Week 1 Blog: Sanofi-aventis continue to expand

It has been reported this week in the Wall street Journal that Sanofi-aventis (SA), 7^th leading pharmaceutical company, continue to pursue its interest in Genzyme, a smaller firm who focus more on rare diseases.

There have been previous meetings between the companies in July and August 2010 to discuss the takeover.  Chris Viehbacher (SA CEO) commented on this that “attempts to reach a mutually agreed transaction have been blocked at every turn”. This been said, SA are valuing Genzyme at $18.5bn, working at out $69 per share, where as since August 2010 Genzyme share price has been operating at above $70, $72 at the start if this year. Although in one sense SA are protecting its own shareholders in the sense that they don’t want to over value Genzyme and pay more than necessary.  With Genzyme operating above $70, is SA not undervaluing Genzyme’s capabilities and the investments its shareholders have put in?

SA’s interest in Genzyme came about partially because several of its patents due to expire, this combined with the realisation that it is facing heavy competition from its market leaders, and challenges with the health care industry in the U.S, with the Government Health Care reform.  This prompted the restructuring of its Research and Development section in 2009, to ensure that its resources (capital, employees and plants) are allocated to those areas that can create growth opportunities, to develop outside of its usual areas of; Diabetes, Atrial Fibrillation and Oncology (Fierce Biotech 2011).  BBC news found that this resulted 1700 employees loosing their jobs, despite this potentially having negative effects on the society’s surrounding these sites, and could create uncertainty for those employees left with SA, it was a necessary action if SA want pursue its growth objectives to ensure a larger return on the investments made.

With the new direction of SA, Genzyme is an excellent takeover prospect with its expertise in rare diseases. With the Financial Times reporting the take over is currently in the due diligence stage, this involves an investigation into the business to asses; assets, capabilities and prospects, prior to signing a contract.  This investigation brought to light a problem SA have with one of the products Genzyme have in development. This regards the drug Lemtrada, a multiple sclerosis drug.  SA evaluating the successfulness of this drug feels it isn’t going to be as rewarding as Genzyme do.  With this in mind, they are going to extend the planning horizon of this drug and propose a Contingent Value Right (CVR). This is used to bridge the gap between the two views of the company’s ‘value’.  However, analysts have found this not to be popular with shareholders, mostly because it has created lawsuits when the parties involved can’t agree if the success rate or milestones reached were adequate enough.  This been said, SA have agreed to future payments if Lemtrada is more successful than originally thought, but how the success of the drug is going to be measured has not been mentioned.

The situation with SA and Genzyme is a perfect example of the problems when evaluating ‘value’, as to each individual value is measured differently.  With the likes of SA, should a companies decision be focused on meeting the needs of the shareholders, who essentially are the owners of the company, or to focus on the other stakeholders who may be equally or more affected by the decisions made?