French drugmaker Sanofi Aventis SA said on Sunday it was in discussions with U.S. bid target Genzyme Corp over ways to value a key Genzyme drug, in a sign the two sides are moving closer to a deal.

Discussions over Campath, which Genzyme hopes to market as a treatment for multiple sclerosis under the brand name Lemtrada, are continuing between representatives from both companies, although Sanofi warned there was no guarantee of agreement.

Sanofi has offered to acquire Genzyme, a maker of drugs for rare diseases, for $18.5 billion, or $69 a share -- a figure Genzyme says is too low.

The two sides are discussing a way to bridge the valuation gap and sweeten Sanofi's offer by focusing on prospects for Campath, Genzyme's most promising drug, via a deal structure known as a contingent value right (CVR).

A CVR would offer Genzyme shareholders an additional payout based on the medicine being approved in multiple sclerosis (MS) and meeting certain revenue targets.

Those discussions are continuing and now include representatives from both companies. There remain significant differences on the terms and conditions of the potential CVR and the value of our offer, and there is no guarantee that the parties will come to an agreement, Sanofi said in a brief statement.


At the heart of Genzyme's bid defense is its estimate that the new MS drug could generate peak annual sales of $3.5 billion, compared with a figure of around $700 million underpinning Sanofi's offer.

Sources familiar with the situation earlier told Reuters the companies were moving closer in their discussions about a possible takeover and a resolution to the situation would likely occur within weeks rather than months.

According to one source, Sanofi would be willing to increase its $69 a share cash offer by a nominal amount and include a CVR in a final deal, though the French company would be unlikely to strike a deal worth as much as $80 a share.

It is unclear how much any CVR would be worth and its potential value would, in any case, be discounted by investors based on their assumptions of whether the new drug will reach its milestones.

Genzyme's shareholders have until January 21 to tender their shares to Sanofi, which has already extended its $69 a share offer once after an initial closing last month garnered less than 1 percent of Genzyme shares.

Industry analysts see no chance of Sanofi's current offer prevailing by the new deadline. They believe Chief Executive Chris Viehbacher's real aim is to buy time to get his opposite number Henri Termeer to the table.

Sanofi's offer could yet be extended again, if Viehbacher needs more time.


The two men have so far sat down together only once, on September 20, to discuss the bid situation, when Termeer made clear he was not prepared to enter talks unless Sanofi put a lot more money on the table.

More recently, however, speculation has increased he might be more willing to talk, in the absence of any alternative bidders.

Viehbacher and Termeer will bump into each other again on January 11 in San Francisco, when they are scheduled to give back-to-back presentations at the annual JPMorgan Healthcare Conference.

Buying Genzyme would give Sanofi a new area for growth, the high-margin business of rare diseases, as it seeks to diversify to make up for patent losses that will take out roughly a third of its 2008 sales base through to 2013.

The market is certainly betting it will improve its current $69 offer. Genzyme shares closed on Friday at $71.39 and advanced in after-hours trading to $74.35.

(Editing by Douwe Miedema)