The Sanofi-Allergan-Amgen Deal Worst-Case Scenario

The WSJ's deal blog notes that rumors are circulating -- again -- that Sanofi-Aventis is on the prowl for a major acquisition. Oddly, Sanofi's stock is up on the news, suggesting that investors don't believe the rumor.

The usual suspect is mentioned -- Bristol-Myers Squibb -- a prospect BNET dealt with many moons ago, here and here. The other two candidates mentioned are Allergan and Amgen. Let's look at the worst-case scenario if Sanofi should take out either of them.

First, Allergan. Unlike Sanofi, Allergan's revenues and profit are in decline as the recession kills off demand for its discretionary products such as Botox and Latisse, a new eyelash lengthener. Allergan will also find itself in a vicious price war in coming months with Medicis' Botox competitor, Dysport.

But if you believe that once the recovery kicks in Americans will go back to spending ludicrous sums of money on their vanity, then Allergan looks like a company poised only to grow that is as cheap as it's ever going to be.

The downside of Allergan is that because its products are discretionary, it only makes $2.08 for every dollar it invests in sales and marketing. Sanofi, by contrast gets twice that. So buying Allergan, despite its potential growth, will only make Sanofi a less efficient company.

Amgen, on the other hand, has a similar level of productivity to Sanofi -- about $4.06 in revenues for every $1 of SG&A. So an acquisition wouldn't "spoil" the host company. The gamble with Amgen is denosumab, its new bone product. If it gets approval in October, all Amgen's problems are fixed. Analysts think it could generate $1 billion or more in sales. Until then, Amgen is a company in decline.

Amgen will become prohibitively expensive if denosumab is approved, and probably not worth acquiring if it isn't. So Sanofi must act now if it wants Amgen. That's a big wager, given how slow, fearful and conservative the FDA has become over new approvals.

Amgen's stock has declined about 20 percent in the last year, so again, it's about as cheap as it's going to be before denosumab hits. The worst-case scenario? Sanofi pulls the trigger on Amgen and the FDA demurs, leaving Sanofi with billions in wasted debt.

• Want more of BNET Pharma's "Worst-Case Scenarios"? Click here:
• The Pfizer-Wyeth Deal Worst-Case Scenario
• The Pfizer-Shire Deal Worst-Case Scenario
• The Pfizer-Amgen Deal Worst-Case Scenario
• The Pfizer-Allergan Deal Worst-Case Scenario
• The Lilly-ImClone Deal Worst-Case Scenario
• The Worst-Case Scenario in the Roche-Genentech Bid
• Why a Pfizer Takeover of Bristol-Myers Squibb Seems Unlikely
• Odds May Be Against a Pfizer-Bayer Deal