Sanofi/Genzyme: Emblematic of What Big Pharma's Buying Now
Executive Summary
Sanofi-Aventis' much publicized pursuit - first hostile, then friendly - of Genzyme dominated biopharma news flow for more than half a year, with well timed information leaks and dramatic "he said, he said" commentary from the firms' CEOs. Such back and forth ensured continued high profile coverage until the companies officially affianced. But beyond the drama, the $20.1 billion deal, among the largest since the 2009 mega-mergers between Pfizer and Wyeth and Merck & Co. and Schering-Plough Corp., is worth discussion because it provides insight into what now drives big pharma dealmaking in the post-blockbuster era - and how companies want to pay for it.
Ellen Foster Licking
Having diversified into ancillary businesses like consumer medicine and animal health, a sizeable biotech acquisition was perhaps the only means by which Sanofi could bridge its patent chasm.
Genzyme's rare disease business offers Sanofi a theoretical platform for growth and validates the notion that pharma companies see intrinsic advantages to developing expertise in hyper-niche arenas.
Given the deal's high up-front price tag, Genzyme needs to retain key people in the enzyme replacement business, which continues to enjoy robust brand equity, despite past manufacturing challenges.
Contingent Value Rights played a central role in the deal's completion helping bridge a valuation impasse; their utilization shows the growing importance of this financial instrument in the biopharma industry.
Sanofi' much publicized pursuit – first hostile, then friendly – of Genzyme Corp. dominated biopharma news flow for more than half a year, with well timed information leaks and dramatic "he said, he said" commentary from the firms' CEOs. Such back and forth ensured continued high profile coverage until the companies officially affianced. [See Deal] But beyond the drama, the $20.1 billion deal, among the largest since the 2009 mega-mergers between Pfizer Inc. and Wyeth and Merck & Co. Inc. and Schering-Plough Corp., is worth discussion because it provides insight into what now drives big pharma dealmaking in the post-blockbuster era – and how companies want to pay for it. [See Deal] [See Deal]
No company in the industry faces a deeper patent problem than Sanofi. Come 2013, the French pharma will have lost patent protection of key franchises Plavix (clopidogrel), Lovenox (enoxaparin), and Taxotere (docetaxel) and it has little in its own pipeline to make up the shortfall, especially after the demise of its diet drug Acomplia (rimonabant) . Given this dearth, it's hardly surprising Sanofi would look to an acquisition to help cushion its top and bottom lines. After all, the company has used this strategy to good effect over the past 24 months, bolting on capabilities in both emerging markets and consumer health in an effort to diversify its business beyond traditional branded pharmaceuticals.
But to build a bridge wide enough to span its patent chasm, Sanofi had to do something more radical. Simply put, the execution risks associated with stringing together a robust pipeline via piecemeal transactions dwarfed the challenges of a bigger, single M&A deal. Thus, there was never any other choice but to consider a company sizeable enough to give the drug maker ownership of multiple products from day one of the merger's completion. At the same time, the potential target couldn't be so big that its integration would derail any nascent gains achieved via the French pharma's more externally focused R&D and business development efforts. In the end, only one logical choice would appeal to shareholders and fit management's desire to avoid the challenges of a mega-merger: Genzyme.
In announcing the acquisition at Genzyme's corporate headquarters in Cambridge, MA, February 16, 2011, CEO Christopher Viehbacher called it "a very exciting moment for Sanofi," emphasizing the deal helps the multinational expand its research and manufacturing capability in biologics, extend its presence in rare diseases, and build its footprint in a major biotechnology hub. Sanofi's desire to gain expertise in the über-protected orphan drug class is hardly surprising. Even as drugmakers bulk up in less risky, but also less profitable generics, they are moving in the other direction, trying to amass capabilities in niche arenas, such as rare diseases, where payors historically have not curbed reimbursement. ( See "Pharma Serious About Change?" IN VIVO , October 2010 (Also see "Pharma: Serious About Change? " - In Vivo, 1 Oct, 2010.) and "A Look Back At 2010: In Search Of New Biopharma Models," IN VIVO , January 2011 [A #2011800004 ].)
The question, of course, is will the strategy be successful – especially at the $74-a-share up-front price Sanofi is paying. While Viehbacher and his team aver the deal puts Sanofi on a path to growth, some analysts believe the take-out is at best a stop-gap measure given Genzyme itself faces a patent cliff and, outside its rare disease franchises, has only a middling pipeline. To make the math work, Sanofi must therefore handle Genzyme's integration with a light touch, making sure it retains key personnel, especially in the company's enzyme replacement business. Moreover, it must ensure that the manufacturing snafus that tarnished the big biotech's flagship brands Cerezyme (imiglucerase) and Fabrazyme (agalsidase beta) are fully resolved even as it fights competition from upstarts like Shire PLC and Protalix BioTherapeutics Inc. and its partner Pfizer. [See Deal]
And Sanofi has tried to hedge its risk by limiting the up-front cost of the deal, agreeing to an additional $14 in contingent value rights tied to Genzyme's ability to meet 2011 Cerezyme and Fabrazyme manufacturing goals and the approval and commercial uptake of one of the biotech's most important products, the Phase III multiple sclerosis medicine Lemtrada (alemtuzumab). Over the last two years, earn-outs have become an increasingly important tool in private M&A, allowing parties to bridge their differences with respect to a target company's valuation. ( See "Biotech Backers Are Learning To Live With Exit-By-Earn-Out," START-UP , March 2010 (Also see "Biotech Backers Are Learning to Live with Exit-by-Earn-out " - Scrip, 1 Mar, 2010.).) That CVRs played a central role in the Sanofi/Genzyme deal is another key element of the transaction, demonstrating the mainstream debut of this financial instrument, and reinforcing the notion that such risk hedging won't disappear any time soon. ( See Sidebar "With Genzyme, CVRs Hit The Main Stream.")
Limited Acquisition Options
Since Chris Viehbacher took the helm from Gerard LeFur as Sanofi's chief in late 2008, he has pushed to diversify the French pharma beyond its expertise in small molecules and vaccines via a string of acquisitions heavily centered on amassing capabilities in consumer medicines, generics, and emerging markets. ( See Exhibit 1.) The 2009 acquisition of Chattem Inc. became the linchpin for the French pharma's over-the-counter product strategy, setting up additional dealmaking such as its $128.8 million purchase of Polish consumer player Nepentes SA and Chinese specialist BMP Sunstone Corp. In the same way, the Genzyme deal launches Sanofi into a new arena, albeit on a much grander scale. [See Deal] [W #201010059] [W #201010137]
To acquire the big biotech, Sanofi paid up front a 35% premium to what analysts calculate was Genzyme's stand-alone value; still, proponents argue the deal makes financial sense, especially given the cheap $15 billion in debt the drugmaker secured from BNP Baribas, J.P. Morgan Chase and Societe Generale to finance the transaction. Genzyme "provides a long-term platform for Sanofi to develop new drugs in new indications…in an area that has thus far been spared the pain of tougher reimbursement," says Seamus Fernandez, an analyst with Leerink Swann, who believes the deal would have been accretive even at a richer $77-a-share price.
According to sources in the investment community, Sanofi's management team decided early on that to stave its patent losses it wanted to do a mid-sized deal, big enough to be "transformative" but not so over-arching that it would be disruptive. "People talked about the $20 billion price tag like it was gospel, but it wasn't," claims one source who asked not to be named. Indeed, the idea all along was to avoid a mega-merger. But executives quickly came to realize adopting a serial acquisition strategy akin to Bristol-Myers Squibb Co.'s so-called string of pearls approach would be extraordinarily difficult to execute for a number of reasons.
For starters, the number of sizeable pearls – companies with multiple marketed products in specialist areas dovetailing Sanofi's interests – is limited and Big Pharma's desire for such assets is intense. Thus, Sanofi feared this scarcity would drive up the multiples associated with each individual deal, making it difficult to maintain a financially disciplined approach. In addition, given the competition for validated products, there was a real possibility a crucial jewel might go to another bidder, which would weaken – or at least delay – Sanofi's bid to resume a growth trajectory. Finally, Sanofi didn't have the luxury of time to see a serial acquisition strategy play out. Given the company's 2013 patent cliff, it needed to bring in several billion dollars in product revenue sooner, rather than later.
The French pharma also faced limited options in the kinds of products that would realistically fill its revenue gap. Thanks to a series of licenses and acquisitions in 2009 and 2010, drug sales in emerging markets already accounted for 25% of Sanofi's total revenues. Perhaps the company could have bolstered its capabilities in South East Asia, but again, acquisition targets in this region were commanding hefty premiums. Recall Abbott Laboratories Inc. paid $2.2. billion upfront plus earn-outs – roughly a sevenfold multiple – for Piramal Enterprises Ltd.'s health care solutions business in May 2010. [See Deal] Likewise, with more than eight acquisitions in the consumer health space in the same time period, Sanofi couldn't fuel enough of its growth by amassing additional capabilities in this area. Nor could the company hope to add on capabilities in animal health, another arena attracting interest from peers looking to diversify. Sanofi already owned a 50% stake in the world's largest animal health outfit, spending $5 billion over the course of 2009 and 2010 to create Merial-Intervet, a joint venture with Merck & Co Inc. with a $16.5 billion enterprise value.
Having already diversified into lower risk arenas adjacent to pharmaceutical drug development, Sanofi therefore had no choice but to consider more traditional biotech acquisitions. Here again, because of the drugmaker's near-term need for revenue, only companies of a certain size – mid-size specialty players or big biotechs like Celgene Corp., Allergan Inc., or Biogen Inc. – would solve Sanofi's problems. Based on discussions with numerous sources with close ties to the deal, Viehbacher and his team clearly canvassed the entire field, but affordable options were limited. Allergan, for instance, would have deepened Sanofi's expertise in ophthalmology and provided diversity with its device offerings, but with an $18 billion market cap, it would have been pricey. Biogen Idec's multiple sclerosis franchise, meanwhile, would have provided a nice fit alongside Sanofi's Phase III oral teriflunomide and boosted the company's presence in a biotech hotbed, but that particular biotech's investors had signaled since 2007 their desire to sell the biotech for a greater sum. As one source notes, the issue was compounded by the fact that in July 2010, when news first surfaced of Sanofi's interest in M&A around the $20 billion mark, valuations of "everyone in that zip code went up." ( See "Deals of The Week: Fireworks," The IN VIVO Blog , July 2, 2010 .)
The Advantages Of Rare Diseases
Sanofi also wanted to acquire a company that provided a potential growth story it could communicate to investors. Given this lengthy checklist –both financial and strategic –it's no wonder Viehbacher and his board quickly set their sights on Genzyme as the most attractive acquisition target, especially after ongoing manufacturing problems and a consent decree sent the big biotech's stock price plummeting from the low $80s in 2008 to just shy of $50 in July 2010.
Sanofi's board has been publicly quiet about the deal, leaving Viehbacher to lead the way. Sources say the company's two largest shareholders, the French cosmetics company L'Oreal Asset Management, and the oil and gas company Total, which together own roughly 14% of shares, both favor the transaction. L'Oreal, which owns 8.9% of the company, has two representatives on Sanofi's board, and was engaged in the process. Total, which now owns roughly 5% of the company, has been slowly reducing its stake and has said it plans to exit its investment.
Building expertise in rare diseases also provides Viehbacher and his team with an opportunity to capitalize on systemic changes wrought by the US's newly enacted health care law. Near term, that legislation exempts rare disease therapies from some of the costly fees and potential rebate impact of the revenue limiting provisions of health care reform; longer term, it may also protect such products by excluding them from potential impacts of federal investments in comparative effectiveness research. Genzyme's SEC filings help to understand the potential advantage of having rare disease capabilities in-house. Unlike Sanofi, which estimates it will lose $290 million in 2011 from lost sales and industry fees as a result of the new legislation, Genzyme predicts the negative impact to its budget will be roughly $25 million. (See "Valuing Genzyme: A Health Care Reform Premium,"The RPM Report , October 2010 [A# 2010500110]; "Health Care Reform Costs To BioPharma in 2011," "The Pink Sheet" February 21, 2011 (Also see "Health Care Reform Costs To Biopharma In 2011" - Pink Sheet, 21 Feb, 2011.).)
Sanofi is hardly the first big pharma to see the advantages of building out its rare disease capabilities. Novartis AG's runaway success with Gleevec (imatinib), first launched in 2001 in the niche indication of chronic myeloid leukemia and now the company's second best-selling medicine, shows the revenue potential of an efficacious drug when the unmet medical need is high and potential exists to expand into new markets. Thanks to its expansion in nearly a dozen indications beyond CML, Gleevec generated $4.2 billion in sales in 2010, while the company's Tekturna (aliskiren), a hypertension medication vying for market share in a traditional blockbuster category, pulled in just $438 million in worldwide sales in the same time period.
In 2010, both Pfizer and GlaxoSmithKline PLC followed where Novartis led, creating discrete business units focused on rare diseases. Both of these companies have chosen to amass capabilities in a piecemeal fashion via lower-cost licensing deals and smaller acquisitions. In 2010, for instance, Pfizer acquired privately-held FoldRx Pharmaceuticals Inc. in an earn-out deal, building on its 2009 alliance with Protalix to create a biosimilar for Gaucher's disease [W #201010113]. Since 2009, meantime, GlaxoSmithKline has inked at least a half dozen alliances in the space, including an option-based deal with Ionis Pharmaceuticals Inc. to use the biotech's RNA-targeting technology to create therapies for rare disorders and tie-ups with Prosensa Holding BV and Pentraxin Therapeutics Ltd. in Duchenne muscular dystrophy and the rare protein folding disorder amyloidosis respectively. [W #201020144][W #200920430] [W #200920105]
In contrast with Pfizer and GlaxoSmithKline's approaches, Sanofi is betting it's more likely to succeed by buying an established franchise with pre-existing deep relationships with payors, patients, and physicians and filling any needed gaps with smaller, more limited dealmaking. As such, the logic motivating Sanofi is akin to Shire's decision in 2005 to bring Transkaryotic Therapies Inc. in house via a $1.57 billion deal that created its Shire Human Genetic Therapies Inc. [See Deal] (See "Shire: Remodeling Specialty Pharma," IN VIVO, April 2006 (Also see "Shire: Remodeling Specialty Pharma" - In Vivo, 1 Apr, 2006.).) That Sanofi paid 12.8-fold what Shire paid for TKT reflects the scarcity premium for a suddenly fashionable arena of drug development.
Moreover, given Sanofi's revenue needs, Genzyme may have been its only choice once it decided to become a major player in the space. While other biotechs focus on rare diseases – BioMarin Pharmaceutical Inc. and Alexion Pharmaceuticals Inc., for instance – they are small and do not have the brand equity of of Genzyme, which still generated $1.65 billion in 2010 from its embattled rare disease franchise. Indeed, despite the biotech's manufacturing challenges, it remains the leading company developing treatments for rare diseases, with 50% market share according to an analysis by Deutsche Bank. As an investor involved with one of Genzyme's competitors noted, recruiting patients into trials for his company's drug was tougher than the firm had expected, partly because the disease was rare, but also because Genzyme has such long-standing, solid relationships with providers and patients.
Viehbacher himself alluded to his desire to amass sizeable rare disease expertise by buying rather than building when announcing the Genzyme transaction to investors and analysts. "What we are trying to do as a business is create sustainable growth, and you build sustainable growth through competencies, through significant capital expenditures, through brand loyalty, through know-how, and there's an awful lot of that within Genzyme's business," he said.
Looking For Synergies
At the deal's current price, Sanofi claims the Genzyme purchase will be accretive in 2012, generating as much as €0.75 to €1 per share by year 2013. But the company has been vague on where it sees the real growth opportunities; nor has it been forthcoming about the synergies that could be realized in the days after the merger's completion. In a Q&A with analysts and investors following the deal's announcement, analysts had to push Sanofi's CFO Jerome Contamine before he eventually revealed that an internal analysis assumes "north of $600 million synergies." "As you can imagine, we have not been able to go into the details of the synergies that we can generate. So we have built, let's say, a certain amount of synergies based on what we consider will be Genzyme's stand-alone business plan," he said.
The predicted $600 million is far larger than the $300 to $400 million most analysts forecast from eliminating overlapping support functions, pipeline combinations outside the rare disease arena, and back-office synergies. In part, that's because Genzyme had already cut a tremendous amount of the waste out of its internal programs. Whether such efforts were designed to woo a white knight bidder to stave off Sanofi's hostile pursuit or keep its own investors satisfied with the existing management team, the big biotech axed more than 1000 positions – 10% of its headcount – in September 2010 and disposed of ancillary businesses like its diagnostics, genetic testing, and pharmaceutical intermediates units. [See Deal][See Deal][See Deal]
Still, says Leerink Swann's Fernandez, plenty remains to be cut, particularly in the oncology and renal/cardiovascular franchises, which together accounted for 43% of Genzyme's 2010 revenue. "If you look at Genzyme's filings, you find substantial inefficiencies," he says. That's particularly true in oncology, a therapeutic area where the big biotech has been trying to amass capability since its 2004 acquisition of Ilex Oncology Inc. [See Deal] Despite a string of licensing deals including a 2009 alliance with Bayer AG that doubled Genzyme's marketed oncology assets, this particular business unit has never developed into a robust franchise alongside the biotech's ERT business. [See Deal]
The company's top sellers Clolar (clofarabine), a second-generation nucleoside analog approved to treat T-cell acute lymphoblastic leukemia, and Mozobil (plerixafor), a stem cell mobilizer obtained via its 2006 hostile takeover of AnorMed Inc. generated 2010 revenues of just $104 million and $92 million respectively. [See Deal] ( See "Genzyme Breaks A Biotech Taboo: The Hostile Bid For AnorMED," IN VIVO , November 2006 [A# 2006800183].) Moreover, the manufacturing crisis that has gripped Genzyme's rare disease division may have impacted its ability to devote attention to other units; a basket of other hematology and oncology assets that includes Campath (alemtuzumab) generated $252 million in 2010, but year over year quarterly sales of the products slipped 10% when compared to 2009. With the oncology business barely profitable, analysts like Fernandez believe Sanofi can take the existing platform and extract additional value by selling the aging products alongside the pharma's recently metastatic prostate cancer medicine Jevtana (cabazitaxel).
While Genzyme's cardiovascular/renal franchise and Sanofi's pipeline have considerably less overlap, here too, analysts expect synergies. Admittedly, Genzyme's flagship renal products, which include Renagel (sevelamer) and Hectorol (doxercalciferol), are aimed at the dialysis market, which is outside Sanofi's core therapeutic focus; however, with the French pharma's low molecular weight heparin Lovenox facing generic competition, the company can redeploy its existing sales team to increase the revenue potential of a business that chalked up more than $1 billion in 2010.
Sanofi could also opt to continue the disaggregation efforts Genzyme began in the fall of 2010. The French drugmaker is likely to consider monetizing the biotech's biosurgery business, which makes the hyaluronic acid injection for osteoarthritis Synvisc, either through a sale or spin-out. Indeed, given the surgical customer base, an orthopedic med-tech outfit would almost certainly be better positioned to sell the products than Sanofi.
A Platform For Growth Or A Stopgap?
The Genzyme transaction may return Sanofi to growth or simply slow its revenue bleed. Some analysts estimate the addition of Genzyme's products simply reduces the big pharma's total profit decline in 2013 from an estimated 20% to around 9%. Outside Genzyme's enzyme replacement franchise, its marketed products are primarily aging assets that will likely face generic competition in the 2013 to 2016 time frame. ( See Exhibit 2.)
Moreover, with the exception of Genzyme's Pompe disease product Myozyme (alglucosidase alfa), the genetic disease business faces its own problems. Of Genzyme's top three ERTs, Myozyme, which is also known as Lumizyme depending on the manufacturing process utilized, is the only medicine not facing marketed competition or manufacturing constraints. Year over year sales growth of the product has been a robust 27%, leading analysts to predict peak sales of $ 1 billion.
Meantime sales of the biotech's Cerezyme and Fabrazyme may never rebound to former levels. Because of the prolonged shutdown of Genzyme's Allston plant, Cerezyme and Fabrazyme now face competition from Shire products Vpriv (velaglucerase alfa) and Replagal (agalsidase alfa) . Approved for sale for roughly a year ago in the US, and since September 2010 in Europe, Vpriv, which is priced at a 15% discount to Cerezyme, has captured approximately 30% of the market. That it hasn't gained additional market share says as much about Shire's own capacity constraints – it hopes to win regulatory approval for a new production plant in the latter half of 2011 – as it does Genzyme's ability to return to full production of that therapy. And while Cerezyme manufacturing has stabilized – patients worldwide are now able to take their normal doses – the Fabrazyme supply still doesn't meet patient demand. If regulators approve a new manufacturing plant in Framingham, MA, in the second half of 2011, Genzyme expects it will finally be able to provide enough of the Fabry disease medicine to meet patients' needs. However, these constraints have helped Shire consolidate its position as a therapy of choice for some Fabry patients; in Europe, the mid-sized pharma's Replagal now enjoys 80% market share.
Sanofi has tried to limit some of the risk associated with Genzyme's ongoing manufacturing issues by creating a $1 CVR – approximately $272.5 million – tied to Cerezyme and Fabrazyme production milestones. According to a recent regulatory filing, Genzyme representatives estimate the company has a 70% chance of reaching this goal, which if achieved would translate into year over year sales increases for the Gaucher and Fabry diseases medicines of 31% and 6% respectively.
Linking milestone payments to one of Genzyme's more controversial pipeline products, Lemtrada, helps mitigate the deal's risk even further. While the financial instrument offers the big pharma some downside protection it doesn't change the fact that outside Genzyme's ERT business and particularly its Phase III oral Gaucher drug eliglustat, the biotech's pipeline is neither deep or home grown. ( See Exhibit 3.) "Genzyme's great at getting drugs to market, but it isn't exactly a powerhouse in developing them," criticizes one source familiar with the Boston biotech community.
Making The Math Work
Such statements lead one to wonder whether the true value of Genzyme isn't the yearly $4 billion buffer it provides Sanofi until the French pharma's own pipeline, which includes the PARP inhibitor iniparib and GLP-1 agonist lixisenatide, matures. As such, the logic underpinning Sanofi/Genzyme starts to sound a lot like the rationale driving a very different, and less costly, deal: the 2009 revision of an existing alliance between Bristol-Myers Squibb and Otsuka Pharmaceutical Co. Ltd. [See Deal] Unlike many growth-oriented deals, this particular transaction alleviated mid-term risks overhanging both companies by bulking up existing financials. It improved Bristol-Myers' cash flow and stabilized the earnings base, while increasing Otsuka's revenues at a time when the Japanese pharma is expanding aggressively into new geographic and therapeutic areas. ( See "Bristol-Myers Squibb And Otsuka Stabilize Their Bases," IN VIVO , April 2009 (Also see "Bristol-Myers Squibb and Otsuka Stabilize Their Bases" - In Vivo, 1 Apr, 2009.).)
Even if Genzyme is an expensive stopgap measure and the potential growth in rare diseases is just theoretical, Sanofi must retain the key personnel responsible for the biotech's value creation if it wants to obtain full value for the deal. Bare minimum that means incentivizing everyone involved in the production and sale of the biotech's genetic medicines, especially the employees who oversee the actual manufacture of the products, handle payor issues, or interact with patients and advocacy groups. Indeed, selling drugs for rare diseases – a practice that can often require finding the patients in the first place – isn't at all like selling primary care drugs, which is all about share of voice, direct-to-consumer advertising, and boots on the ground. Thus, to ensure continued brand equity for products like Cerezyme and Fabrazyme, Sanofi needs to keep staffers who helped cement Genzyme's strong relationships with end-users in the first place. Among the most important to retain: Chief Operating Officer David Meeker and SVP of Global Product Quality Ron Branning, who only recently joined Genzyme after successfully helping former employer Gilead Sciences Inc. negotiate a consent decree.
In the short-term, the CVRs provide employees like Meeker and Branning with an incentive to stay. According to a March SEC filing, Meeker, for instance, could reap as much $6.5 million if Genzyme meets all the manufacturing and Lemtrada milestones. Longer term, however, retention may well be tied to whether Sanofi allows the group the independence it has promised. "These are people who want to do something they care about, that they are passionate about," says Gary Pisano, PhD, a management professor at the Harvard Business School. "If you are Sanofi you have to understand keeping them requires giv[ing] them a certain amount of autonomy, the same autonomy they had before."
In its public comments, Sanofi is certainly making the right noises, talking up Genzyme as the nucleating factor in its efforts to become a dominant player in rare diseases. It has tapped its head of European pharmaceutical operations, Belén Garijo, to oversee the integration and promises to maintain Genzyme's Cambridge headquarters, where the company employs 4,500. But, pharma companies have a poor history of running acquired biotechs as true stand-alone entities; despite avowing to keep Genentech Inc. and MedImmune LLC as independent divisions, those biotechs' respective acquirers Roche and AstraZeneca PLC have been unable to prevent a raft of high profile departures. [See Deal] [See Deal] Genentech, for instance has lost not only its CEO Arthur Levinson, PhD, as well as its Head of Product Development Susan Desmond Hellman, MD, but also some of its top scientists, including most recently the noted Alzheimer biologist Marc Tessier-Lavigne, PhD. ( See"Roche's Acquisition of Genentech: Retention Bonuses Unlikely To Stem Departures," START-UP, September 2008 [A# 2008900169].)
That's not to say a handful of stand-alone models aren't succeeding. Shire' s desire to run its two different businesses as completely independent units has allowed Shire Human Genetic Therapies Inc. to flourish. Likewise, at least to outsiders, Takeda Pharmaceutical Co. Ltd.'s attempt to create a stand-alone oncology business via the 2008 acquisition of Millennium Pharmaceuticals Inc. (now Takeda Oncology) has been an unqualified success. [See Deal] Three years post-merger that biotech's top executives, including its CEO Deborah Dunsire, MD, and its EVP and Chief Commercial Officer Christophe Bianchi, MD, remain at the helm of the division. ( See "Millennium
Prospers Under Takeda—But Will Takeda Get Full Value?" IN VIVO , June 2009 [A# 2009800114].) Certainly, some headhunters are more sanguine about Sanofi's ability to retain employees, not least because the company already has some experience with the model. After its 2009 acquisition of BiPar Sciences Inc., the drug company made the biotech its west coast oncology center, and has thus far been able to retain a majority of the scientists without "Sanofi-izing them." [See Deal] Perhaps more important, the still sputtering economy and Genzyme's highly specialized focus don't give dissatisfied personnel many legitimate employment options – especially if the desire is to remain in the Boston area.
In short, the experiences at Millennium and HGT suggest maintaining an effective stand-alone is possible – especially if there is a strong business reason for not fully integrating the smaller player in the first place. Given how desperately Sanofi needs Genzyme's revenues, the rationale for an autonomous Genzyme exists. The exact nature of the autonomy won't be known for several months, when Sanofi unveils its integration plans as part of an early summer investor meeting.
Nor will it be possible to ascertain whether Sanofi obtained full value for the transactions for at least several more years. Value, like beauty, is in the eye of the beholder. Whether or not Genzyme provides a platform for growth, if it moves Sanofi through its 2013 patent trough, the deal will have met one of Sanofi's primary objectives.
Reporting contributed by Jessica Merrill and Wendy Diller
SIDEBAR: With Genzyme, CVRs Hit The Main Stream
With Sanofi-Aventis' acquisition of Genzyme Corp., contingent value rights hit the big time as a means of bridging drastically different valuations of the big biotech's pipeline. According to SEC filings and public comments, the two companies were billions of dollars apart in their estimates of Genzyme's worth until the French pharma's CEO broached the possibility of using contingent value rights in a meeting in the fall of 2010. Initially Sanofi proposed CVRs worth $6 and then increased the value to $12, tied to the approval and sale of Genzyme's Lemtrada (alemtuzumab) in the multiple sclerosis setting. Ultimately the terms were revised yet again; following roughly a week's diligence in January 2011, the French pharma increased the CVR portion of its offer to $14, but amended it to include a $1 earn-out tied to Genzyme's ability to meet certain Cerezyme and Fabrazyme production levels. ( See Exhibit 1.) If Genzyme meets all the earn-out goals, its final take-out price will increase another $3.8 billion to almost $24 billion.
Even with the alterations, the complex CVR, which will be traded publicly on NASDAQ until either December 31, 2020, or all contingent milestones have been achieved, is still largely pegged to Lemtrada's performance. "We approach this in the way of almost taking Lemtrada out of the broader equation and almost doing a sort of business development deal of a late-stage asset," Sanofi CEO Christopher Viehbacher said Feb. 16. "There is a value-sharing mechanism that is not dissimilar to what you would expect in late-stage asset deals." CVRs are rare but not unprecedented in pharma M&A. Celgene Corp.'s $2.9 billion purchase of Abraxis BioScience Inc. in 2009 included a CVR pegged to approval of Abraxis' oncology drug Abraxane (paclitaxel protein-bound particles for intravenous suspension) in additional cancer indications and sales goals. [W #201010080] ( See "Despite Celgene's Abraxane Stock, Trading Earn-Outs Is The Exception Not The Rule," IN VIVO , November 2010 (Also see "Despite Celgene's Abraxane Stock, Trading Earn-Outs Is The Exception Not The Rule" - In Vivo, 1 Nov, 2010.).)
Still analysts estimate Sanofi will pay at most $4 of the proposed earn-outs before the CVRs sunset in 2020, despite Lemtrada's strong showing in Phase II head to head trials against Merck KGAA's Rebif (interferon beta-1a). (Genzyme's own financial analysts have calculated a $5.58 intrinsic value the CVRs based on a March 7 filing with the Securities and Exchange Commission.) Indeed, the problem isn't Lemtrada's efficacy; based on available data the antibody appears to be one of the most efficacious –if not the most efficacious – therapy for MS currently. Moreover its annual dosing regimen offers theoretical advantages in terms of compliance.
The concern, however, is the considerable toxicity associated with the drug, including the potentially fatal condition idiopathic thrombycytopenic purpura. In addition, because Lemtrada profoundly suppresses the immune system, it may predispose patients to severe opportunistic infections. Thus, if approved, Lemtrada's adoption is certain to be measured, as physicians are wary of repeating what happened with Biogen Idec Inc.'s Tysabri (natalizumab), which launched to great acclaim and then was briefly taken off the market because of a minute but real risk of causing the deadly brain infection, progressive multifocal leukoencephalopathy. ( See "Surveying The Changing Multiple Sclerosis Landscape," IN VIVO , February 2011 (Also see "Surveying The Changing Multiple Sclerosis Landscape" - In Vivo, 1 Feb, 2011.).) In a February 16 note to investors, Collins Stewart analyst Salveen Richter estimated Lemtrada "will be a salvage therapy or for patients with aggressive disease course" with sales in 2016 reaching only $800 million.— Ellen Foster Licking and Joseph Haas