. Each right would yield an additional $1 if Lemtrada wins FDA approval. Additional payments will be made if Lemtrada hits certain other annual revenue targets. The CVR, which runs until the end of 2020, entitles holders to a series of payments that could cumulatively be worth up to $14 per share if Lemtrada reaches $2.8 billion in annual sales.

The Genzyme transaction was structured as a tender offer to be followed immediately with a back-end short-form merger. The short-form merger enables an acquirer, without a shareholder vote, to squeeze out any minority shareholders not tendering their shares during the tender offer period. To execute the short-form merger, the purchase agreement included a top-up option granted by the Genzyme board to Sanofi. The top-up option would be triggered when Sanofi acquired 75% of Genzymes outstanding shares through its tender offer. The 75% threshold could have been lower had Genzyme had more authorized but unissued shares to make up the difference between the 90% requirement for the short-form merger and the number of shares accumulated as a result of the tender offer. The deal also involved the so-called dual-track model of simultaneously filing a proxy statement for a shareholders meeting and vote on the merger while the tender offer is occurring to ensure that the deal closes as soon as possible.

Discussion Question

1. What alternatives could Sanofi have used instead of the CVR to bridge the gap in how the parties valued Genzyme? Discuss the advantages and disadvantages of each.

2. How might both the target firm and the bidding firm benefit from the top-up option?

3. How might the existence of a CVR limit Sanofis ability to realize certain types of synergies? Be specific.