Today (On Wednesday), Sanofi-Aventis (NYSE:SNY) inked an agreement to acquire Genzyme Corp (NASDAQ:GENZ) after sweetening its bid price to $74 per share plus a contingent value right (CVR), up from the $69 per share bid that GENZ rejected as too low back in October. We wrote in October that SNY was overpaying for GENZ because we valued the shares at $64. Including the CVR, which is contingent on recovering from the manufacturing problems it’s faced for its 2 key biotech drugs, as well as receiving FDA approval to market its multiple sclerosis drug candidate Lemtrada, and increased sales targets, the market is valuing the total bid price at about $78 per share.
At the same time (On the same day), GENZ reported its Q4 10 and FY 10 results that came up short of consensus expectations. Some news articles marveled at GENZ’s ability to grow its Q4 10 sales by 23% year-over-year to $1.15 billion and adjusted net income from continuing operations that almost tripled to $221 million, or $0.82 per share, up from $78 million, or $0.29 per share, in the year-ago quarter. However, analysts were expecting sales of $1.17 billion and EPS of $0.86. Under normal circumstances, GENZ shares would likely experience a sell off. But, with SNY’s higher takeout offer, GENZ shares are trading near the $78 per share level, or 1.5% higher on the day. This is good for GENZ shareholders.
On the other hand, SNY, in desperation, needs a major acquisition like this to prop up its operations. Every one of its 5 blockbuster (annual sales over $1 billion) pharmaceutical drugs either currently face generic competition because of an expired patent, or will face generics soon because the patent will expire over the next 4 years. For FY 10, SNY reported 2% less sales to 40 billion (USD) than in FY 09, and 1% higher adjusted net income from continuing operations at 12.1 billion (USD), or 4.64 (USD) per ADR. Next year, SNY’s FY 11, was expected to record 2% lower sales and 3% lower EPS. So, GENZ’s operations will help SNY at least record growth on the top line in FY 11. Whether it is a smart acquisition is debatable. SNY pats its own back calling out “success” in integrating its February acquisition of Chattem Inc for $2 billion. Yet, SNY shares grossly underperformed the market and every one of its mega pharmaceutical peers, except for Merck (NYSE:MRK), whose undergoing some FDA-related setbacks. Our conclusion is that SNY’s acquisition of GENZ is a bad bet for SNY shareholders.
SNY has a lot of hurdles to clear with GENZ. We wish them luck. They’re going to need it.