A whiff of desperation

Sanofi/ Genzyme: Sanofi-Aventis obviously was pleased by what it saw. For more than six months the French pharmaceuticals company refused to up its lowball $69 dollars-a-share offer for US biotech Genzyme on the grounds that it needed to see the books before it could consider making a better offer. The pair's negotiation-through-media turned friendly a few weeks ago — very friendly, it seems. Sanofi has won the day with a cash offer of $74 a share, worth $20.1 billion, plus up to $14 a share, worth another $3.8 billion, if certain milestones are met. That equates to a 60 per cent-plus premium — or $9.7 billion — over the US group's undisturbed share price.

It's a stunning price. Synergies haven't been detailed. But there are probably worth only about $1.8 billion taxed and capitalised, judging by similar deals in the sector.

Sanofi's chief executive, Chris Viehbacher, has said he’s looking for synergies as much as growth. The price he has finally agreed to pay is but a reflection of the urgent need to beef up the company’s pipeline as its top line suffers from increasing competition from generics drugs. The French company last week said earnings would decline by five to 10 per cent this year. Now it hopes the Genzyme deal will help lift earnings by about 12 to 16 per cent in 2013. At first glance, Genzyme seems to have got a cracking deal out of its eager suitor. But the extra value contained in the so-called contingent value right is, frankly, highly contingent.

CVRs are often frowned upon because of a lingering suspicion the issuer will be tempted to cheat on the eventual numbers. In this case, only $1 out of this CVR will be paid according to a black and white target: the approval of Lemtrada for multiple sclerosis by the US Food and Drug Administration. The risk of litigation looms on the 13 other dollars, which are linked to production and sales volumes - factors which Sanofi arguably has the power to influence. If Lemtrada becomes a $2.8 billion-revenue drug, Sanofi’s total additional payout under the CVR is worth $3.5 billion. The market seems willing to give Sanofi the benefit of the doubt that this is good value. If, on the other hand, Lemtrada fails to get regulatory approval, the French group will owe some explanation to its own shareholders for the high base price of this deal.