Don't Look for Strategy Behind Sanofi's Bid for Genzyme: It's All About the Cash

Last Updated Jul 26, 2010 9:49 AM EDT

If you're looking for the "strategic" rationale behind Sanofi-Aventis's (SNY) rumored bid for Genzyme (GENZ), don't bother: This is all about future cashflows expected from an undervalued asset. It has absolutely nothing to do with being a "good fit," leveraging complementary assets, or eliminating excess capacity and duplication, which are the usual reasons given in large mergers.

It's certainly not the kind of landscape transforming marriage we saw when Pfizer (PFE) bought Wyeth or Merck (MRK) bought Schering-Plough: Sanofi has $44 billion in annual revenue and Genzyme gets just $4.5 billion.

Having eliminated the strategic rationales for such an acquisition we're left with only one other explanation: Sanofi thinks Genzyme will throw off enough cash, over enough years, to offset its "patent cliff" (when its blockbusters Plavix and Lovenox lose their market exclusivity).

At first glance, Genzyme does not look particularly promising as a source of cashflows. As BNET readers know, Genzyme screwed up its monopoly on two lucrative drugs for two rare diseases, Fabrazyme for Fabry's disease and Cerezyme for Gaucher's disease. The FDA allowed Shire (SHPGY) and Pfizer to come into the market to pick up the shortage. When Genzyme fixes its manufacturing problems and gets back on its feet, it will still be making money but it will have ceded significant market share to its rivals.

However, the real potential future value of Genzyme lies in Campath, its drug for chronic lymphocytic leukemia, a blood cancer. That drug makes only $112 million a year for Genzyme, but tests show it may be a dramatically effective treatment for multiple sclerosis, the cruel, paralyzing disease that is irreversible. Campath blocks its progress for years, early tests show. If Genzyme can get the FDA to approve Campath for MS, and figure out a way to charge MS patients enough money for it without raising the current, much lower, price for cancer patients, it could be huge.

The Campath potential is not well understood. Carl Icahn, who recently got two directors placed on the Genzyme board, doesn't seem to understand it, for instance. Genzyme's management believes Campath is so poorly understood by the marketplace that it's never been properly priced into its stock.

Which is why Genzyme is an undervalued asset as far as Sanofi is concerned. Sanofi is reportedly willing to make an acquisition of a U.S. biotech for as much as $20 billion. Genzyme's market cap, even after its 15 percent rise due to the Sanofi rumor on Friday, is $16.7 billion.

The stars favor this deal: Sanofi CEO Chris Viehbacher needs to do something that will change the future of this company. Genzyme CEO Henri Termeer needs a way to retire with his name linked to something successful, not the ruination of Genzyme that he's presided over the last couple of years. And Icahn needs to extract a premium on the under-performing stock he's invested in.

Thus, this deal will happen. And if Sanofi can solve the Campath pricing problem, it will benefit all parties concerned (except, of course, the wallets of MS patients).

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Image by Flickr user Robert Scoble, CC.